DXP ENTERPRISES, INC.
The following management discussion and analysis ("MD&A") of the financial
condition and results of operations of DXP Enterprises, Inc. together with its
subsidiaries (collectively "DXP," "Company," "us," "we," or "our") for the three
and six months ended June 30, 2020 should be read in conjunction with our
previous Annual Report on Form 10-K and our Quarterly Reports on Form 10-Q, and
the consolidated financial statements and notes thereto included in such
reports. The Company's consolidated financial statements are prepared in
accordance with accounting principles generally accepted in the United States of
America ("US GAAP").
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (this "Report") contains statements that constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, as amended. These forward-looking statements include without limitation those about the Company's expectations regarding the impact of the COVID-19 pandemic and the impact of low commodity prices of oil and gas; the Company's business, the Company's future profitability, cash flow, liquidity, and growth. Such forward-looking statements can be identified by the use of forward-looking terminology such as "believes", "expects", "may", "might", "estimates", "will", "should", "could", "would", "suspect", "potential", "current", "achieve", "plans" or "anticipates" or the negative thereof or 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 or historical performance 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, 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, decreases in oil and natural gas prices, decreases in oil and natural gas industry expenditure levels, which may result from decreased oil and natural gas prices or other factors, economic risks related to the impact of COVID-19, our ability to manage changes and the continued health or availability of management personnel, and our ability to obtain financing on favorable terms or amend our credit facilities 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", included in this Report and in our Annual Report on Form 10-K filed with theSecurities and Exchange Commission onMarch 13, 2020 . 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 meanDXP Enterprises, Inc. , aTexas corporation, together with its subsidiaries.
CURRENT MARKET CONDITIONS AND OUTLOOK
During the six months endedJune 30, 2020 , the widely publicized and discussed coronavirus (COVID-19) outbreak rapidly spread across the world, driving a sharp erosion in demand for crude oil and other products and services, as whole economies ordered curtailed activity. In response to declining demand for crude oil, members of theOrganization of the Petroleum Exporting Countries and other producing countries (OPEC+), includingRussia , met in early March to discuss additional production cuts to help stabilize prices. The group failed to reach an agreement, and production was instead increased into the already oversupplied market, decimating oil prices and rapidly filling worldwide oil storage facilities. OPEC+ eventually reached an agreement inApril 2020 to reduce production, which had a muted effect on oil prices due to the belief that the cuts were significantly less than the demand destruction caused by COVID-19. As a result, companies across the industry responded with severe capital spending budget cuts, cost cuts, personnel layoffs, facility closures and bankruptcy filings. The North American rig count has declined from 1,079 active rigs in July of 2019 to only 296 as ofJuly 2020 . 16 -------------------------------------------------------------------------------- We have taken a number of mitigation efforts and proactive steps in response. We moved forward with our plans to increase our ABL revolver facility from$85 Million to$135 Million . In addition, we reduced certain discretionary expenditures and suspended the Company's matching contributions to retirement plans. We may take additional mitigation actions in the future such as raising additional financing or furloughs. Some of these measures may have an adverse impact on our businesses. Throughout the COVID-19 pandemic crisis, we have continued to operate our business despite the challenges that arise from closing offices and operating our branch locations. Our use of technology and third party conferencing platforms have enabled our office employees to work from home, performing their job functions with little to no loss of productivity. We required our employees to work from home as a result of governmental isolation orders and, in many cases, in advance of those orders for the health and safety of our employees. For the most part, our warehouses and regional distribution centers have remained open. Under various isolation orders by national, state, provincial and local governments, we have been exempted as an "essential" business as the products we sell are necessary for the maintenance and functioning of the energy infrastructure and other industries. We have taken measures to safeguard the health and welfare of our employees, including social distancing measures while at work, certain screening, providing personal protection equipment such as gloves, face masks and hand sanitizer and sterilizing cleaning services at Company facilities. As various governmental isolation orders are lifted or phased out, we are reviewing our operational plans to continue operating our business while addressing the health and safety of our employees and those with whom our business comes into contact. As a distribution business, we have also closely monitored the ability of our suppliers and transportation providers to continue the functioning of our supply chain. We have not experienced significant delays by transportation providers or significant delays in our supply chains. Our inventory position for most products has allowed us to continue supply to most customers with little interruption. In those instances where there is interruption, we are working with our customers to discuss the impact of the COVID-19 delay. We continue to monitor the situation and have ongoing dialogue with our vendors and customers regarding the status of impacted orders. Management expects industry activity levels and spending by customers to decrease throughout the remainder of 2020 as oil supplies continue to increase and demand destruction from COVID-19 remains. A prolonged contraction of activity related to oil and gas and a long lasting economic impact from COVID-19 may have a further adversely impact on our results and the carrying value of long-lived assets, inventory and related business segment goodwill. DXP remains committed to streamlining operations and improving organizational efficiencies while continuing to focus on delivering the products and services that remain in the Company's backlog. We believe this strategy will further advance the Company's competitive position, regardless of the market environment. 17 -------------------------------------------------------------------------------- RESULTS OF OPERATIONS (in thousands, except percentages and per share data) DXP is organized into three business segments: Service Centers ("SC"), Supply Chain Services ("SCS") and Innovative Pumping Solutions ("IPS").The Service Centers are engaged in providing maintenance, repair and operating ("MRO") products, equipment and integrated services, including technical expertise and logistics capabilities, to industrial customers with the ability to provide same day delivery.The Service Centers provide a wide range of MRO products and services in the rotating equipment, bearing, power transmission, hose, fluid power, metal working, industrial supply and safety product and service categories. The SCS segment provides a wide range of MRO products and manages all or part of our customer's supply chain function, and inventory management. The IPS segment fabricates and assembles integrated pump system packages custom made to customer specifications, remanufactures pumps and manufactures branded private label pumps. Over 90% of DXP's revenues represent sales of products.
Three Months Ended
2020 % 2019 %
Sales $ 251,401 100.0 % $ 333,318 100.0 %
Cost of sales 181,705 72.3 % 241,331 72.4 %
Gross profit $ 69,696 27.7 % $ 91,987 27.6 %
Selling, general and administrative expenses 62,943 25.0 % 69,140 20.7 %
Income from operations $ 6,753 2.7 % $ 22,847 6.9 %
Other (income) expense, net 133 0.1 % 185 0.1 %
Interest expense 3,930 1.6 % 4,885 1.5 %
Income before income taxes $ 2,690 1.1 % $ 17,777 5.3 %
Provision for income taxes (benefit) 610 0.2 % 4,427 1.3 %
Net income $ 2,080 0.8 % $ 13,350 4.0 %
Net (loss) income attributable to noncontrolling interest (62)
- (109) -
Net income attributable to
0.9 %$ 13,459 4.0 % Per share amounts attributable toDXP Enterprises, Inc. Basic earnings per share 0.12$ 0.76 Diluted earnings per share 0.12$ 0.73
Three Months Ended
SALES. Sales for the three months endedJune 30, 2020 decreased$81.9 million , or 24.6%, to approximately$251.4 million from$333.3 million for the prior year's corresponding period. Sales from businesses acquired during the year accounted for$4.5 million of the sales for the three months endedJune 30, 2020 . This overall sales decrease is the result of a decrease in sales in our SC, IPS and SCS segments of$46.1 million ,$20.5 million and$15.2 million , respectively. The fluctuations in sales is further explained in our business segment discussions below. Three Months Ended June 30, 2020 2019 Change Change%
Sales by Business Segment (in thousands, exceptchange%)
Service Centers $ 153,848 $ 199,978 $ (46,130) (23.1) %
Innovative Pumping Solutions 60,479 81,028 (20,549) (25.4) %
Supply Chain Services 37,074 52,312 (15,238) (29.1) %
Total DXP Sales $ 251,401 $ 333,318 $ (81,917) (24.6) %
18-------------------------------------------------------------------------------- Service Centers segment. Sales for the Service Centers segment decreased by approximately$46.1 million , or 23.1% for the three months endedJune 30, 2020 compared to the prior year's corresponding period. Excluding$4.5 million of second quarter 2020 Service Centers segment sales from businesses acquired, Service Centers segment sales for the second quarter in 2020 decreased$50.6 million , or 25.3% from the prior year's corresponding period. This sales decrease is primarily the result of decreased sales of metal working, safety supply products and bearings to customers engaged in the OEM oil and gas markets in connection with decreased capital spending by oil and gas producers as well as the negative economic impacts of the COVID-19 pandemic. We expect that this level of sales to the oil and gas industry will likely continue to decline ifU.S. crude oil production remains at levels experienced during the quarter. With a prolonged economic shutdown related to COVID-19, we will likely experience a further decline in overall segment sales. Innovative Pumping Solutions segment. Sales for the IPS segment decreased by$20.5 million , or 25.4% for the three months endedJune 30, 2020 compared to the prior year's corresponding period. This decrease was primarily the result of a decrease in the capital spending by oil and gas producers and related businesses stemming from a decrease inU.S. crude oil production due to low crude prices and the negative economic impacts of COVID-19. This level of IPS sales will likely continue to decline during the remainder of 2020 if theU.S. crude oil production remains at levels experienced during the first six months of 2020. Supply Chain Services segment. Sales for the SCS segment decreased by$15.2 million , or 29.1%, for the three months endedJune 30, 2020 , compared to the prior year's corresponding period. The decline in sales is primarily related to decreased sales to customers in the aerospace and oil and gas industries due to the economic impacts of the COVID-19 pandemic. GROSS PROFIT. Gross profit as a percentage of sales for the three months endedJune 30, 2020 increased by approximately 13 basis points from the prior year's corresponding period. Excluding the impact of the businesses acquired, gross profit as a percentage of sales increased by approximately 15 basis points. The increase in the gross profit percentage excluding the businesses acquired is primarily the result of an approximate 292 basis point increase in the gross profit percentage in our SCS segment, partially offset by a 53 basis point decrease in the gross profit percentage in our SC segment and a 5 basis point decrease in the gross profit percentage in our IPS segment. Innovative Pumping Solutions segment. As a percentage of sales, the second quarter gross profit percentage for the IPS segment increased approximately 5 basis points from the prior year's corresponding period primarily as a result of an increase in utilization and capacity within IPS' engineered-to-order business and an overall improvement in the pricing environment. Additionally, gross profit margins for individual orders have continued to improve because of the increase in sales of built-to-order customer specific products. Operating income for the IPS segment decreased$3.5 million or 28.8%, during the second quarter of 2020 compared to the prior year's corresponding period. The decrease in operating income is primarily the result of the above-mentioned decrease in sales. Service Centers segment. As a percentage of sales, the second quarter gross profit percentage for the Service Centers decreased approximately 59 basis points and decreased approximately 53 basis points, adjusting for the businesses acquired, from the prior year's corresponding period. This was primarily as a result of sales mix and price increases from vendors. Operating income for the Service Centers segment decreased$9.6 million , or 41.2%, during the second quarter of 2020 compared to the prior year's corresponding period. . The decrease in operating income is primarily the result of the decline in sales due to the items discussed above. Supply Chain Services segment. Gross profit as a percentage of sales for the SCS segment increased approximately 292 basis points, compared to the prior year's corresponding period. This was primarily as a result of costs associated with new customer implementation in 2019 with no comparable activity in 2020. Operating income for the second quarter of 2020 decreased$0.4 million compared to the prior year's corresponding period mainly due to the above- mentioned decrease in sales. SELLING, GENERAL AND ADMINISTRATIVE ("SG&A"). Selling, general and administrative expense for the three months endedJune 30, 2020 decreased by approximately$6.2 million , or 9.0%, to$62.9 million from$69.1 million for the prior year's corresponding period. Selling, general and administrative expense from businesses acquired accounted for$1.2 million . Excluding expenses from businesses acquired, SG&A for the quarter decreased by$7.4 million , or 10.7%. The overall decrease in SG&A is primarily the result of decreased payroll, incentive compensation and related taxes and 401(k) expenses as a result of decreased business activity and cost reduction actions associated with COVID-19 and depressed demand in oil and gas markets. Adjusting for the businesses acquired, the second quarter 2020 expense decreased 428 basis points to 25.0% from 20.7% for the prior year's corresponding period primarily as a result of the fixed cost leverage nature of SG&A. OPERATING INCOME. Operating income for the second quarter of 2020 decreased by$16.1 million to$6.8 million , from$22.8 million in the prior year's corresponding period. This decrease in operating income is primarily related to the above mentioned decrease in sales discussed above. 19 -------------------------------------------------------------------------------- INTEREST EXPENSE. Interest expense for the second quarter of 2020 decreased$1.0 million compared with the prior year's corresponding period due to lower LIBOR rates and a reduction in principal balance. INCOME TAXES. Our effective tax rate from continuing operations was a tax expense of 22.9% for the three months endedJune 30, 2020 compared to a tax expense of 24.9% for the three months endedJune 30, 2019 . Compared to theU.S. statutory rate for the three months endedJune 30, 2020 , the effective tax rate was increased by state taxes, foreign taxes, and nondeductible expenses. The effective tax rate was decreased by research and development tax credits and other tax credits. Compared to theU.S. statutory rate for the three months endedJune 30, 2019 , the effective tax rate was increased by state taxes, foreign taxes and nondeductible expenses. The effective tax rate was decreased by research and development tax credits and other tax credits.
Six Months Ended
2020 % 2019 %
Sales $ 552,384 100.0 % $ 644,543 100.0 %
Cost of sales 398,703 72.2 % 468,356 72.7 %
Gross profit $ 153,681 27.8 % $ 176,187 27.3 %
Selling, general and administrative expenses 136,013 24.6 % 138,524 21.5 %
Income from operations $ 17,668 3.2 % $ 37,663 5.8 %
Other (income) expense, net (701) (0.1) % 152 - %
Interest expense 8,307 1.5 % 9,925 1.5 %
Income before income taxes $ 10,062 1.8 % $ 27,586 4.3 %
Provision for income taxes (benefit) 2,334 0.4 % 7,049 1.1 %
Net income $ 7,728 1.4 % $ 20,537 3.2 %
Net loss attributable to noncontrolling interest (124) - (213) -
Net income attributable to DXP Enterprises, Inc. $ 7,852 1.4 % $ 20,750 3.2 %
Per share amounts attributable to DXP Enterprises, Inc.
Basic earnings per share $ 0.44 $ 1.18
Diluted earnings per share $ 0.42 $ 1.13 Six Months Ended
SALES. Sales for the six months endedJune 30, 2020 decreased$92.2 million , or 14.3%, to approximately$552.4 million from$644.5 million for the prior year's corresponding period. This sales decrease is the result of a decrease in sales in our SC, IPS and SCS segments of$49.7 million ,$25.3 million , and$17.2 million , respectively. The fluctuations in sales are further explained in our business segment discussions below. Six Months Ended June
30,
2020 2019 Change Change%
Sales by Business Segment (in thousands, exceptchange%)
Service Centers 336,433 386,157 $ (49,724) (12.9) %
Innovative Pumping Solutions 130,500 155,751 (25,251) (16.2) %
Supply Chain Services 85,451 102,635 (17,184) (16.7) %
Total DXP Sales $ 552,384 $ 644,543 $ (92,159) (14.3) %
20-------------------------------------------------------------------------------- Service Centers segment. Sales for the Service Centers segment decreased by$49.7 million , or 12.9% for the six months endedJune 30, 2020 compared to the prior year's corresponding period. Excluding$9.7 million of Service Center segment sales for the six months endedJune 30, 2020 from businesses acquired, Service Centers segment sales decreased$59.5 million , or 15.4% from the prior year's corresponding period. This sales decrease is primarily the result of decreased sales of metal working, safety supply products and bearings to customers engaged in the OEM oil and gas markets in connection with decreased capital spending by oil and gas producers as well as the negative economic impacts of the COVID-19 pandemic. We expect that this level of sales to the oil and gas industry will likely continue to decline ifU.S. crude oil production remains at levels experienced during the first six months of 2020. With a prolonged economic shutdown related to COVID-19, we will likely experience a further decline in overall segment sales. Supply Chain Services segment. Sales for the SCS segment decreased by$17.2 million , or 16.7%, for the six months endedJune 30, 2020 , compared to the prior year's corresponding period. The decline in sales is primarily related to decreased sales to customers in the aerospace and oil and gas industries due to the economic impacts of the COVID-19 pandemic. Innovative Pumping Solutions segment. Sales for the IPS segment decreased by$25.3 million , or 16.2% for the six months endedJune 30, 2020 compared to the prior year's corresponding period. This decrease was primarily the result of a decrease in the capital spending by oil and gas producers and related businesses stemming from a decrease inU.S. crude oil production due to low crude prices and the economic impacts of COVID-19. This level of IPS sales will likely continue to decline during the remainder of 2020 ifU.S. crude oil production remains at levels experienced during the first six months of 2020. GROSS PROFIT. Gross profit as a percentage of sales for the six months endedJune 30, 2020 increased by approximately 49 basis points from the prior year's corresponding period. Excluding the impact of the businesses acquired, gross profit as a percentage of sales increased by approximately 53 basis points. The increase in the gross profit percentage is primarily the result of an approximate 208 basis point increase in the gross profit percentage in our IPS segment and 143 basis point increase in the gross profit percentage in our SCS segment, partially offset by a 35 basis point decrease in the gross profit percentage in our SC segment excluding businesses acquired during the six months endedJune 30, 2020 . Innovative Pumping Solutions segment. As a percentage of sales, the six months endedJune 30, 2020 gross profit percentage for the IPS segment increased approximately 208 basis points from the prior year's corresponding period primarily as a result of an increase in utilization and capacity within IPS' engineered-to-order business and an overall improvement in the pricing environment driven by an increase in capital spending by oil and gas producers. Additionally, gross profit margins for individual orders have continued to improve because of the increase in sales of built to order customer specific products. Operating income for the IPS segment increased$0.2 million or 0.9%, primarily as a result of the below mentioned decrease in SG&A. Service Centers segment. As a percentage of sales, the six months endedJune 30, 2020 gross profit percentage for the Service Centers decreased approximately 44 basis points from the prior year's corresponding period. This was primarily as a result of sales mix and price increases from vendors. Operating income for the Service Centers segment decreased$11.6 million , or 27.5%. The decrease in operating income is primarily the result of a decline in sales. Supply Chain Services segment. Gross profit as a percentage of sales increased approximately 143 basis points, compared to the prior year's corresponding period. This was primarily as a result of costs associated with new customer site implementations which are incurred prior to sales in the comparable 2019 period. Operating income for the six month period of 2020 decreased$0.8 million compared to the prior year's corresponding period mainly due to a decrease in SG&A expense of$1.8 million primarily related to payroll and incentive compensation. SELLING, GENERAL AND ADMINISTRATIVE ("SG&A"). Selling, general and administrative expense for the six months endedJune 30, 2020 decreased by approximately$2.5 million , or 1.8%, to$136.0 million from$138.5 million for the prior year's corresponding period. Selling, general and administrative expense from businesses acquired accounted for$2.6 million . Excluding expenses from businesses acquired, SG&A for the six months endedJune 30, 2020 decreased by$5.1 million , or 3.7%. The overall decrease in SG&A is the result of decreased payroll, incentive compensation and related taxes and 401(k) expenses as a result of decreased business activity and cost reduction actions associated with COVID-19 and depressed demand in oil and gas markets. The overall decrease adjusting for the businesses acquired, increased 309 basis points to 24.6% from 21.5% for the prior year's corresponding period primarily as a result of the fixed cost leverage nature of SG&A.
OPERATING INCOME. Operating income for the six months ended
21
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INTEREST EXPENSE. Interest expense for the six months ended
INCOME TAXES. Our effective tax rate from continuing operations was a tax expense of 23.2% for the six months endedJune 30, 2020 compared to a tax expense of 25.6% for the six months endedJune 30, 2019 . Compared to theU.S. statutory rate for the six months endedJune 30, 2020 , the effective tax rate was increased by state taxes, foreign taxes and nondeductible. The effective tax rate decreased primarily due to research and development tax credits and other tax credits. Compared to theU.S. statutory rate for the six months endedJune 30, 2019 , the effective tax rate was increased by state taxes, foreign taxes, and nondeductible expenses. The effective tax rate was decreased by research and development tax credits and other tax credits.
LIQUIDITY AND CAPITAL RESOURCES
General Overview
As ofJune 30, 2020 , we had cash and cash equivalents of$78.8 million and bank and other borrowings of$222.6 million . We have a$135 million Asset-Based loan facility that is due to mature inAugust 2022 , under which we had no borrowings outstanding as ofJune 30, 2020 . Our primary source of capital is cash flow from operations, supplemented as necessary by bank borrowings or other sources of financing. As a distributor of MRO products and services and fabricator of custom pumps and packages, working capital can fluctuate as a result of changes in inventory levels, accounts receivable and costs in excess of billings for project work. Additional cash is required for capital items for information technology, warehouse equipment, leasehold improvements, pump manufacturing equipment and safety services equipment. We also require cash to pay our lease obligations and to service our debt. The following table summarizes our net cash flows used in operating activities, net cash used in investing activities and net cash used in financing activities for the periods presented (in thousands): Six Months Ended June 30, 2020 2019 Net Cash Provided by (Used in): Operating Activities$ 61,764 $ (3,460) Investing Activities (19,163) (8,550) Financing Activities (17,133) (3,267) Effect of Foreign Currency (1,025) 311 Net Change in Cash$ 24,443 $ (14,966) Operating Activities The Company provided$61.8 million of cash in operating activities during the six months endedJune 30, 2020 compared to using$3.5 million of cash during the prior year's corresponding period. The$65.2 million increase in the amount of cash provided between the two periods was primarily driven by the collections of receivables associated with trade accounts receivables and decreased inventory purchases. Investing Activities For the six months endedJune 30, 2020 , net cash used in investing activities was$19.2 million compared to$8.6 million in the corresponding period inJune 30, 2019 . This$10.6 million increase was primarily driven by the purchase of PSI and Turbo in the first quarter of 2020. For the six months endedJune 30, 2020 , purchases of property and equipment decreased to approximately$5.1 million compared to$8.6 million in 2019 primarily due to leasehold improvements in 2019 with no comparable activity in 2020. 22 --------------------------------------------------------------------------------
Financing Activities
For the six months endedJune 30, 2020 , net cash used in financing activities was$17.1 million , compared to net cash used in financing activities of$3.3 million for the corresponding period inJune 30, 2019 . The activity in the period was primarily attributed to Term Loan B payments of$15.6 million in 2020 compared to$1.3 million in 2019 and$1.1 million associated with common stock sold in public markets in 2020. OnMay 11, 2020 , the Company entered into an Equity Distribution Agreement (the "Equity Distribution Agreement") withBMO Capital Markets Corp. (the "Distribution Agent") pursuant to which the Company may offer and sell shares of the Company's common stock, par value$0.01 per share, having an aggregate offering price of up to$37,500,000 from time to time through the Distribution Agent. Sales, if any, of the Company's common stock pursuant to the Equity Distribution Agreement will be made in "at the market offerings" as defined in Rule 415(a)(4) promulgated under the Securities Act of 1933, as amended. During the three months endedJune 30, 2020 , the Company issued and sold 46,000 shares of common stock under the Equity Distribution Agreement, with net proceeds totaling approximately$1.1 million , after deducting the Distribution Agent's commission of approximately$26 thousand . OnMarch 17, 2020 , the Company entered into an Increase Agreement (the "Increase Agreement") that provided for a$135 million asset-backed revolving line of credit (the "ABL Revolver"), a$50 million increase from the$85.0 million available under the original revolver. During the six months endedJune 30, 2020 , the amount available to be borrowed under our credit facility increased to$131.0 million compared to$81.6 million atDecember 31, 2019 , primarily as a result of the above mentioned Increase Agreement offset by outstanding letters of credit.
We believe this is adequate funding to support working capital needs within the business.
Funding Commitments We intend to pursue additional acquisition targets, but the timing, size or success of any acquisition effort and the related potential capital commitments cannot be determined with certainty. We continue to expect to fund future acquisitions primarily with cash flows from operations and borrowings, including the undrawn portion of the credit facility or new debt issuances, but may also issue additional equity either directly or in connection with acquisitions. There can be no assurance that additional financing for acquisitions will be available at terms acceptable to us. We believe our cash generated from operations will meet our normal working capital needs during the next twelve months. However, we may require additional debt outside of our credit facilities or equity financing to fund potential acquisitions. Such additional 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.
DISCUSSION OF SIGNIFICANT ACCOUNTING AND BUSINESS POLICIES
Critical accounting and business policies are those that are both most important to the portrayal of a company's financial position and results of operations, and require management's subjective or complex judgments. These policies have been discussed with the Audit Committee of the Board of Directors of DXP. The Company's condensed financial statements are prepared in accordance with accounting principles generally accepted inthe 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 endedDecember 31, 2019 . 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 theSecurities and Exchange Commission onMarch 13, 2020 . The results of operations for the six months endedJune 30, 2020 are not necessarily indicative of results expected for the full fiscal year.
RECENT ACCOUNTING PRONOUNCEMENTS
See Note 3 - Recent Accounting Pronouncements to the Condensed Consolidated Financial Statements for information regarding recent accounting pronouncements.
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