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ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES | 12 Months Ended
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Dec. 31, 2011
ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES [Abstract] |
ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES | 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES: DXP Enterprises, Inc., a Texas corporation, was incorporated on July 26, 1996, to be the successor to SEPCO Industries, Inc., DXP Enterprises, Inc. and its subsidiaries (“DXP” or the “Company”) is engaged in the business of distributing maintenance, repair and operating products, equipment and service to industrial customers. The Company is organized into three business segments: Service Centers, Supply Chain Services (“SCS”) and Innovative Pumping Solutions (“IPS”). See Note 14 for discussion of the business segments. Principles of Consolidation The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Certain prior year amounts have been reclassified to conform with the current year presentation. 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 many customers do not pay within stated trade terms. The Company has trade receivables from a diversified customer base located primarily in the Rocky Mountain, Northeastern, Midwestern, Southeastern and Southwestern regions of the United States. 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, but generally does not require collateral. Provisions to the allowance for doubtful accounts are made monthly and adjustments are made periodically (as circumstances warrant) based upon management's best estimate of the collectability of all such accounts. 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. Inventories Inventories consist principally of finished goods and are priced at lower of cost or market, cost being determined using the first-in, first-out (“FIFO”) method. Reserves are provided against inventories for estimated obsolescence based upon the aging of the inventories and market trends. Property and Equipment Assets are carried on the basis of cost. Provisions for depreciation are computed at rates considered to be sufficient to amortize the costs of assets over their expected useful lives. Depreciation of property and equipment is computed using the straight-line method. Maintenance and repairs of depreciable assets are charged against earnings as incurred. Additions and improvements are capitalized. When properties are retired or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and gains or losses are credited or charged to earnings. The principal estimated useful lives used in determining depreciation are as follows: Buildings 20 – 39 years Building improvements 10 – 20 years Furniture, fixtures and equipment 3 – 10 years Leasehold improvements over the shorter of the estimated useful life or the term of the related lease Cash and Cash Equivalents The Company's presentation of cash includes cash equivalents. Cash equivalents are defined as short-term investments with maturity dates of 90 days or less at time of purchase. Fair Value of Financial Instruments A summary of the carrying and the fair value of financial instruments, excluding derivatives, at December 31, 2010 and 2011 is as follows (in thousands):
| 2010 |  | 2011
| Carrying Value |  | Fair Value |  | Carrying Value |  | Fair Value
Cash | $770 |  | $770 |  | $1,507 |  | $1,507
Marketable securities | - |  | - |  | $1,679 |  | $1,679
Long-term debt, including current portion | 114,551 |  | 114,551 |  | $114,899 |  | $114,899
The marketable securities are included in other assets on the consolidated balance sheet. The fair values were derived using quoted market prices. The carrying value of the long-term debt approximates fair value based upon the current rates and terms available to the Company for instruments with similar remaining maturities. The carrying amounts of accounts receivable and accounts payable approximate their fair values due to the short-term maturities of these instruments. Stock-Based Compensation The Company uses restricted stock for share-based compensation programs. No future grants will be made under the Company's stock option plans. See Note 9 – Shareholders' Equity for additional information on stock-based compensation. Revenue Recognition 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. Approximately $9.8 million of revenues were recognized on contracts in process as of December 31, 2011. The typical time span of these contracts is approximately one to two years. At December 31, 2010 and 2011, $2.8 million and $7.4 million, respectively, of unbilled costs and estimated earnings are included in accounts receivable. For other sales, the Company recognizes revenues 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. Revenues are recorded net of sales taxes. The Company reserves for potential customer returns based upon the historical level of returns. 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. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires the Company 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. The significant estimates made by the Company in the accompanying financial statements relate to the valuation of intangibles, impairment analysis, reserves for accounts receivable collectability, inventory valuations, income taxes and self-insured medical and liability claims. Actual results could differ from those estimates and such differences could be material. Self-insured Insurance and Medical Claims We generally retain up to $100,000 of risk for each claim for workers compensation, general liability, automobile and property loss. We accrue for the estimated loss on the self-insured portion of these claims. The accrual is adjusted quarterly based upon reported claims information. The actual cost could deviate from the recorded estimate. We generally retain up to $200,000 of risk on each medical claim for our employees and their dependents. We accrue for the estimated outstanding balance of unpaid medical claims for our employees and their dependents. The accrual is adjusted monthly based on recent claims experience. The actual claims could deviate from recent claims experience and be materially different from the reserve. The accrual for these claims at December 31, 2011 and 2010 was approximately $2.4 million and $1.8 million, respectively. Impairment of Long-Lived Assets and Goodwill Goodwill represents a significant portion of our total assets. We review goodwill for impairment annually during our fourth quarter, or more frequently if certain impairment indicators arise under the provisions of authoritative guidance. We review goodwill at the reporting level unit, which is one level below an operating segment. In prior years we compared the carrying value of the net assets of each reporting unit to the net present value of estimated discounted anticipated cash flows of each reporting unit, discounted using a weighted average cost of capital rate. If the carrying value exceeded the net present value of estimated discounted anticipated cash flows, an impairment indicator existed and an estimate of the impairment loss was calculated. The fair value calculation included management views and multiple assumptions and estimates, including the projected cash flows and discount rates applied. Estimated cash flows were primarily based on projected revenues, operating costs and capital expenditures and were discounted based on comparable industry average rates for weighted average cost of capital. Changes in these assumptions and estimates could have resulted in goodwill impairment that could have materially adversely impacted our financial position or results of operations. Assets, liabilities, deferred taxes and goodwill for each reporting unit were determined using the balance sheets maintained for each reporting unit. The following are examples of events or changes in circumstances that might suggest an asset or asset group should be tested for impairment: a. A significant decrease in the market price of a long-lived asset (asset group) b. A significant adverse change in the extent or manner in which a long-lived asset (asset group) is being used or in its physical condition c. A significant adverse change in legal factors or in the business climate that could affect the value of a long-lived asset (asset group), including an adverse action or assessment by a regulator d. A current-period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with the use of a long-lived asset (asset group) e. A current expectation that, more likely than not, a long-lived asset (asset group) will be sold or otherwise disposed of significantly before the end of its previously estimated useful life. Goodwill of $101.8 million was primarily recorded in connection with the 17 acquisitions completed since 2004. Approximately $16.0 million of goodwill is included in our Innovative Pumping Solutions segment. Approximately $82.9 million of goodwill is included in the two reporting units for our Service Centers segment which are DXP and PFI. Approximately $2.9 million of goodwill is included in our Supply Chain Services segment. During 2011 the U.S. economy improved and oil prices increased, which led to improvements in our sales, margins and cash flows. Our sales and profitability improved throughout the year. We considered the impact of these changes in the economic and business climate as we performed our annual impairment assessments of goodwill as of December 31, 2011. In the fourth quarter of 2011, in conjunction with our December 31, 2011 goodwill assessment, we adopted new accounting guidance that allows an entity to first assess qualitative factors to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying amount and if a quantitative assessment should be performed. We performed a qualitative analysis and concluded it is more likely than not that the fair value of each reporting unit is not less than its carrying value and therefore, did not perform a quantitative analysis. Accordingly, the annual impairment assessment at December 31, 2011 indicated there is no impairment of goodwill. Qualitative factors considered during our assessment include the capital markets environment, U.S. economic conditions, industrial distribution industry competition and trends, oil and gas exploration and production industry trends, changes in our results of operations, the magnitude of the excess of fair value over the carrying amount of each reporting unit as determined in prior years' quantitative testing and other factors. We believe the fair value of our reporting units substantially exceeds the carrying value of our reporting units. Long-lived assets, including property, plant and equipment and amortizable intangible assets comprise a significant portion of our total assets. We evaluate the carrying value of long-lived assets when impairment indicators are present or when circumstances indicate that impairment may exist under authoritative guidance. When events or changes in circumstances indicate that a long-lived asset carrying amount may not be recoverable, a long-lived asset or assets shall be grouped with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. Depending on the circumstances, this could be at a reporting unit or segment level. Estimates of future cash flows are generally used to test the recoverability of a long-lived asset (asset group), unless market information is available that would more clearly indicate the fair value of an asset or asset group. To the extent estimates of future cash flows are utilized, only the future cash flows (cash inflows less associated cash outflows) that are directly associated with, and that are expected to arise as a direct result of the use and eventual disposition of the asset (asset group) are utilized. Those estimates shall exclude interest charges that will be recognized as an expense when incurred. These impairment tests are heavily influenced by assumptions and estimates that are subject to change as additional information becomes available. We concluded DXP did not have an impairment of long-lived assets during 2011. During 2009 there were significant declines in U.S. and global economies and in oil and natural gas prices which led to declines in our sales, margins and cash flows. Our sales and profitability declined throughout the year particularly in the fourth quarter. We considered the impact of these significant adverse changes in the economic and business climate as we performed our annual impairment assessment of goodwill as of December 31, 2009. The estimated fair values of our reporting units were negatively impacted by significant reductions in estimated cash flows for the income approach. Our goodwill impairment analysis led us to conclude that there was a significant impairment of goodwill for the PFI reporting unit and a significant impairment of goodwill for the DXP reporting unit and, accordingly, we recorded a non-cash charge of $40.7 million to our operating results for the year ended December 31, 2009, for the impairment of our goodwill. In connection with the our 2009 goodwill impairment test we concluded the 2009 decline in the business and economic climate and significant reductions in estimated cash flows for the income approach resulted in a full impairment of the value of customer relationships for the PFI reporting unit. This $12.3 million expense is included in the "Goodwill and other intangible impairment" expense on the Consolidated Statements of Operations. The PFI reporting unit is part of the Service Centers segment. Goodwill and Other Intangible Assets The $24.2 million increase in goodwill and the $12.3 million increase in other intangibles acquired during 2010 results from recording the goodwill and other intangibles associated with the acquisitions of the assets of Quadna, Inc. (“Quadna”) and D&F Distributors, Inc. (“D&F”). The $0.2 million increase in goodwill for payment of earn out in 2010 relates to contingent purchase price for the 2008 acquisition of Falcon Pump. The $15.8 million increase in goodwill and the $17.5 million increase in other intangibles acquired during 2011 results from recording the goodwill and other intangibles associated with the acquisitions of the assets of KC and CW Rod. The $1.0 million increase in goodwill for payment of earn out in 2011 relates to contingent purchase price for the 2007 acquisition of Indian Fire and Safety. Other intangible assets are generally amortized on a straight line basis over the useful lives of the assets. Approximately $82.9 million of goodwill and $27.9 million of other intangible assets pertain to the Service Centers segment. Approximately $16.0 million of goodwill and $2.6 million of other intangible assets pertain to the IPS segment. Approximately $2.9 million of goodwill and approximately $12.7 million of other intangible assets pertain to the Supply Chain Services segment. The changes in the carrying amount of goodwill and other intangibles for 2010 and 2011 are as follows (in thousands):
| Total |  | Goodwill |  | Other Intangibles
Balance as of December 31, 2009 | $ 86,269 |  | $ 60,542 |  | $ 25,727
Payment of earn out | 200 |  | 200 |  | -
Acquired during the year | 36,533 |  | 24,200 |  | 12,333
Amortization | (5,824) |  | - |  | (5,824)
Balance as of December 31, 2010 | $117,178 |  | $ 84,942 |  | $ 32,236
Payment of earn out | 1,000 |  | 1,000 |  | -
Acquired during the year | 33,352 |  | 15,822 |  | 17,530
Amortization | (6,572) |  | - |  | (6,572)
Balance as of December 31, 2011 | $144,958 |  | $101,764 |  | $43,194
The changes in the carrying amount of goodwill by segment for 2010 and 2011 are as follows (in thousands):
| Total |  | Service Centers |  | SCS |  | IPS
Balance as of December 31, 2009 | $ 60,542 |  | $ 52,100 |  | - |  | $ 8,442
Payment of earn out | 200 |  | 200 |  | - |  | -
Acquired during the year | 24,200 |  | 16,662 |  | - |  | 7,538
Balance as of December 31, 2010 | $ 84,942 |  | $ 68,962 |  | - |  | $ 15,980
Payment of earn out | 1,000 |  | 1,000 |  | - |  | -
Acquired during the year | 15,822 |  | 12,897 |  | 2,925 |  | -
Balance as of December 31, 2011 | $101,764 |  | $82,859 |  | $2,925 |  | $ 15,980
A summary of amortizable other intangible assets follows (in thousands):
| As of December 31, 2010 |  | As of December 31, 2011
| Gross Carrying Amount |  | Accumulated Amortization |  | Gross Carrying Amount |  | Accumulated Amortization
Vendor agreements | $ 2,496 |  | $ (831) |  | $ 2,496 |  | $ (956)
Customer relationships | 47,363 |  | (17,237) |  | 64,262 |  | (23,508)
Non-compete agreements | 1,980 |  | (1,535) |  | 2,611 |  | (1,711)
Total | $ 51,839 |  | $ (19,603) |  | $ 69,369 |  | $ (26,175)
The estimated future annual amortization of intangible assets for each of the next five years follows (in thousands): 2012 $ 8,531 2013 $ 7,804 2014 $ 7,529 2015 $ 6,057 2016 $ 4,851 Thereafter $ 8,422 The weighted average useful lives of acquired intangibles related to vendor agreements, customer relationships, and non-compete agreements are 20 years, 9.0 years and 4.3 years, respectively, at December 31, 2011. The weighted average useful life of amortizable intangible assets in total is 9.3 years at December 31, 2011. Of the $145.0 million net balance of goodwill and other intangibles at December 31, 2011, $131.0 million is expected to be deductible for tax purposes. Purchase Accounting DXP estimates the fair value of assets, including property, machinery and equipment and their related useful lives and salvage values, intangibles and liabilities when allocating the purchase price of an acquisition. 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. DXP's gross margins may not be comparable to those of other entities, since some entities include all of the costs related to their distribution network in cost of sales and others like DXP exclude a portion of these costs from gross margin, including the costs in a line item, such as selling, general and administrative expense. 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. Comprehensive Income Comprehensive income includes net income, foreign currency translation adjustments, unrecognized gains (losses) on postretirement and other employment-related plans, changes in fair value of certain derivatives, and unrealized gains and losses on certain investments in debt and equity securities. The Company's other comprehensive (loss) income is comprised of changes in the value of an interest rate swap and changes in the market value of an investment with quoted market prices in an active market for identical instruments. Accounting for Uncertainty in Income Taxes In July 2006, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance which requires that a position taken or expected to be taken in a tax return be 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 2007. The Company's policy is to recognize interest related to unrecognized tax benefits as interest expense and penalties as operating expenses. Accrued interest is insignificant and there are no penalties accrued at December 31, 2011. 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.

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- Definition The entire disclosure for the business description and accounting policies concepts. Business description describes the nature and type of organization including but not limited to organizational structure as may be applicable to holding companies, parent and subsidiary relationships, business divisions, business units, business segments, affiliates and information about significant ownership of the reporting entity. Accounting policies describe all significant accounting policies of the reporting entity. + References No definition available. + Details
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