The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
DXP ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - THE COMPANY
DXP Enterprises, Inc. together with its subsidiaries (collectively "DXP," "Company," "us," "we," or "our") was incorporated in Texas on July 26, 1996. DXP Enterprises, Inc. and its subsidiaries are engaged in the business of distributing maintenance, repair and operating (MRO) products, and service to energy and industrial customers. Additionally, DXP provides integrated, custom pump skid packages, pump remanufacturing and manufactures branded private label pumps to energy and industrial customers. The Company is organized into three business segments: Service Centers ("SC"), Supply Chain Services ("SCS") and Innovative Pumping Solutions ("IPS"). See Note 15 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 generally accepted accounting principles in the United States of America ("US GAAP"). The accompanying condensed consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries and its variable interest entity ("VIE").
The accompanying unaudited condensed consolidated financial statements have been prepared on substantially the same basis as our annual consolidated financial statements and should be read in conjunction with our annual report on Form 10-K for the year ended December 31, 2017.
For a more complete discussion of our significant accounting policies and business practices, refer to the consolidated annual report on Form 10-K filed with the Securities and Exchange Commission on March 28, 2018. The results of operations for the three months ended March 31, 2018 are not necessarily indicative of results expected for the full fiscal year.
In the opinion of management, these condensed consolidated financial statements contain all adjustments necessary to present fairly the Company's condensed consolidated balance sheets as of December 31, 2017 and March 31, 2018, condensed consolidated statements of operations and comprehensive operations for the three months ended March 31, 2018 and March 31, 2017, and condensed consolidated statements of cash flows for the three months ended March 31, 2018 and March 31, 2017 . All such adjustments represent normal recurring items.
DXP is the primary beneficiary of a VIE in which DXP owns 47.5% of the equity. DXP consolidates the financial statements of the VIE with the financial statements of DXP. As of March 31, 2018, the total assets of the VIE were approximately $5.1 million including approximately $4.7 million of fixed assets compared to $5.2 million of total assets and $4.5 million of fixed assets at December 31, 2017. DXP is the primary customer of the VIE. For the three months ended March 31, 2018 and 2017, consolidation of the VIE increased cost of sales by approximately $0.1 million, respectively for each period. The Company recognized a related income tax benefit of $14,058 and $0.2 million, respectively, related to the VIE for the three months ended March 31, 2018 and 2017. At March 31, 2018, the owners of 52.5% of the equity not owned by DXP included a former executive officer and other employees of DXP.
Equity investments in which we exercise significant influence, but do not control and are not the primary beneficiary, are accounted for using the equity method of accounting.
All intercompany accounts and transactions have been eliminated upon consolidation.
NOTE 3 - RECENT ACCOUNTING PRONOUNCEMENTS
Standards Effective in 2018 or Later
Compensation - Stock Compensation.
In May 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") ASU 2017-09,
Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting.
This ASU provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting. An entity would not apply modification accounting if the fair value, vesting conditions, and classification of the awards are the same immediately before and after the modification. The amendments in this ASU are effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017 with early adoption permitted. The amendments in this ASU should be applied prospectively to an award modified on or after the adoption date. The Company adopted this ASU as of January 1, 2018, and it did not have a material impact on the Company's Financial Statements.
Intangibles-Goodwill and Other.
In January 2017, the FASB issued ASU 2017-04,
Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.
This ASU is to simplify how an entity is required to test goodwill for impairment. The effective date of the amendment to the standard is for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.
The Company adopted this ASU early on December 31, 2017. T
he Company's annual tests of goodwill for impairment, including qualitative assessments of all of its reporting units goodwill, determined a quantitative impairment test was not necessary.
Business Combinations.
In January 2017, the FASB issued ASU 2017-01,
Business Combinations (Topic 805): Clarifying the Definition of a Business.
This ASU clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill and consolidation. The effective date of this ASU is for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years.
The Company adopted this ASU as of January 1, 2018, and it did not have a material impact on the Company's Financial Statements.
Statement of Cash Flows.
In August 2016, the FASB issued ASU 2016-15,
Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments.
This ASU addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. The effective date of the amendment to the standard is for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years.
The Company adopted this ASU as of January 1, 2018, and it did not have a material impact on the Company's Financial Statements.
Financial Instruments – Credit Losses.
In June 2016, the FASB issued ASU 2016-13:
Financial Instruments – Credit Losses,
which replaces the incurred loss impairment methodology in current US GAAP with a methodology that reflects expected credit losses. The update is intended to provide financial statement users with more useful information about expected credit losses. The amended guidance is effective for fiscal years beginning after December 15, 2019, with early adoption permitted. We are currently evaluating the effect, if any, that the guidance will have on the Company's Consolidated Financial Statements and related disclosures
.
Leases.
In February 2016, the FASB issued ASU No. 2016-02,
Leases (Topic 842).
The update requires organizations that lease assets ("lessees") to recognize the assets and liabilities for the rights and obligations created by leases with terms of more than 12 months. The recognition, measurement and presentation of expenses and cash flows arising from a lease by a lessee remains dependent on its
classification as a finance or operating lease. The criteria for determining whether a lease is a finance or operating lease has not been significantly changed by this ASU. The ASU also requires additional disclosure of the amount, timing, and uncertainty of cash flows arising from leases, including qualitative and quantitative requirements. This pronouncement is effective for financial statements issued for annual periods beginning after December 15, 2018, including interim periods within those fiscal years.
Early adoption is permitted. The Company is currently assessing the impact that this standard will have on its Consolidated Financial Statements.
Financial Instruments.
In January 2016, the FASB issued ASU 2016-01,
Financial Instruments: Recognition and Measurement of Financial Assets and Financial Liabilities
. This change to the financial instrument model primarily affects the accounting for equity investments, financial liabilities under fair value options and the presentation and disclosure requirements for financial instruments. The effective date for the standard is for fiscal years and interim periods within those years beginning after December 15, 2017. Certain provisions of the new guidance can be adopted early.
The Company adopted this ASU as of January 1, 2018, and it did not have a material impact on the Company's Financial Statements.
Revenue
Recognition.
In May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers (Topic 606),
which provides guidance on revenue recognition. The core principal of this guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This guidance requires entities to apply a five-step method to (1) identify the contract(s) with customers, (2) identify the performance obligation(s) in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligation(s) in the contract, and (5) recognize revenue when (or as) the entity satisfies a performance obligation. This pronouncement, as amended by ASU 2015-14, is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017.
The Company has evaluated the provisions of the new standard and assessed its impact on financial statements, information systems, business processes and financial statement disclosures. We had engaged third party consultants to assist us in assessing our contracts with customers, processes and controls required to address the impact that ASU No. 2014-09 would have on our business. The Company elected the modified retrospective method and adopted the new revenue guidance effective January 1, 2018, with no impact to the opening retained earnings.
The analysis of contracts with customers under the new revenue recognition standard was consistent with the Company's current revenue recognition model, whereby revenue is recognized primarily on the date products are shipped to the customer. The ASU also requires expanded qualitative and quantitative disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers, significant judgments and accounting policy.
Based on our overall assessment performed to date, the adoption of the new standard did not have a material impact on the Company's Consolidated Financial Statements. See Note 4 – Revenue Recognition
NOTE 4 – REVENUE RECOGNITION
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers
, and issued subsequent amendments to the initial guidance in August 2015, March 2016, April 2016, May 2016, and December 2016 within ASU 2015-14, ASU 2016-08, ASU 2016-10, ASU 2016-12 and ASU 2016-20, respectively. The core principle of this new revenue recognition guidance is that a company will recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The new guidance defines a five-step process to achieve this core principle. The new guidance also requires more detailed disclosures to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The new guidance provides for two transition methods, a full retrospective approach and a modified retrospective approach.
On January 1, 2018, the Company adopted ASC Topic 606 using the modified retrospective method with no impact to the opening retained earnings
and determined there were no changes required to its reported revenues as a result of the adoption. The Company has enhanced its disclosures of revenue to comply with the new guidance.
Results for reporting periods beginning after January 1, 2018 are presented under ASC Topic 606, while prior period amounts were not adjusted and continue to be reported in accordance with ASC Topic 605, "Revenue Recognition."
Overview
The Company's primary source of revenue is the sale of products, and service to energy and industrial customers. The Company is organized into three business segments: Service Centers ("SC"), Supply Chain Services ("SCS") and Innovative Pumping Solutions ("IPS").
The Service Centers segment provides a wide range of MRO products, equipment and integrated services, including logistics capabilities, to industrial customers within our Service Center segment. Revenues are recognized when an agreement is in place, the price is fixed, title for product passes to the customer or services have been provided and collectability is reasonably assured, which is generally upon delivery to the customer. Revenues are recorded net of sales taxes.
The Company fabricates and assembles custom-made pump packages, remanufactures pumps and manufactures branded private label pumps within our Innovative Pumping Solutions segment. For binding agreements to fabricate tangible assets to customer specifications, the Company recognizes revenues using the percentage of completion method. Under this method, revenues are recognized as costs are incurred and include estimated profits calculated on the basis of the relationship between costs incurred and total estimated costs at completion. If at any time expected costs exceed the value of the contract, the loss is recognized immediately. The typical time span of these contracts is approximately one to two years.
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. Revenues are recognized when an agreement is in place, the price is fixed, title for product passes to the customer or services have been provided and collectability is reasonably assured, which is generally upon delivery to the customer. Revenues are recorded net of sales taxes.
See Note 16 "Segment Reporting" for disaggregation of revenue by reporting segments. The Company believes this disaggregation best depicts how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.
NOTE 5 - FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES
Authoritative guidance for financial assets and liabilities measured on a recurring basis applies to all financial assets and financial liabilities that are being measured and reported on a fair value basis. Fair value, as defined in the authoritative guidance, is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The authoritative guidance affects the fair value measurement of an investment with quoted market prices in an active market for identical instruments, which must be classified in one of the following categories:
Level 1 Inputs
Level 1 inputs come from quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2 Inputs
Level 2 inputs are other than quoted prices that are observable for an asset or liability. These inputs include: quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability; and inputs that are derived principally from, or corroborated by, observable market data by correlation or other means.
Level 3 Inputs
Level 3 inputs are unobservable inputs for the asset or liability which require the Company's own assumptions.
Financial assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of the fair value of assets and liabilities and their placement within the fair value hierarchy levels.
NOTE 6 – INVENTORIES
The carrying values of inventories are as follows (
in thousands
):
|
|
March 31,
2018
|
|
|
December 31,
2017
|
|
|
|
|
|
|
|
|
Finished goods
|
|
$
|
90,402
|
|
|
$
|
79,820
|
|
Work in process
|
|
|
12,792
|
|
|
|
11,593
|
|
Inventories
|
|
$
|
103,194
|
|
|
$
|
91,413
|
|
NOTE 7 – COSTS AND ESTIMATED PROFITS ON UNCOMPLETED CONTRACTS
Costs and estimated profits in excess of billings on uncompleted contracts arise in the consolidated balance sheets when revenues have been recognized but the amounts cannot be billed under the terms of the contracts. Such amounts are recoverable from customers upon various measures of performance, including achievement of certain milestones, completion of specified units, or completion of a contract.
Costs and estimated profits on uncompleted contracts and related amounts billed were as follows (
in thousands
):
|
|
March 31,
2018
|
|
|
December 31,
2017
|
|
Costs incurred on uncompleted contracts
|
|
$
|
47,906
|
|
|
$
|
37,899
|
|
Estimated profits, thereon
|
|
|
5,439
|
|
|
|
2,665
|
|
Total
|
|
|
53,345
|
|
|
|
40,564
|
|
Less: billings to date
|
|
|
21,962
|
|
|
|
17,881
|
|
Net
|
|
$
|
31,383
|
|
|
$
|
22,683
|
|
Such amounts were included in the accompanying condensed consolidated balance sheets for 2018 and 2017 under the following captions (
in thousands
):
|
|
March 31,
2018
|
|
|
December 31, 2017
|
|
Costs and estimated profits in excess
of billings on uncompleted contracts
|
|
$
|
35,534
|
|
|
$
|
26,915
|
|
Billings in excess of costs and estimated
profits on uncompleted contracts
|
|
|
(4,156
|
)
|
|
|
(4,249
|
)
|
Translation adjustment
|
|
|
5
|
|
|
|
17
|
|
Net
|
|
$
|
31,383
|
|
|
$
|
22,683
|
|
NOTE 8 - PROPERTY AND EQUIPMENT, NET
The carrying values of property and equipment are as follows (
in thousands
):
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
|
December 31,
2017
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
2,381
|
|
|
$
|
2,346
|
|
Buildings and leasehold improvements
|
|
|
17,017
|
|
|
|
16,724
|
|
Furniture, fixtures and equipment
|
|
|
96,495
|
|
|
|
94,475
|
|
Less – Accumulated depreciation
|
|
|
(63,636
|
)
|
|
|
(60,208
|
)
|
Total property and equipment, net
|
|
$
|
52,257
|
|
|
$
|
53,337
|
|
NOTE 9 - GOODWILL AND OTHER INTANGIBLE ASSETS
The following table presents the changes in the carrying amount of goodwill and other intangible assets during the three months ended March 31, 2018 (
in thousands
):
|
|
Goodwill
|
|
|
Other
Intangible Assets
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2017
|
|
$
|
187,591
|
|
|
$
|
78,525
|
|
|
$
|
266,116
|
|
Acquired during the period
|
|
|
6,483
|
|
|
|
6,185
|
|
|
|
12,668
|
|
Translation adjustment
|
|
|
-
|
|
|
|
(315
|
)
|
|
|
(315
|
)
|
Amortization
|
|
|
-
|
|
|
|
(4,358
|
)
|
|
|
(4,358
|
)
|
Balance as of March 31, 2018
|
|
$
|
194,074
|
|
|
$
|
80,037
|
|
|
$
|
274,111
|
|
The following table presents the goodwill balance by reportable segment as of March 31, 2018 and December 31, 2017
(in thousands)
:
|
|
March 31,
2018
|
|
|
December 31,
2017
|
|
Service Centers
|
|
$
|
160,956
|
|
|
$
|
154,473
|
|
Innovative Pumping Solutions
|
|
|
15,980
|
|
|
|
15,980
|
|
Supply Chain Services
|
|
|
17,138
|
|
|
|
17,138
|
|
Total
|
|
$
|
194,074
|
|
|
$
|
187,591
|
|
The following table presents a summary of amortizable other intangible assets (
in thousands
):
|
|
March 31, 2018
|
|
|
December 31, 2017
|
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Carrying Amount, net
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Carrying Amount, net
|
|
Customer relationships
|
|
$
|
168,255
|
|
|
$
|
(88,557
|
)
|
|
|
79,698
|
|
|
|
162,200
|
|
|
|
(83,806
|
)
|
|
|
78,394
|
|
Non-compete agreements
|
|
|
784
|
|
|
|
(445
|
)
|
|
|
339
|
|
|
|
949
|
|
|
|
(818
|
)
|
|
|
131
|
|
Total
|
|
$
|
169,039
|
|
|
$
|
(89,002
|
)
|
|
$
|
80,037
|
|
|
$
|
163,149
|
|
|
$
|
(84,624
|
)
|
|
$
|
78,525
|
|
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.
NOTE 10 – INCOME TAXES
The Tax Cuts and Jobs Act was enacted on December 22, 2017. The Tax Cuts and Jobs Act contains several tax law changes that will impact the Company in the current and future periods. The Company is applying the guidance in SAB 118 issued by the Securities and Exchange Commission when accounting for the enactment-date effects of the Tax Cuts and Jobs Act. Specifically, SAB 118 permits companies to record a provisional amount which can be remeasured during the measurement period due to obtaining, preparing, or analyzing additional information about facts and circumstances that existed as of the enacted date. At March 31, 2018, the Company has not completed our accounting for all of the tax effects of the Tax Cuts and Jobs Act; however, in certain cases, as described below, the Company has made a reasonable estimate of other effects. The Company will continue to refine our calculations as additional analysis is completed.
The Company originally remeasured our U.S. net deferred tax liabilities and recorded a provisional $1.3 million benefit and a corresponding provisional decrease in the U.S. net deferred tax liability relating to the reduction in the U.S. federal corporate income tax rate to 21% from 35%. We are still in the process of analyzing Tax Cuts and Jobs Act's impact as permitted under SAB 118. The largest impact to the Company being the remeasurement of deferred taxes due to the U.S. statutory tax rate change. The mandatory repatriation and resulting toll charge on accumulated foreign earnings and profits has limited impact on the Company as unremitted earnings from non-US jurisdictions is minimal. The Company is provisional in its approach and assertion that there is no financial statement impact related to mandatory repatriation as of March 31, 2018. We will continue to monitor tax reform, as we anticipate additional guidance from the Internal Revenue Service will become more available throughout 2018.
Our effective tax rate from continuing operations was a tax expense of 25.59% for the three months ended March 31, 2018 compared to a tax expense of 37.77% for the three months ended March 31, 2017. Compared to the U.S. statutory rate for the three months ended March 31, 2018, the effective tax rate was increased by state taxes and nondeductible expenses. The effective tax rate was decreased by research and development tax credits. Compared to the U.S. statutory rate for the three months ended March 31, 2017, the effective tax rate was increased by state taxes and nondeductible expenses. The effective tax rate was decreased by lower income tax rates on income earned in foreign jurisdictions, domestic production activities deduction, and research and development credits.
NOTE 11 – LONG-TERM DEBT
Long-term debt consisted of the following (
in thousands
):
|
|
March 31,
2018
|
|
|
December 31,
2017
|
|
|
|
|
|
|
|
|
ABL Revolver
|
|
$
|
-
|
|
|
$
|
-
|
|
Term Loan B
|
|
|
248,750
|
|
|
|
249,375
|
|
Promissory note payable in monthly installments at 2.9% through
January 2021, collateralized by equipment
|
|
|
2,504
|
|
|
|
2,722
|
|
Less unamortized debt issuance costs
|
|
|
(9,650
|
)
|
|
|
(10,073
|
)
|
Total long-term debt
|
|
|
241,604
|
|
|
|
242,024
|
|
Less: Current portion
|
|
|
(3,387
|
)
|
|
|
(3,381
|
)
|
Long-term debt less current maturities
|
|
$
|
238,217
|
|
|
$
|
238,643
|
|
ABL Facility
On August 29, 2017, DXP entered into a five year, $85 million Asset Based Loan and Security Agreement (the "ABL Credit Agreement"). The ABL Credit Agreement provides for asset-based revolving loans in an aggregate principal amount of up to $85.0 million (the "ABL Loans"). The ABL Loans may be increased, in increments of $10.0 million, up to an aggregate of $50.0 million. The facility will mature on August 29, 2022. Interest accrues on outstanding borrowings at a rate equal to LIBOR or CDOR plus a margin ranging from 1.25% to 1.75% per annum, or at an alternate base rate, Canadian prime rate or Canadian base rate plus a margin ranging from 0.25% to 0.75% per annum, in each case, based upon the average daily excess availability under the facility for the most recently completed calendar quarter. Fees ranging from 0.25% to 0.375% per annum are payable on the portion of the facility not in use at any given time. The interest rate for the ABL facility was 3.2% at March 31, 2018. The unused line fee was 0.375% at March 31, 2018. As of March 31, 2018 there were no amounts of ABL Loans outstanding under the facility.
The obligations of the borrowers are guaranteed by the Company and its direct and indirect material wholly-owned subsidiaries other than certain excluded subsidiaries.
The ABL Credit Agreement contains a financial covenant restricting the Company from allowing its Fixed Charge Coverage Ratio to be less than 1.00 to 1.00 during a compliance period, which is triggered when the availability under ABL facility falls below a threshold set forth in the ABL Credit Agreement. As of March 31, 2018, the Company's consolidated Fixed Charge Coverage Ratio was 3.44to 1.00.
As of March 31, 2018, DXP was in compliance with all such covenants that were in effect on such date under the ABL facility.
The ABL Loan is secured by substantially all of the assets of the Company.
Senior Secured Term Loan B:
On August 29, 2017, DXP entered into a six year Senior Secured Term Loan B (the "Term Loan") with an original principal amount of $250 million which amortizes in equal quarterly installments of 0.25% with the balance payable in August 2023, when the facility matures. Subject to securing additional lender commitments, the Term Loan allows for incremental increases in facility size up to an aggregate of $30 million, in minimum increments of $10 million, plus an additional amount such that DXP's Secured Leverage Ratio (as defined under the Term Loan) would not exceed 3.60 to 1.00. We are required to repay the Term Loan in connection with certain asset sales and insurance proceeds, certain debt proceeds and 50% of excess cash flow, reducing to 25%, if our total leverage ratio is no more than 3.00 to 1.00 and 0%, if our total leverage ratio is no more than 2.50 to 1.00. In addition, the Term Loan contains a number of customary restrictive covenants. The interest rate for the Term Loan was 7.4 % as of March 31, 2018. At March 31, 2018, the aggregate principal amount of Term Loan borrowings outstanding under the facility was $248.8 million.
The Term Loan 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 restricted cash, not to exceed $30 million) as of such day to EBITDA, beginning with the fiscal quarter ending December 31, 2017, be either equal to or less than the ratio indicated in the table below:
Fiscal Quarter
|
Secured Leverage Ratio
|
December 31, 2017
|
5.75:1.00
|
March 31, 2018
|
5.75:1.00
|
June 30, 2018
|
5.50:1.00
|
September 30, 2018
|
5.50:1.00
|
December 31, 2018
|
5.25:1.00
|
March 31, 2019
|
5.25:1.00
|
June 30, 2019
|
5.00:1.00
|
September 30, 2019
|
5.00:1.00
|
December 31, 2019
|
4.75:1.00
|
March 31, 2020
|
4.75:1.00
|
June 30, 2020 and each Fiscal Quarter thereafter
|
4.50:1.00
|
As of March 31, 2018, the Company's consolidated Secured Leverage Ratio was 3.43 to 1.00.
As of March 31, 2018, DXP was in compliance with all such covenants that were in effect on such date under the Term Loan facility.
The Term Loan 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.
The Term Loan is secured by substantially all of the assets of the Company.
Extinguishment of Previously Existing Credit Facility
As set forth above, on August 29, 2017, the Company terminated its previously existing credit agreement and facility and replaced it with the Term Loan and the ABL Credit Agreement. The terminated facility was under the Amended and Restated Credit Agreement, dated as of January 2, 2014, by and among the Company, as borrower, and Wells Fargo Bank, National Association, as issuing lender and administrative agent for other lenders (the "Original
Credit Agreement"). This Original Credit Agreement was subsequently amended five times by the First Amendment to Restated Credit Agreement dated as of August 6, 2015, Second Amendment to Restated Credit Agreement dated as of September 30, 2015, Third Amendment to Restated Credit Agreement dated as of May 12, 2016, Fourth Amendment to Restated Credit Agreement dated as of August 15, 2016, and Fifth Amendment to Amended and Restated Credit Agreement dated as of November 28, 2016. A description of the material terms of these terminated agreements can be found in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 28, 2017. In connection with the extinguishment of the previously existing Credit Facility we recorded a $0.6 million write-off of debt issuance costs.
NOTE 12 - STOCK-BASED COMPENSATION
Restricted Stock
Under the equity incentive plans approved by our shareholders, directors, consultants and employees may be awarded shares of DXP's common stock. The shares of restricted stock and restricted stock units granted to employees and that are outstanding as of March 31, 2018 vest (or have forfeiture restrictions that lapse) in accordance with one of the following vesting schedules: 100% one year after date of grant; 33.3% each year for three years after date of grant; 20% each year for five years after date of grant; or 10% each year for ten years after date of grant. The shares of restricted stock granted to non-employee directors of DXP vest one year after the grant date. The fair value of restricted stock awards is measured based upon the closing prices of DXP's common stock on the grant dates and is recognized as compensation expense over the vesting period of the awards. Shares of our common stock are issued and outstanding upon the grant of awards of restricted stock. Once restricted stock units vest, new shares of the Company's stock are issued. At March 31, 2018, 288,899 shares were available for future grant.
Changes in restricted stock for the three months ended March 31, 2018 were as follows:
|
|
Number of
Shares
|
|
|
Weighted Average
Grant Price
|
|
Non-vested at December 31, 2017
|
|
|
77,901
|
|
|
$
|
30.36
|
|
Granted
|
|
|
114,724
|
|
|
$
|
30.94
|
|
Forfeited
|
|
|
(2,400
|
)
|
|
$
|
46.68
|
|
Vested
|
|
|
(10,699
|
)
|
|
$
|
55.90
|
|
Non-vested at March 31, 2018
|
|
|
179,526
|
|
|
$
|
28.99
|
|
Compensation expense, associated with restricted stock, recognized in the three months ended March 31, 2018 and 2017 was $446 thousand and $0.5 million, respectively. Related income tax benefits recognized in earnings for the three months ended March 31, 2018 and 2017 were approximately $0.2
million and $0.2 million, respectively. Unrecognized compensation expense under the Restricted Stock Plan at March 31, 2018 and December 31, 2017 was $4.5 million and $1.6 million, respectively. As of March 31, 2018, the weighted average period over which the unrecognized compensation expense is expected to be recognized is 26.7 months.
NOTE 13 - EARNINGS PER SHARE DATA
Basic earnings per share is computed based on weighted average shares outstanding and excludes dilutive securities. Diluted earnings per share is computed including the impacts of all potentially dilutive securities.
The following table sets forth the computation of basic and diluted earnings per share for the periods indicated (
in thousands, except per share data
):
|
|
Three Months Ended
March 31,
|
|
|
2018
|
|
|
2017
|
Basic:
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
17,901
|
|
|
17,409
|
Net income attributable to DXP Enterprises, Inc.
|
|
$
|
4,551
|
|
|
$
|
3,133
|
Convertible preferred stock dividend
|
|
|
23
|
|
|
|
23
|
Net income attributable to common shareholders
|
|
$
|
4,528
|
|
|
$
|
3,110
|
Per share amount
|
|
$
|
0.25
|
|
|
$
|
0.18
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
17,901
|
|
|
|
17,409
|
Assumed conversion of convertible
preferred stock
|
|
|
840
|
|
|
|
840
|
Total dilutive shares
|
|
|
18,741
|
|
|
|
18,249
|
Net income attributable to common shareholders
|
|
$
|
4,528
|
|
|
$
|
3,110
|
Convertible preferred stock dividend
|
|
|
23
|
|
|
|
23
|
Net income attributable to DXP Enterprises, Inc. for diluted
earnings per share
|
|
$
|
4,551
|
|
|
$
|
3,133
|
Per share amount
|
|
$
|
0.24
|
|
|
$
|
0.17
|
NOTE 14 - COMMITMENTS AND CONTINGENCIES
From time to time, the Company is a party to various legal proceedings arising in the ordinary course of business. While DXP is unable to predict the outcome of these lawsuits, it believes that the ultimate resolution will not have, either individually or in the aggregate, a material adverse effect on DXP's consolidated financial position, cash flows, or results of operations.
NOTE 15 – BUSINESS ACQUISITIONS
On January 1, 2018, the Company completed the acquisition of Application Specialties, Inc. ("ASI"), a distributor of cutting tools, abrasives, coolants and machine shop supplies. The Company paid approximately $11.5 million for ASI. The purchase was financed with $10.6 million of cash on hand as well as issuing $0.9 million of the Company's common stock. ASI will provide the Company's metal working division with new geographic territory and enhance DXP's end market mix. With ASI, we continue to build on our strategy of providing a breadth of technical products and services on a regional and local level. ASI provides us scale and access to the U.S. Pacific Northwest market, while allowing us to continue to serve our customer's evolving needs within our Service Center segment. For the three months ended March 31, 2018, the business acquired contributed sales of $10.6 million and earnings before taxes of approximately $1.3 million.
NOTE 16 - SEGMENT REPORTING
The Company's reportable business segments are: Service Centers, Innovative Pumping Solutions and Supply Chain Services. The Service Centers segment is engaged in providing maintenance, MRO products, equipment and integrated services, including logistics capabilities, to industrial customers. The Service Centers segment provides a wide range of MRO products in the rotating equipment, bearing, power transmission, hose, fluid power, metal working, fastener, industrial supply, safety products and safety services categories. The Innovative Pumping Solutions segment fabricates and assembles custom-made pump packages, remanufactures pumps and manufactures branded private label pumps. The Supply Chain Services segment provides a wide range of MRO products and manages all or part of a customer's supply chain, including warehouse and inventory management.
The high degree of integration of the Company's operations necessitates the use of a substantial number of allocations and apportionments in the determination of business segment information. Sales are shown net of intersegment eliminations.
The following table sets out financial information related to the Company's segments (
in thousands
):
|
|
For the Three Months Ended March 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
SC
|
|
|
IPS
|
|
|
SCS
|
|
|
Total
|
|
|
SC
|
|
|
IPS
|
|
|
SCS
|
Total
|
|
Sales
|
|
$
|
175,362
|
|
|
$
|
67,642
|
|
|
$
|
42,932
|
|
|
$
|
285,936
|
|
|
$
|
148,713
|
|
|
$
|
49,058
|
|
|
$
|
40,756
|
|
|
$
|
238,527
|
|
Amortization
|
|
|
2,459
|
|
|
|
1,627
|
|
|
|
272
|
|
|
|
4,358
|
|
|
|
2,250
|
|
|
|
1,795
|
|
|
|
271
|
|
|
|
4,316
|
|
Income (loss) from operations
|
|
|
13,371
|
|
|
|
4,755
|
|
|
|
3,782
|
|
|
|
21,908
|
|
|
|
11,090
|
|
|
|
1,715
|
|
|
|
3,787
|
|
|
|
16,592
|
|
Income from operations,
excluding amortization
|
|
$
|
15,830
|
|
|
$
|
6,382
|
|
|
$
|
4,054
|
|
|
$
|
26,266
|
|
|
$
|
13,340
|
|
|
$
|
3,510
|
|
|
$
|
4,058
|
|
|
$
|
20,908
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents reconciliations of operating income for reportable segments to the consolidated income before taxes (
in thousands
):
|
|
Three Months Ended
March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Operating income for reportable segments, excluding amortization
|
|
$
|
26,266
|
|
|
$
|
20,908
|
|
Adjustment for:
|
|
|
|
|
|
|
|
|
Amortization of intangible assets
|
|
|
4,358
|
|
|
|
4,316
|
|
Corporate expense
|
|
|
10,759
|
|
|
|
8,356
|
|
Income from operations
|
|
|
11,149
|
|
|
|
8,236
|
|
Interest expense
|
|
|
5,041
|
|
|
|
3,653
|
|
Other income, net
|
|
|
(22
|
)
|
|
|
(228
|
)
|
Income before income taxes
|
|
$
|
6,130
|
|
|
$
|
4,811
|
|
NOTE 17 - SUBSEQUENT EVENTS
We have evaluated subsequent events through the date the interim Condensed Consolidated Financial Statements were issued. There were no subsequent events that required recognition or disclosure unless elsewhere identified in this report.