DXP ENTERPRISES INC - Annual Report: 2016 (Form 10-K)

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This Annual Report on Form 10-K (this “Report”) contains statements that constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, as amended. Such statements can be identified by the use of forward-looking terminology such as “believes”, “expects”, “may”, “might”, “estimates”, “will”, “should”, “could”, “plans”, or “anticipates”, or the negative thereof, other variations thereon, or comparable terminology, or by discussions of strategy. Any such forward-looking statements are not guarantees of future performance and may involve significant risks and uncertainties, and actual results may vary materially from those discussed in the forward-looking statements as a result of various factors. These factors include the effectiveness of management’s strategies and decisions, our ability to implement our internal growth and acquisition growth strategies, general economic and business conditions specific to our primary customers, changes in government regulations, our ability to effectively integrate businesses we may acquire, our success in remediating our internal control weaknesses, new or modified statutory or regulatory requirements, availability of materials and labor, inability to obtain or delay in obtaining government or third-party approvals and permits, non-performance by third parties of their contractual obligations, unforeseen hazards such as weather conditions, acts or war or terrorist acts and the governmental or military response thereto, cyber-attacks adversely affecting our operations, other geological, operating and economic considerations and declining prices and market conditions, including reduced oil and gas prices and supply or demand for maintenance, repair and operating products, equipment and service, and our ability to obtain financing on favorable terms or amend our credit facility as needed. This Report identifies other factors that could cause such differences. We cannot assure that these are all of the factors that could cause actual results to vary materially from the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in "Risk Factors", and elsewhere in this Report. We assume no obligation and do not intend to update these forward-looking statements. Unless the context otherwise requires, references in this Report to the "Company", "DXP", “we” or “our” shall mean DXP Enterprises, Inc., a Texas corporation, together with its subsidiaries.

 

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The Company is organized into three business segments: Service Centers (SC), Supply Chain Services (SCS) and Innovative Pumping Solutions (IPS). Our segments provide management with a comprehensive financial view of our key businesses. The segments enable the alignment of strategies and objectives and provide a framework for timely and rational allocation of resources within our businesses. The following table sets forth DXP’s sales recognition by business segments as of December 31, 2016.  See Results of Operations under Item 7, “Management Discussion and Analysis of Financial Condition and Results of Operations” for further information on our segments’ financial results.

 

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The Service Centers segment’s long-lived assets are located in the United States, Canada, Dubai and Mexico. Approximately 11.8% of the Service Centers segment’s revenues were in Canada and the remainder was virtually all in the U.S. Our foreign operations are subject to certain unique risks, which are more fully disclosed in Item 1A “Risk Factors,” “Risks Associated with Conducting Business in Foreign Countries.”

At December 31, 2016, the Service Centers segment had approximately 1,431 employees, all of whom were full-time.

 

At December 31, 2016, the Supply Chain Services segment operated supply chain installations in 67 of our customers’ facilities.

 

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At December 31, 2016, the Supply Chain Services segment had approximately 269 employees, all of whom were full-time.

 

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At December 31, 2016, the Innovative Pumping Solutions segment operated out of 11 facilities, 9 of which are located in the United States and two in Canada.

 

At December 31, 2016, the IPS segment had approximately 524 employees, all of whom were full-time.

 

We acquire our products through numerous OEMs. We are authorized to distribute certain manufacturers' products only in specific geographic areas. All of our oral or written distribution authorizations are subject to cancellation by the manufacturer, some upon little or no notice. For the last three fiscal years, no manufacturer provided products that accounted for 10% or more of our revenues.

 

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On May 1, 2012, DXP completed the acquisition of Industrial Paramedic Services, Ltd. (“Industrial Paramedic Services”) through its wholly owned subsidiary, DXP Canada Enterprises Ltd. Industrial Paramedic Services is a provider of industrial medical and safety services to industrial customers operating in remote locations and large facilities in western Canada. DXP acquired this business to expand DXP's geographic presence into Canada and to expand our safety services offering. Industrial Paramedic Services is headquartered in Calgary, Alberta and operates out of three locations. The $25.3 million purchase price was financed with $20.6 million of borrowings under DXP's then-existing credit facility, $2.5 million of promissory notes bearing a 5% interest rate and 19,685 shares of DXP common stock.

 

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At December 31, 2016, DXP had approximately 2,453 employees, all of whom were full-time. Less than three percent (3%) of our employees are unionized.

 

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Available Information

Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as amended (the “Exchange Act”), are available free of charge through our Internet website (www.dxpe.com) as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission. Additionally, we make the following available free of charge through our Internet website ir.dxpe.com:

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DXP Code of Ethics for Senior Financial Officers;

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DXP Code of Conduct;

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Compensation Committee Charter;

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Nominating and Governance Committee Charter; and

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Audit Committee Charter

 

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A further deterioration in the oil and gas sector or other circumstances may negatively impact our business and results of operations and thus hinder our ability to comply with financial covenants under our credit facility, including the Consolidated EBITDA financial covenant.

A further deterioration of the oil and gas sector or other circumstances that reduce our earnings may hinder our ability to comply with certain financial covenants under our credit facility. Specifically, compliance with the Consolidated EBITDA covenant depends on our ability to maintain net income and prevent losses. There can be no assurance that in the future we will be able to comply with the covenants or, if we are not able to do so, that our lenders will be willing to waive such non-compliance or further amend such covenants. If we are unable to comply with our financial covenants or obtain a waiver or amendment of those covenants or obtain alternative financing, our business and financial condition would be adversely affected.

We likely will need to amend our credit facility or obtain alternative financing during the next 12 months.

Because our credit facility, as amended by the Fifth Amendment, matures on March 31, 2018, we will need to amend our credit facility or obtain alternative financing including additional debt and/or equity during the next 12 months. Such alternative financings may include additional bank debt or the public or private sale of debt or equity securities. In connection with any such financing, we may issue securities that substantially dilute the interests of our shareholders. Our ability to amend the credit facility or to obtain alternative financing on attractive terms, if at all, may be affected by our recent difficulty meeting the financial covenants in the credit facility and will depend in part on prevailing economic conditions and other factors, including factors beyond our control.

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If we do not successfully remediate our internal controls weaknesses, our financial statements may not be accurate and the trading price of our stock could be negatively impacted.

As discussed in Item 9A, “Managements Report on Internal Controls Over Financial Reporting,” we had material weaknesses in our internal controls during 2016.  If we fail to successfully remediate those weaknesses, our financial statements may not be accurate and the trading price of our stock could be negatively impacted

Economic and industry trends affect DXP’s business. Demand for our products is subject to economic trends affecting our customers and the industries in which they compete in particular. Many of these industries, such as the oil and gas industry, are subject to volatility while others, such as the petrochemical industry, are cyclical and materially affected by changes in the economy. As a result, demand for our products could be adversely impacted by changes in the markets of our customers. We traditionally do not enter into long-term contracts with our customers which increases the likelihood that economic downturns would affect our business.

 

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Our future results will depend in part on our success in implementing our internal growth strategy, which includes expanding our existing geographic areas, selling additional products to existing customers and adding new customers. Our ability to implement this strategy will depend on our success in selling more products and services to existing customers, acquiring new customers, hiring qualified sales persons, and marketing integrated forms of supply management such as those being pursued by us through our SmartSource^SM program. Although we intend to increase sales and product offerings to existing customers, there can be no assurance that we will be successful in these efforts. Consolidation in our industry could heighten the impacts of competition on our business and results of operations discussed above. The fact that we do not traditionally enter into long-term contracts with our suppliers or customers may provide opportunities for our competitors.

 

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On March 29, 2017, we had approximately registered 392 holders of record for outstanding shares of our common stock. This number does not include shareholders for whom shares are held in “nominee” or “street name”.

 

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On August 19, 2016, the Company filed with the Securities and Exchange Commission a Form S-3 Registration Statement, commonly referred to as a “shelf registration,” which was effective August 26, 2016, whereby the Company registered shares of common stock and which shall have an aggregate offering price of up to $100 million. In September 2016, pursuant to this registration statement, the Company issued 238,858 shares of common stock at a weighted average price of $26.38 per share under the related Equity Distribution Agreement. The distribution agents received $0.1 million aggregate commissions on such sales. Net proceeds were approximately $6.0 million. These proceeds were used to pay down debt obligations.

 

On December 17, 2014, DXP publicly announced an authorization from the Board of Directors that allows DXP from time to time to purchase up to 400,000 shares of DXP's common stock over 24 months. Purchases could be made in open market or in privately negotiated transactions. DXP purchased 191,420 shares for $8.9 million under this authorization through December 31, 2015. No shares were purchased during 2016.  The authorization expired on December 16, 2016.

 

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During 2014, the growth rate of the general economy increased slightly from 2013. However, oil prices declined significantly during the second half of 2014. Our employee headcount increased 15.5% primarily as a result of the two acquisitions completed during the year. Sales for the year ended December 31, 2014 increased $258.2 million, or 20.8%, to approximately $1,499.7 million from $1,241.5 million in 2013. Sales by businesses acquired in 2014 accounted for $176.4 million of 2014 sales. Sales by businesses acquired in 2013 accounted for $35.1 million of the 2014 increase, on a same store sales basis. Excluding 2014 sales of $211.5 million by businesses acquired in 2014 and 2013, on a same store sales basis, sales increased by $46.7 million, or 3.8%, from 2013. This sales increase is primarily the result of increased sales by the Service Centers segment of $22.1 million, IPS segment of $8.1 million, and SCS segment of $16.5 million, on a same store sales basis. The majority of these 2014 sales increases came from a broad based increase in sales of pumps, bearings, industrial supplies, metal working and safety products to customers engaged in oilfield service, oil and gas exploration and production, mining, manufacturing and petrochemical processing.

 

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SALES. Sales for the year ended December 31, 2016 decreased $285.0 million, or 22.9%, to approximately $962.1 million from $1,247.0 million in 2015. Sales by businesses acquired in 2015 accounted for $15.1 million of 2016 sales. Sales by a business sold in 2016 accounted for a decline of $7.1 million of sales on a same store basis.  Excluding 2016 sales of $15.1 million by businesses acquired in 2015; and 2015 sales of $7.1 million of the business sold in 2016, on a same store sales basis, sales decreased by $292.9 million, or 23.6%, from 2015. This sales decline is the result of decreased sales by all three segments including $213.5 milion in Service Centers, $67.7 million in IPS and $11.7 million in SCS, on a same store sales basis. These decreases are explained in the segment discussions below.

GROSS PROFIT. Gross profit as a percentage of sales decreased approximately 70 basis points to 27.5% for 2016 compared to 28.2% for 2015. On a same store sales basis, gross profit as a percentage of sales decreased by approximately 60 basis points. This decline is primarily the result of an approximate 100 basis point decline in the 2016 gross profit percentage for our IPS segment and an approximate 80 basis point decline in our Service Centers segment, which was partially offset by an increase of approximately 145 basis points for the SCS segment. Gross profit as a percentage of sales for each segment are explained below.

 

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INCOME TAXES. Our 2016 provision for income taxes, which is at an effective rate of 26.1%, differed from the U.S. statutory rate of 35% primarily due to the effect of the book gain, but tax loss, recognized on the sale of Vertex during 2016. Our effective tax rate for 2016 of 62.4%, after excluding the effect of the sale of Vertex, increased from 27.7% for the prior corresponding period, before the effect of the mostly non-deductible impairment of goodwill and B27 settlement, primarily as a result of reduced research and development and foreign tax credits, reduced domestic production activity deductions and prior year provision to return adjustments.  During 2009, DXP wrote off $38.2 million of goodwill and intangibles in connection with an impairment which substantially reduced the book basis of Vertex, but not the tax basis.

 

SALES. Sales for the year ended December 31, 2015 decreased $252.6 million, or 16.9%, to approximately $1,247.0 million from $1,499.7 million in 2014. Sales by businesses acquired in 2015 accounted for $9.1 million of 2015 sales. Sales by a business acquired in 2014 reduced the sales decline by $14.5 million, on a same store sales basis. Excluding 2015 sales of $23.6 million by businesses acquired in 2015 and 2014, on a same store sales basis, sales decreased by $276.2 million, or 18.4%, from 2014. This sales decrease is primarily the result of decreased sales by the Service Centers segment of $184.6 million and IPS segment of $93.3 million, which were partially offset by increased sales by the SCS segment of $1.7 million, on a same store sales basis. These increases are explained in the segment discussions below. The strength of the U.S. dollar also contributed to the sales decline. Sales for our Canadian operations were $127.8 million for 2015. The change in the exchange rate reduced sales by approximately $20.0 million compared to the amount which would be calculated using the 2014 average exchange rate.

 

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GROSS PROFIT. Gross profit as a percentage of sales decreased approximately 65 basis points to 28.2% for 2015 compared to 28.9% for 2014. On a same store sales basis, gross profit as a percentage of sales also decreased by approximately 65 basis points. This decline is primarily the result of an approximate 315 basis point decline in the 2015 gross profit percentage for our IPS segment, which was partially offset by an increase of approximately 105 basis points for the SCS segment. Gross profit as a percentage of sales for the Service Centers segment remained flat. Gross profit as a percentage of sales for each segment are explained below.

 

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SUPPLY CHAIN SERVICES SEGMENT. Sales for Supply Chain Services increased by $1.7 million, or 1.0%, in 2015 compared to 2014. None of the 2015 or 2014 acquisitions contributed sales to this segment. The increase is primarily related to increased sales to new and existing customers in the transportation, mining, chemical and alternative energy industries. These were partially offset by decreased sales to customers engaged in the oilfield services and oilfield manufacturing industries. We suspect the customers that purchased more products from DXP did so because the customers increased production during the period. We suspect customers in the oilfield services and oilfield equipment manufacturing industries purchased less from DXP because of the decline in the number of drilling rigs operating in the U.S and Canada. Gross profit as a percentage of sales increased approximately 105 basis points in 2015 compared to the prior corresponding period as a result of decreased sales of lower margin products to oil and gas and trucking related customers. Operating income for the SCS segment increased $0.4 million, or 3.0%, primarily as a result of the 105 basis point increase in gross profit as a percentage of sales.

 

Pro Forma Results

The pro forma unaudited results of operations for the Company on a consolidated basis for the twelve months ended December 31, 2016 and 2015, assuming the acquisition of businesses completed in 2015 and the divestiture of a business completed in 2016 (previously discussed in Item 1, Business) were consummated as of January 1, 2015 are as follows (in millions, except per share amounts):

 

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We generated approximately $48.0 million of cash in operating activities in 2016 as compared to generating $98.0 million in 2015. The decrease between the two periods was primarily driven by reduced earnings before impairment charges and a $59.2 million smaller reduction in accounts receivable in 2016 compared to 2015. The smaller reduction in accounts receivable resulted from a smaller decline in sales for the fourth quarter ended December 31, 2016 compared to the fourth quarter of the year ended December 31, 2015.  Sales for the fourth quarter of 2016 declined $56.4 million compared to sales for the fourth quarter of 2015.  Sales for the fourth quarter of 2015 declined $104.0 million compared to sales for the fourth quarter of 2014.

 

We purchased approximately $4.9 million of capital assets during 2016 compared to $14.0 million for 2015. Capital expenditures during 2016 were primarily related to B27 building improvements, manufacturing equipment, and patterns. Capital expenditures for 2017 are expected to be within the range of capital expenditures during 2015 and 2016.

 

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Amortization payments are required with respect to the Facility on the last business day of each fiscal quarter, payable at $15.625 million per quarter for the fiscal quarter periods ending March 31, 2017 and thereafter. On October 31, 2016, DXP prepaid $12 million of the $15.625 million amortization payment due on March 31, 2017. The Fourth Amendment required additional term loan principal reductions of $17 million by December 31, 2016 and $14 million by March 31, 2017.  During October, 2015 DXP paid the mandatory $17 million and $14 million principal reductions.  At December 31, 2016, the aggregate principal amount of term loans outstanding under the Facility was $74.5 million. Substantially all of the Company’s assets are pledged as collateral to secure the credit facilities.

 

Consolidated EBITDA as defined under the Facility for financial covenant purposes means, without duplication, for any period the consolidated net income of DXP plus, to the extent deducted in calculating consolidated net income, depreciation, amortization (except to the extent that such non-cash charges are reserved for cash charges to be taken in the future), non-cash compensation including stock option or restricted stock expense, interest expense and income tax expense for taxes based on income, certain one-time costs associated with our acquisitions, integration costs, facility consolidation and closing costs, severance costs and expenses, write-down of cash expenses incurred in connection with the existing credit agreement and extraordinary losses less interest income and extraordinary gains. Consolidated EBITDA shall be adjusted to give pro forma effect to disposals or business acquisitions assuming that such transaction(s) had occurred on the first day of the period excluding all income statement items attributable to the assets or equity interests that are subject to such disposition made during the period and including all income statement items attributable to property or equity interests of such acquisitions permitted under the Facility.

 

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A Minimum Consolidated EBITDA and capital expenditure covenant were added to the Facility.

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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, 2017, including interim periods within those fiscal years. The Company's goodwill impairment testing for the fiscal period beginning January 1, 2018, will follow the provisions of this ASU

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 is evaluating the impact of this ASU.

In December 2016, the FASB issued ASU 2016-19, Technical Corrections and Improvements. This ASU represents changes to clarify, correct errors or make minor improvements to the Accounting Standards Codification. The amendments make the Accounting Standards Codification easier to understand and easier to apply by eliminating inconsistencies and providing clarifications. Most of the amendments in this Update do not require transition guidance and are effective upon issuance of this Update. Six amendments in this Update clarify guidance or correct references in the Accounting Standards Codification that could potentially result in changes in current practice because of either misapplication or misunderstanding of current guidance. Early adoption is permitted for the amendments that require transition guidance. This ASU is not expected to have a material impact on the Company's Consolidated Financial Statements

In October 2016, the FASB issued ASU 2016-17, Consolidation - Interests Held Through Related Parties That Are Under Common Control. This ASU amends the consolidation guidance on how a reporting entity that is the single decision maker of a variable interest entity (VIE) should treat indirect interests in the entity held through related parties that are under common control with the reporting entity when determining whether it is the primary beneficiary of that VIE. The effective date of the amendment to the standard is for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. This ASU is not expected to have a material impact on the Company's Consolidated Financial Statements.

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. This ASU is not expected to have a material impact on the Company's Consolidated Financial Statements.

 

In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The update aims to simplify aspects of accounting for share-based payment award transactions, including (a) income tax consequences; (b) classification of awards as either equity or liabilities; and (c) classification on the statement of cash flows. This pronouncement is effective for financial statements issued for annual periods beginning after December 15, 2017 and interim periods within annual periods beginning after December 15, 2018. Early adoption is permitted. The Company has elected not to early adopt this ASU.  The Company expects the new guidance to impact its tax expense and dilutive shares outstanding calculation, with a potentially dilutive impact on future earnings per share and increased period-to-period variability of net earnings.  The impact cannot be quantified due to the timing and exercise activity that will occur in future periods.

 

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In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements – Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern, which asserts that management should evaluate whether there are relevant conditions or events that are known and reasonably knowable that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date the financial statements are issued or are available to be issued when applicable. If conditions or events at the date the financial statements are issued raise substantial doubt about an entity’s ability to continue as a going concern, disclosures are required which will enable users of the financial statements to understand the conditions or events as well as management’s evaluation and plan. ASU 2014-15 is effective for the annual period ending after December 15, 2016, and for annual and interim periods thereafter; early application is permitted. The Company adopted this guidance for the fourth quarter of 2016.

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 was originally effective for fiscal years, and interim periods within those years, beginning after December 15, 2016. In April 2015, the FASB approved a proposal to defer the effective date to fiscal years, and interim periods within those years, beginning after December 15, 2017. The Company has evaluated the provisions of the new standard and is in the process of assessing its impact on financial statements, information systems, business processes and financial statement disclosures.  Based on initial reviews, the standard is not expected to have a material impact on the Company’s Consolidated Financial Statements.

 

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Report of Independent Registered Public Accounting Firm

 

To the Board of Directors and Shareholders

DXP Enterprises, Inc.

 

We have audited the accompanying consolidated balance sheet of DXP Enterprises, Inc. and subsidiaries (collectively, the “Company”) as of December 31, 2016, and the related consolidated statements of income (loss) and comprehensive income (loss), shareholders' equity and cash flows for the year ended December 31, 2016. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of DXP Enterprises, Inc. and subsidiaries as of December 31, 2016, and the results of their operations and their cash flows for the year ended December 31, 2016, in conformity with U.S. generally accepted accounting principles.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. Our report dated March 31, 2017 expressed an opinion that the Company had not maintained effective internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.

/s/ Hein & Associates LLP

Houston, Texas

March 31, 2017

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We have audited the accompanying consolidated balance sheet of DXP Enterprises, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2015, and the related consolidated statements of income (loss) and comprehensive income (loss), shareholders’ equity, and cash flows for the years ended December 31, 2015 and 2014.  These financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of DXP Enterprises, Inc. and subsidiaries as of December 31, 2015, and the results of their operations and their cash flows for the years ended December 31, 2015 and 2014 in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 3 (not included herein) to the consolidated financial statements, the Company adopted new accounting guidance in 2015 and 2014, related to the presentation for debt issuance costs.

 

/s/ GRANT THORNTON LLP

Houston, Texas

February 29, 2016

 

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