UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

(Mark One)

[X]

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the fiscal year ended December 31, ~~2009~~2011

[ ]

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the transition period from

Commission file number 0-21513

DXP Enterprises, Inc.

(Exact name of registrant as specified in its charter)

Texas		76-0509661
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

7272 Pinemont, Houston, Texas	77040	(713) 996-4700
(Address of principal executive offices)	(Zip Code)	(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $0.01 Par Value		NASDAQ
(Title of Class)		(Name of exchange on which registered)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X]

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

[ ]X] Yes [ ] No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. (See definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act).

Large accelerated filer [ ] Accelerated filer [X]

Non-accelerated filer [ ] (Do not check if a smaller reporting company) Smaller reporting company [ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [ ] No [X]

Aggregate market value of the registrant's Common Stock held by non-affiliates of registrant as of June 30, ~~2009: $99,953,629.~~2011: $245,207,990

Number of shares of registrant's Common Stock outstanding as of March ~~19, 2010: 12,945,981.~~5, 2012: 14,130,220.

Documents incorporated by reference: Portions of the definitive proxy statement for the annual meeting of shareholders to be held in ~~2010~~2012 are incorporated by reference into Part III hereof.

TABLE OF CONTENTS					DESCRIPTION
Item		Page		Page
	PART 1		PART I
1.	Business	4	Business	4
1A.	Risk Factors	9	Risk Factors	10
1B.	Unresolved Staff Comments	11	Unresolved Staff Comments	13
2.	Properties	11	Properties	13
3.	Legal Proceedings	11	Legal Proceedings	13
4.	Submission of Matters to a Vote of Security Holders	11	Mine Safety Disclosures	13
	PART II		PART II
5.	Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	12	Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	14
6.	Selected Financial Data	13	Selected Financial Data	16
7.	Management's Discussion and Analysis of Financial Condition and Results of Operations	14	Management's Discussion and Analysis of Financial Condition and Results of Operations	17
7A.	Quantitative and Qualitative Disclosures about Market Risk	24	Quantitative and Qualitative Disclosures about Market Risk	28
8.	Financial Statements and Supplementary Data	25	Financial Statements and Supplementary Data	29
9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	52	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	55
9A.			Controls and Procedures	55
9B.	Other Information	53	Other Information	56
	PART III		PART III
10.	Directors, Executive Officers, and Corporate Governance	54	Directors, Executive Officers, and Corporate Governance	57
11.	Executive Compensation	54	Executive Compensation	57
12.	Security Ownership of Certain Beneficial Owners and Management		Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	57
	and Related Stockholder Matters	54
13.	Certain Relationships and Related Transactions, and Director Independence	54	Certain Relationships and Related Transactions, and Director Independence	57
14.	Principal Accountant Fees and Services	54	Principal Accounting Fees and Services	57

	PART IV		PART IV
15.	Exhibits, Financial Statement Schedules	55	Exhibits, Financial Statement Schedules	58
	Signatures	59	Signatures	63

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K contains statements that constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements can be identified by the use of forward-looking terminology such as “believes”, “expects”, “may”, “estimates”, “will”, “should”, “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 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. ~~T hese~~These factors include the effectiveness of management’s strategies and decisions, our ability to affect our internal growth strategy, general economic and business conditions, developments in technology, our ability to effectively integrate businesses we may acquire, new or modified statutory or regulatory requirements and changing prices and market conditions. This report identifies other factors that could cause such differences. We cannot assure you that these are all of the factors that could cause actual results to vary materially from the forward-looking statements. We assume no obligation and do not intend to update these forward-looking statements.

PART I

This Annual Report on Form 10-K (this “Report”) contains, in addition to historical information, “forward-looking statements” that involve risks and uncertainties. DXP Enterprises, Inc.'s actual results could differ materially from those discussed in 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 Annual Report on Form 10-K. Unless the context otherwise requires, references in this Report to the "Company", "DXP", “we” or ~~"DXP"~~“our” shall mean DXP Enterprises, Inc., a Texas corporation, together with its subsidiaries.

ITEM 1. Business

Company Overview

DXP was incorporated in Texas in 1996 to be the successor to a company founded in 1908. Since our predecessor company was founded, we have primarily been engaged in the business of distributing maintenance, repair and operating (“MRO”) products, equipment and service to industrial customers. We are organized into ~~two~~three segments: ~~MRO~~Service Centers, Innovative Pumping Solutions and ~~Electrical Contractor.~~Supply Chain Services. Sales and operating income for ~~2007, 2008~~2009, 2010 and ~~2009,~~2011, and identifiable assets at the close of such years for our business segments are presented in Note 1614 of the Notes to the Consolidated Financial Statements.

Our total sales have increased from $125 million in 1996 to $807 million in 2011 through a combination of internal growth and acquisitions. At December 31, 2011 we operated from 123 locations in 34 states in the U.S. and Sonora, Mexico serving more than 50,000 customers engaged in a variety of industrial end markets. We have grown sales and profitability through a combination of additional locations, products, services and becoming customer driven experts in maintenance, repair and operating solutions.

Our principal executive office is located at 7272 Pinemont Houston, Texas 77040, and our telephone number is (713) 996-4700. Our website address on the Internet is www.dxpe.com and emails may be sent to info@dxpe.com. The reference to our website address does not constitute incorporation by reference of the information contained on the website and such information should not be considered part of this report.

Industry Overview

The industrial distribution market is highly fragmented. Based on ~~2008~~2010 sales as reported by ~~industry sources,~~Industrial Distribution magazine, we were the 16th largest distributor of MRO products in the United States. Most industrial customers currently purchase their industrial supplies through numerous local distribution and supply companies. These distributors generally provide the customer with repair and maintenance services, technical support and application expertise with respect to one product category. Products typically are purchased by the distributor for resale directly from the manufacturer and warehoused at distribution facilities of the distributor until sold to the customer. The customer also typically will purchase an amount of product inventory for its near term anticipated needs and store those products at its industrial site until the products are used.

We believe that the distribution system for industrial products in the United States, described in the preceding paragraph, creates inefficiencies at both the customer and the distributor levels through excess inventory requirements and duplicative cost structures. To compete more effectively, our customers and other users of MRO products are seeking ways to enhance efficiencies and lower MRO product and procurement costs. In response to this customer desire, three primary trends have emerged in the industrial supply industry:

Industry Consolidation. Industrial customers have reduced the number of supplier relationships they maintain to lower total purchasing costs, improve inventory management, assure consistently high levels of customer service and enhance purchasing power. This focus on fewer suppliers has led to consolidation within the fragmented industrial distribution industry.

Customized Integrated Service. As industrial customers focus on their core manufacturing or other production competencies, they increasingly are demanding customized integration services, ~~ranging from~~consisting of value-added traditional distribution, ~~to integrated~~ supply ~~and system design, fabrication, installation~~chain services, modular equipment and repair and maintenance services.

Single Source, First-Tier Distribution. As industrial customers continue to address cost containment, there is a trend toward reducing the number of suppliers and eliminating multiple tiers of distribution. Therefore, to lower overall costs to the ~~MRO~~ customer, some MRO distributors are expanding their product coverage to eliminate second-tier distributors and ~~the difficulties associated with alliances.~~become a “one stop source”.

We believe we have increased our competitive advantage through our traditional and integrated supply programs, which are designed to address the customer's specific product and procurement needs. We offer our customers various options for the integration of their supply needs, ranging from serving as a single source of supply for all or specific lines of products and product categories to offering a fully integrated supply package in which we assume the procurement and management functions, including ownership of inventory, at the customer's location. Our approach to integrated supply allows us to design a program that best fits the needs of the customer. Customers purchasing large quantities of product are able to outsource all or most of those needs to us. For customers with smaller supply needs, we are able to combine our traditional distribution capabilities with our broad product categories and advanced ordering systems to allow the customer to engage in one-stop sourcing without the commitment required under an integrated supply contract.

Business Segments

DXP is organized under three business segments: Service Centers, Innovative Pumping Solutions (“IPS”) and Supply Chain Services (“SCS”). Our segments provide management with a comprehensive financial view of our key businesses. The segments enable the alignment of strategies and objectives and they provide a framework for timely and rational allocation of resources within our businesses.

Service Centers Segment

The Service Centers provide MRO products, equipment and services, including technical design expertise and logistics capabilities, to industrial customers with the ability to provide same day delivery. We offer our customers a single source of supply on an efficient and competitive basis by being a first-tier distributor that can purchase products directly from the manufacturer. As a first-tier distributor, we are able to reduce our customers' costs and improve efficiencies in the supply chain. We also provide services such as field safety supervision, in-house and field repair and predictive maintenance. We offer a wide range of industrial MRO products, equipment and services through a complete continuum of customized and efficient MRO solutions.

DXP Service Centers are stocked and staffed with knowledgeable sales associates and backed by a centralized customer service team of experienced industry professionals. Our Service Centers’ products and services are distributed from 123 service centers and 7 distribution centers.

DXP Service Centers provide a wide range of MRO products in the rotating equipment, bearing, power transmission, hose, fluid power, metal working, industrial supply and safety product categories. We currently serve as a first-tier distributor of more than 1,000,000 items of which more than 60,000 are stock keeping units ("SKUs") for use primarily by customers engaged in the oil and gas, food and beverage, petrochemical, transportation and other general industrial industries. Other industries served by our Service Centers include mining, construction, chemical, municipal, agriculture and pulp and paper.

Virtually all of the segment’s long-lived assets are located in the U.S. and virtually all sales are recognized in the U.S.

At December 31, 2011, the Service Centers segment had approximately 1,295 full-time employees.

Supply Chain Services Segment

DXP’s Supply Chain Services segment manages the supply-chain of its customers from across a variety of industries. Our mission is to help our customers become more competitive by reducing their indirect material costs and order cycle time by increasing productivity and by creating enterprise-wide inventory and procurement visibility and control.

DXP has developed assessment tools and master plan templates aimed at taking cost out of supply chain processes, streamlining operations and boosting productivity. This multi-faceted approach allows us to manage the entire channel for maximum efficiency and optimal control, which ultimately provides our customers with a low-cost solution.

DXP takes a consultative approach to determine the strengths and opportunities for improvement within a customer’s indirect supply chain. This assessment determines if and how we can best streamline operations, drive value within the procurement process, and increase control in storeroom management.

Decades of supply chain inventory management experience and comprehensive research, as well as a thorough understanding of our customer’s business and industry have allowed us to design standardized programs that are flexible enough to be fully adaptable to address our customers’ unique supply chain challenges. These standardized programs include:

·	SmartAgreement, a planned, pro-active procurement solution for MRO categories serviced by local DXP Service Centers.

·	SmartBuy, DXP’s on-site or centralized MRO procurement solution.

·	SmartSourceSM, DXP’s on-site procurement and storeroom management by DXP personnel.

·	SmartStore, DXP’s customized e-Catalog solution.

·	SmartVend, DXP’s industrial dispensing solution. It allows for inventory-level optimization, user accountability and item usage reduction by 20-40% and

·	SmartServ, DXP’s integrated service pump solution. It provides a more efficient way to manage the entire life cycle of pumping systems and rotating equipment.

DXP’s SmartSolutions programs help customers to cut product costs, improve supply chain efficiencies and obtain expert technical support. DXP represents manufacturers of up to 90% of all the maintenance, repair and operating products of our customers. Unlike many other distributors who buy products from second-tier sources, DXP takes customers to the source of the products they need.

The Supply Chain Services segment operates supply chain installations in 55 of our customers’ facilities.

All of the segment’s long-lived assets are located in the U. S. and all of 2011 sales were recognized in the U.S.

At December 31, 2011, the Supply Chain Services segment had approximately 276 full-time employees.

Innovative Pumping Solutions Segment

DXP’s Innovative Pumping Solutions® segment provides fabrication and technical design to meet the capital equipment needs of our global customer base.

DXP’s engineering staff can design a complete custom pump package to meet the customers’ project specifications. Drafting programs such as Solidworks and AutoCAD allow our engineering team to verify the design and layout of packages with our customers prior to the start of fabrication. FEA programs such as Cosmos Professional are used to design the package to meet all normal and future loads and forces. This process helps maximize the pump packages’ life and minimizes any impact to the environment.

With over 100 years of fabrication experience, DXP has acquired the technical expertise to ensure that our pumps and pump packages are built to meet the highest standards. DXP utilizes manufacturer authorized equipment and certified personnel. Pump packages require MRO and OEM equipment such as pumps, motors, valves, and consumable products, such as welding supplies. DXP leverages its MRO inventories and breadth of authorized products to lower the total cost and maintain the quality of the pump package.

DXP’s fabrication facilities provide convenient technical support and pump services. They have been designed with state of the art equipment to provide the technical services our customers require:

·	Certified structural welding

·	Certified pipe welding

·	Custom skid assembly

·	Custom coatings

·	Hydrostatic pressure testing

·	Mechanical string testing

·	ABS/DNV certification

Examples of our innovative pump packages include:

·	Diesel and electric driven firewater

·	Pipeline booster

·	Potable water packages

·	Pigging pump packages

·	LACT charge units

·	Chemical injection pump packages wash down units

·	Seawater lift pumps

·	Jockey pumps

·	Condensate pump packages

·	Cooling water skids

·	Seawater/produced water injection packages

·	Variety of packages to meet API, ANSI and NFPA 20 specifications

The Innovative Pumping Solutions segment operates out of 8 facilities located in Texas, Arizona, Louisiana, Colorado and Nebraska.

All of the segment’s long-lived assets are located in the U. S. and virtually all sales are recognized in the U.S.

At December 31, 2011, the Innovative Pumping Solutions segment had approximately 230 full-time employees.

Products

Most industrial customers currently purchase their MRO supplies through local or national distribution companies that are focused on single or unique product categories. As a first-tier distributor, our network of service and distribution centers stock more than 60,000 stock keeping units and provide customers with access to more than 1,000,000 items. Given our breadth of product and the industrial distribution customers focus around key products categories such as bearings & power transmission, fluid handling and power, safety, metal working and industrial supplies, we have become customer driven experts in five key product categories. As such, our three business segments are supported by five key product categories including, rotating equipment, bearings & power transmission, industrial supplies, metal working and safety products & services. Each business segment tailors its inventory and leverages product experts to meet the needs of its local customers.

Key product categories that we offer include:

Rotating Equipment. Our rotating equipment products include a full line of centrifugal pumps for transfer and process service applications, such as petrochemicals, refining and crude oil production; rotary gear pumps for low- to medium pressure service applications, such as pumping lubricating oils and other viscous liquids; plunger and piston pumps for high-pressure service applications such as salt water injection and crude oil pipeline service; and air-operated diaphragm pumps. We also provide various pump accessories.

Bearings & Power Transmission. Our bearing products include several types of mounted and unmounted bearings for a variety of applications. The power transmission products we distribute include speed reducers, flexible-coupling drives, chain drives, sprockets, gears, conveyors, clutches, brakes and hoses.

·	Industrial Supplies. We offer a broad range of industrial supplies, such as abrasives, tapes and adhesive products, coatings and lubricants, fasteners, hand tools, janitorial products, pneumatic tools, welding supplies and welding equipment.

·	Metal Working. Our metal working products include a broad range of cutting tools, abrasives, coolants, gauges, industrial tools and machine shop supplies.

Safety Products & Services. We provide safety services including safety supervision, training, monitoring, equipment rental and consulting. Our safety products and services include safety supervision, medic services, safety audits, instrument repair and calibration, training, monitoring, equipment rental and consulting. Additionally, we sell safety products including eye and face protection, first aid, hand protection, hazardous material handling, instrumentation and respiratory protection products.

We acquire our products through numerous original equipment manufacturers, or OEMs. We are authorized to distribute certain manufacturers' products in only specific geographic areas. All of our distribution authorizations are subject to cancellation by the manufacturer upon one-year notice or less. For the last three fiscal years, no manufacturer provided products that accounted for 10% or more of our revenues. We believe that alternative sources of supply could be obtained in a timely manner if any distribution authorization were canceled. Accordingly, we do not believe that the loss of any one distribution authorization would have a material adverse effect on our business, financial condition or results of operations.

Recent Acquisitions

~~Our~~A key component of our growth strategy includes effecting acquisitions of businesses with complementary or desirable product lines, locations or customers. WeSince 2004, we have completed 1317 acquisitions across our three business segments. Below is a summary of recent acquisitions since the ~~beginning~~end of ~~2005.~~

On August 20, 2005, we paid approximately $2.4 million to purchase the assets of a pump remanufacturer. We made this acquisition to enhance our ability to meet customer needs for shorter lead times on selected pumps. We ~~assumed $1.0 million of liabilities and gave a $0.5 million credit to the seller to use to purchase maintenance, repair and operating supplies from us.~~

On December 1, 2005, we purchased 100% of R. A. Mueller, Inc. to expand geographically into Ohio, Indiana, Kentucky and West Virginia. DXP paid $7.3 million ($3.65 million cash and $3.65 million in promissory notes payable to the former owners) and assumed approximately $1.6 million of debt and $1.9 million of accounts payable and other liabilities.

On May 31, 2006, DXP purchased the businesses of Production Pump and Machine Tech. DXP acquired these businesses to strengthen DXP’s position with upstream oil and gas and pipeline customers. DXP paid approximately $8.9 million for the acquired businesses and assumed approximately $1.2 million worth of liabilities. The purchase price consisted of approximately $5.4 million paid in cash and $3.5 million in the form of promissory notes payable to the former owners of the acquired businesses. In addition, DXP may pay up to an additional $1.2 million contingent upon future earnings.2006.

On October 11, 2006, we completed the acquisition of the business of Safety International. DXP acquired this business to strengthen DXP’s expertise in safety products and services. DXP paid $2.2 million in cash for the business of Safety International.

On October 19, 2006, DXP completed the acquisition of the business of Gulf Coast Torch & Regulator. DXP acquired this business to strengthen DXP’s expertise in the distribution of welding supplies. DXP paid approximately $5.5 million, net of $0.5 million of acquired cash, for the business of Gulf Coast Torch & Regulator, and assumed approximately $0.2 million worth of debt. Approximately $2.0 million of the purchase price was paid by issuing promissory notes payable to the former owners of Gulf Coast Torch & Regulator.

On November 1, 2006, DXP completed the acquisition of the business of Safety Alliance. DXP acquired this business to strengthen DXP’s expertise in safety products. DXP paid $2.3 million in cash for the business of Safety Alliance.

On May 4, 2007, DXP completed the acquisition of the business of Delta Process Equipment. DXP paid $10 million in cash for this business. DXP acquired this business to diversify DXP’s customer base in the municipal, wastewater and downstream industrial pump markets. The purchase price was funded by utilizing available capacity under DXP’s credit facility.

On September 10, 2007, DXP completed the acquisition of Precision Industries, Inc. DXP acquired this business to expand DXP’s geographic presence and strengthen DXP’s integrated supply offering. The Company paid $106 million in cash for Precision Industries, Inc. The purchase price was funded using approximately $24 million of cash on hand and approximately $82 million borrowed from a new credit facility.

On October 19, 2007, DXP completed the acquisition of the business of Indian Fire & Safety. DXP acquired this business to strengthen DXP’s expertise in safety products and services in New Mexico and Texas. DXP paid $6.0 million in cash, $3.0 million in the form of a promissory note and ~~up to $3.0~~$2.0 million in future payments which were contingent upon future earnings.

On January 31, 2008, DXP completed the acquisition of the business of Rocky Mtn. Supply. DXP acquired this business to expand DXP’s presence in the Colorado area. DXP paid $3.9 million in cash and $0.7 million in seller notes.

On August 28, 2008, DXP completed the acquisition of PFI, LLC (“PFI”). DXP acquired this business to strengthen DXP’s expertise in the distribution of fasteners. DXP paid $66.4 million in cash for this business.

On December 1, 2008, DXP completed the acquisition of the business of Falcon Pump. DXP acquired this business to strengthen DXP’s pump offering in the Rocky Mountain area. DXP paid $3.1 million in cash, $0.8 million in seller notes and ~~up to $1.0~~$0.2 million in ~~future payments contingent~~cash based upon ~~future~~ earnings after the acquisition date.

~~MRO Segment~~convertible promissory notes, along with accrued interest, were converted into 376,417 shares of DXP’s common stock. On August 18, 2010, $3.7 million of the convertible promissory notes were paid off using funds obtained from DXP’s credit facility and $1.8 million of the convertible promissory notes were converted to 117,374 shares of DXP common stock. The $11 million cash portion of the purchase price was funded by borrowings under DXP’s existing credit facility. DXP completed this acquisition to expand its pump business in the Western U.S.

The MRO segment provides MRO products, equipment and integrated services, including technical design expertise and logistics capabilities, to industrial customers. We provide a wide range of MRO products in the fluid handling equipment, bearing, power transmission equipment, general mill, safety supply and electrical products categories. We offer our customers a single source of integrated services and supply on an efficient and competitive basis by being a first-tier distributor that can purchase products directly from the manufacturer. We also provide integrated services such as system design, fabrication, installation, repair and maintenance for our customers. We offer a wide range of industrial MRO products, equipment and services through a complete continuum of customized and efficient MRO solutions, ranging from traditional distr ibution to fully integrated supply contracts. The integrated solution is tailored to satisfy our customers’ unique needs.

~~SmartSource~~SM~~, one of our proprietary integrated supply programs, allows a more effective and efficient way to manage the customer’s supply chain needs for MRO products. SmartSource~~SM ~~effectively lowers costs by outsourcing the customer’s purchasing, accounting and on-site supply/warehouse management to~~On November 30, 2010, DXP which reduces the duplication of effort by the customer and supplier. The program allows the customer to transfer all or part of their supply chain needs to DXP, so the customer can focus on their core business. DXP has a broad range of first-tier products to support a successful integrated supply offering. The program provides a pr oductive, measurable solution to reduce cost and streamline procurement and sourcing operations.

We currently serve as a first-tier distributor of more than 1,000,000 items of which more than 45,000 are stock keeping units ("SKUs") for use primarily by customers engaged in the general manufacturing, oil and gas, petrochemical, service and repair and wood products industries. Other industries served by our MRO segment include mining, construction, chemical, municipal, food and beverage, agriculture and pulp and paper. Our MRO products include a wide range of products in the fluid handling equipment, bearing, power transmission equipment, general mill, safety products and electrical products. Our products are distributed from 112 service centers, 50 supply chain locations and 6 distribution centers.

Our fluid handling equipment line includes a full line of centrifugal pumps for transfer and process service applications, such as petrochemicals, refining and crude oil production; rotary gear pumps for low- to medium-pressure service applications, such as pumping lubricating oils and other viscous liquids; plunger and piston pumps for high-pressure service applications such as salt water injection and crude oil pipeline service; and air-operated diaphragm pumps. We also provide various pump accessories. Our bearing products include several types of mounted and unmounted bearings for a variety of applications. The hose products we distribute include a large selection of industrial fittings and stainless steel hoses, hydraulic hoses, Teflon hoses and expansion joints, as well as hoses for chemical, petroleum, air and water applications . We distribute seal products for downhole, wellhead, valve and completion equipment to oilfield service companies. The power transmission products we distribute include speed reducers, flexible-coupling drives, chain drives, sprockets, gears, conveyors, clutches, brakes and hoses. We offer a broad range of general mill supplies, such as abrasives, tapes and adhesive products, coatings and lubricants, cutting tools, fasteners, hand tools, janitorial products, pneumatic tools, welding supplies and welding equipment. We offer a broad range of fluid power and hydraulics solutions. Our safety products include eye and face protection products, first aid products, hand protection products, hazardous material handling products, instrumentation and respiratory protection products. We distribute a broad range of electrical products, such as wire conduit, wiring devices, electrical fittings and boxes, signaling devices, heaters, tools, switch gear, lighting, lamps, tape, lugs, wire nut s, batteries, fans and fuses.

In addition to distributing MRO products, we provide innovative pumping solutions. DXP provides fabrication and technical design to meet the capital equipment needs of our customers. DXP provides these solutions by utilizing manufacturer- authorized equipment and certified personnel. Pump packages require MRO and original equipment manufacturer, or OEM, equipment and parts such as pumps, motors and valves, and consumable products such as welding supplies. DXP leverages its MRO inventories and breadth of authorized products to lower the total cost and maintain the quality of our innovative pumping solutions.

Our operations managers support the sales efforts through direct customer contact and manage the efforts of the outside and direct sales representatives. We have structured compensation to provide incentives to our sales representatives, through the use of commissions, to increase sales. Our outside sales representatives focus on building long-term rela-

tionships with customers and, through their product and industry expertise, providing customers with product application, engineering and after-the sale services. The direct sales representatives support the outside sales representatives and are responsible for entering product orders and providing technical support with respect to our products. Because we offer a broad range of products, our outside and direct sales representatives are able to use their existing customer relationships with respect to one product line to cross-sell our other product lines. In addition, geographic locations in which certain products are sold also are being utilized to sell products not historically sold at such locations. As we expand our product lines and geograph ical presence through hiring experienced sales representatives, we assess the opportunities and appropriate timing of introducing existing products to new customers and new products to existing customers. Prior to implementing such cross-selling efforts, we provide the appropriate sales training and product expertise to our sales force.

Unlike many of our competitors, we market our products primarily as a first-tier distributor, generally procuring products directly from the manufacturers, rather than from other distributors. As a first-tier distributor, we are able to reduce our customers' costs and improve efficiencies in the supply chain.

We believe we have increased our competitive advantage through our traditional and integrated supply programs, which are designed to address the customer's specific product and procurement needs. We offer our customers various options for the integration of their supply needs, ranging from serving as a single source of supply for all or specific lines of products and product categories to offering a fully integrated supply package in which we assume the procurement and management functions, including ownership of inventory, at the customer's location. Our approach to integrated supply allows us to design a program that best fits the needs of the customer. For those customers purchasing a number of products in large quantities, the customer is able to outsource all or most of those needs to us. For customers with smaller supply needs, w e are able to combine our traditional distribution capabilities with our broad product categories and advanced ordering systems to allow the customer to engage in one-stop shopping without the commitment required under an integrated supply contract.

We acquire our products through numerous original equipment manufacturers, or OEMs. We are authorized to distribute the manufacturers' products in specific geographic areas. All of our distribution authorizations are subject to cancellation by the manufacturer upon one-year notice or less. No manufacturer provided products that accounted for 10% or more or our revenues. We believe that alternative sources of supply could be obtained in a timely manner if any distribution authorization were canceled. Accordingly, we do not believe that the loss of any one distribution authorization would have a material adverse effect on our business, financial condition or results of operations. Representative manufacturers of our products include BACOU/DALLOZ, Baldor Electric, Emerson, Falk, G&L, Gates, Gould's, INA/Fag Bearing, LaCross Rainfair Safety Products, Martin Sprocket, National Oilwell, Norton Abrasives, NTN, Rexnord, SKF, ULTRA, 3M, Timken, Tyco, Union Butterfield, Viking and Wilden.

~~All of the segment’s long-lived assets are located in the U. S. and virtually all sales are recognized in the U. S.~~

~~At December 31, 2009, the MRO Segment had 1,687 full-time employees.~~

~~Electrical Contractor Segment~~

~~The Electrical Contractor segment was formed in 1998 with the acquisition of~~acquired substantially all of the assets of ~~an electrical supply business.~~D&F Distributors, Inc. (“D&F”). The ~~Electrical Contractor segment sells~~purchase price of $13.4 million consisted of approximately $7.4 million paid in cash, approximately $2.9 million in the form of promissory notes bearing interest at a ~~broad range~~rate of ~~electrical products, such as wire conduit, wiring devices, electrical fittings~~5%, and ~~boxes, signaling devices, heaters, tools, switch gear, lighting, lamps, tape, lugs, wire nuts, batteries, fans and fuses, to electrical contractors.~~approximately $3.1 million in the form of 155,393 shares of DXP common stock. The ~~segment has one owned warehouse/sales facility in Memphis, Tennessee.~~

We acquire our electrical products through numerous OEMs. We are authorized to distribute the manufacturers' products in specific geographic areas. All of our distribution authorizations are subject to cancellation by the manufacturer upon one-year notice or less. No one manufacturer provides products that account for 10% or more of our revenues. We believe that alternative sources of supply could be obtained in a timely manner if any distribution authorization were canceled. Accordingly, we do not believe that the loss of any one distribution authorization would have a material adverse effect on our business, financial condition or results of operations. Significant vendors include Cutler-Hammer, Cooper, Killark, 3M, General Electric and Allied. To meet prompt delivery demands of its customers, this segment maint ains large inventories.

~~All~~cash portion of the ~~segment’s long-lived assets are located~~purchase price was funded by borrowings under DXP’s existing credit facility. DXP completed this acquisition to expand its pump business in ~~the U. S.~~Indiana, Kentucky, Tennessee and ~~virtually all sales are recognized in the U. S.~~

~~At December 31, 2009, the Electrical Contractor segment had 10 full-time employees.~~Ohio.

On ~~March 5, 2010, the Company sold~~October 10, 2011, DXP acquired substantially all of the assets of Kenneth Crosby ("KC"). DXP acquired this business to expand DXP's geographic presence in the ~~Electrical Contractor segment~~eastern U.S. and strengthen DXP's metal working and supply chain services offerings. DXP paid approximately $16 million for KC, which was borrowed under our existing credit facility.

On December 30, 2011, DXP acquired substantially all of the assets of C.W. Rod Tool Company ("CW Rod"). DXP acquired this business to strengthen DXP's metal working offering in Texas and Louisiana. DXP paid approximately ~~$1.4 million.~~$1.1 million of DXP's common stock (35,714 shares) and approximately $42 million in cash for CW Rod, which was borrowed during 2011 and 2012 under our recently expanded credit facility.

Competition

Our business is highly competitive. In the ~~MRO~~Service Centers segment we compete with a variety of industrial supply distributors, many of which may have greater financial and other resources than we do. Many of our competitors are small enterprises selling to customers in a limited geographic area. We also compete with ~~larger distributors that provide integrated supply programs and outsourcing services similar to those offered through our SmartSource~~SM ~~program, some of which might be able to supply their products in a more efficient and cost-effective manner than we can provide. We also compete with~~ catalog distributors, large warehouse stores and, to a lesser extent, manufacturers. While many of our competitors offer traditional distribution of some of the ~~pro duct~~product groupings that we offer, we are not aware of any major competitor that offers on a non-catalog basis a ~~product grouping~~range of products and services as broad as our offering. Further, while certain catalog distributors provide product offerings as broad as ours, these competitors do not offer the product application, technical design and after-the-sale services that we provide. In the ~~Electrical Contractor~~Supply Chain Services segment we compete with larger distributors that provide integrated supply programs and outsourcing services, some of which might be able to supply their products in a more efficient and cost-effective manner than we can provide. In the Innovative Pumping Solutions segment we compete against a variety of ~~suppliers of electrical products,~~manufacturers, distributors and fabricators, many of which may have greater financial and other resources than we do. We generally compete on service and ~~price.~~price in all of our segments.

Insurance

We maintain liability and other insurance that we believe to be customary and generally consistent with industry practice. We retain a portion of the risk for medical claims, general liability, worker’s compensation and property losses. The various deductibles of our insurance policies generally do not exceed $200,000 per occurrence. There are also certain risks for which we do not maintain insurance. There can be no assurance that such insurance will be adequate for the risks involved, that coverage limits will not be exceeded or that such insurance will apply to all liabilities. The occurrence of an adverse claim in excess of the coverage limits that we maintain could have a material adverse effect on our financial condition and results of operations. The premiums for insurance have ~~i ncreased~~increased significantly over the past three years. This trend could continue. Additionally, we are partially self-insured for our group health plan, worker’s compensation, auto liability and general liability insurance. The cost of claims for the group health plan has increased over the past three years. This trend is expected to continue.

Government Regulation and Environmental Matters

We are subject to various laws and regulations relating to our business and operations, and various health and safety regulations as established by the Occupational Safety and Health Administration.

Certain of our operations are subject to federal, state and local laws and regulations controlling the discharge of materials into or otherwise relating to the protection of the environment. Although we believe that we have adequate procedures to comply with applicable discharge and other environmental laws, the risks of accidental contamination or injury from the discharge of controlled or hazardous materials and chemicals cannot be eliminated completely. In the event of such a discharge, we could be held liable for any damages that result, and any such liability could have a material adverse effect on us. We are not currently aware of any situation or condition that we believe is likely to have a material adverse effect on our results of operations or financial condition.

Employees

At December 31, ~~2009, we~~2011, DXP had ~~1,697~~approximately 2,093 full-time employees. We believe that our relationship with our employees is good.

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.

ITEM 1A. Risk Factors

The following is a discussion of significant risk factors relevant to DXP’s business that could adversely affect its business, financial condition or results of operations.

The trading price of our common stock may be volatile.

The market price of our common stock could be subject to wide fluctuations in response to, among other things, the risk factors described in this and other periodic reports, and other factors beyond our control, such as fluctuations in the valuation of companies perceived by investors to be comparable to us. Furthermore, the stock markets have experienced price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. These fluctuations often have been unrelated or disproportionate to the operating performance of those companies. These broad market and industry fluctuations, as well as general economic, political, and market conditions, such as recessions, interest rate changes or international currency fluctuations, may negatively affect the market price of our common stock. In the past, many companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation. We may be the target of this type of litigation in the future. Securities litigation against us could result in substantial costs and divert our management's attention from other business concerns, which could seriously harm our business.

Our future results will be impacted by our ability to implement our internal growth strategy.

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 SmartSourceSM 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.

Risks Associated With Acquisition Strategy

Our future results will depend in part on our ability to successfully implement our acquisition strategy. We may not be able to consummate acquisitions at rates similar to the past, which could adversely impact our growth rate and our stock price. This strategy includes taking advantage of a consolidation trend in the industry and effecting acquisitions of businesses with complementary or desirable ~~new~~ product lines, strategic distribution locations, attractive customer bases or manufacturer relationships. ~~Our ability~~Promising acquisitions are difficult to ~~implement this strategy successfully will depend on~~identify and complete for a number of reasons, including high valuations, competition among prospective buyers, the need for regulatory (including antitrust) approvals and the availability of affordable funding in the capital markets. In addition, competition for acquisitions in our business areas is significant and may result in higher purchase prices. Changes in accounting or regulatory requirements or instability in the credit markets could also adversely impact our ability to ~~identify,~~ consummate and successfully assimilate acquisitions on economically favorable terms. Although DXP is actively seeking acquisitions that would meet its strategic objectives, there can be no assurance that we will be successful in these efforts.acquisitions. In addition, acquisitions involve a number of special risks, including possible adverse effects ~~o n~~on our operating results, diversion of management’s attention, failure to retain key personnel of the acquired business, risks associated with unanticipated events or liabilities, and expenses associated with obsolete inventory of an acquired business, ~~and amortization of acquired intangible assets,~~ some or all of which could have a material adverse effect on our business, financial condition and results of operations. ~~There can be no assurance that DXP~~Our ability to grow at or ~~other businesses acquired~~above our historic rates depends in ~~the future will achieve anticipated revenues and earnings. In addition, our credit agreement with our bank lenders contains certain restrictions that could adversely affect~~part upon our ability to implement our acquisition strategy. Such restrictions include a provision prohibiting us from merging or consolidating with, or acquiring all or a substantial part of the properties or capital stock of, any other entity without the prior written consent of the lenders. There can be no assurance that we will be able to obtain the lender’s consent to any of our proposed acquisitions.identify and successfully acquire and integrate companies and businesses at appropriate prices and realize anticipated cost savings.

Risks Related to Acquisition Financing

We may need to finance acquisitions by using shares of Common Stock for a portion or all of the consideration to be paid. In the event that the Common Stock does not maintain a sufficient market value, or potential acquisition candidates are otherwise unwilling to accept Common Stock as part of the consideration for the sale of their businesses, we may be required to use more of our cash resources, if available, to maintain our acquisition program. These cash resources may include borrowings under our credit agreement or equity or debt financings. Our current credit agreement with our bank lenders contains certain restrictions that could adversely affect our ability to implement and finance potential acquisitions. Such restrictions include a provision prohibiting us from merging or consolidating with, or acquiring all or a substantial part of the properties or capital stock of, any other entity without the prior written consent of the lenders. There can be no assurance that we will be able to obtain the lender’s consent to any of our proposed acquisitions. If we do not have sufficient cash resources, our growth could be limited unless we are able to obtain additional capital through debt or equity financings.

Ability to Comply with Financial Covenants of Credit Facility

Our credit facility requires the Company to comply with certain specified covenants, restrictions, financial ratios and other financial and operating tests. The Company’s ability to comply with any of the foregoing restrictions will depend on its future performance, which will be subject to prevailing economic conditions and other factors, including factors beyond the Company’s control. A failure to comply with any of these obligations could result in an event of default under the credit facility, which could permit acceleration of the Company’s indebtedness under the credit facility. The Company from time to time has been unable to comply with some of the financial covenants contained in the credit facility (relating to, among other things, the maintenance of prescribed financial ~~rati os)~~ratios) and has, when necessary, obtained waivers or amendments to the covenants from its lenders. Although the ~~company~~ Company expects to be able to comply with the covenants, including the financial covenants, of the credit facility, there can be no assurance that in the future the Company will be able to do so or, if is not able to do so, that its lenders will be willing to waive such compliance or further amend such covenants.

Goodwill and intangible assets recorded as a result of our acquisitions could become impaired.

Goodwill represents the difference between the purchase price of acquired companies and the related fair values of net assets acquired. We test goodwill for impairment annually and whenever events or changes in circumstances indicate that impairment may have occurred. As of December 31, 2011, our combined goodwill and intangible assets amounted to $145.0 million, net of accumulated amortization. To the extent we do not generate sufficient cash flows to recover the net amount of any investments in goodwill and other intangible assets recorded, the investment could be considered impaired and subject to write-off. We expect to record additional goodwill and other intangible assets as a result of future acquisitions we may complete. Future amortization of such other intangible assets or impairments, if any, of goodwill or intangible assets would adversely affect our results of operations in any given period.

Our business has substantial competition ~~and competition~~that could adversely affect our results.

Our business is highly competitive. We compete with a variety of industrial supply distributors, some of which may have greater financial and other resources than us. Although many of our traditional distribution competitors are small enterprises selling to customers in a limited geographic area, we also compete with larger distributors that provide integrated supply programs such as those offered through outsourcing services similar to those that are offered by our ~~SmartSource~~SM ~~program.~~SCS segment. Some of these large distributors may be able to supply their products in a more timely and cost-efficient manner than us. Our competitors include catalog suppliers, large warehouse stores and, to a lesser extent, certain manufacturers. Competitive ~~pres sures~~pressures could adversely affect DXP’s sales and profitability.

The loss of or the failure to attract and retain key personnel could adversely impact our results of operations.

We will continue to be dependent to a significant extent upon the efforts and ability of David R. Little, our Chairman of the Board, President and Chief Executive Officer. The loss of the services of Mr. Little or any other executive officer of our Company could have a material adverse effect on our financial condition and results of operations. In addition, our ability to grow successfully will be dependent upon our ability to attract and retain qualified management and technical and operational personnel. The failure to attract and retain such persons could materially adversely affect our financial condition and results of operations.

The loss of any key supplier could adversely affect DXP’s sales and profitability.

We have distribution rights for certain product lines and depend on these distribution rights for a substantial portion of our business. Many of these distribution rights are pursuant to contracts that are subject to cancellation upon little or no prior notice. Although we believe that we could obtain alternate distribution rights in the event of such a cancellation, the termination or limitation by any key supplier of its relationship with the Company could result in a temporary disruption of our business and, in turn, could adversely affect our results of operations and financial condition.

A slowdown in the economy could negatively impact DXP’s sales growth.

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.

Interruptions in the proper functioning of our information systems could disrupt operations and cause increases in costs and/or decreases in revenues.

The proper functioning of DXP’s information systems is critical to the successful operation of our business. Although DXP’s information systems are protected through physical and software safeguards and remote processing capabilities exist, our information systems are still vulnerable to natural disasters, power losses, telecommunication failures and other

problems. If critical information systems fail or are otherwise unavailable, DXP’s ability to procure products to sell, process and ship customer orders, identify business opportunities, maintain proper levels of inventories, collect accounts receivable and pay accounts payable and expenses could be adversely affected.

ITEM 1B. Unresolved Staff Comments

None.

ITEM 2. Properties

We own our headquarters facility in Houston, Texas, which has approximately 48,000 square feet of office space. The ~~MRO~~Service Centers segment owns or leases ~~112~~123 facilities located in Alabama, Arizona, Arkansas, California, Colorado, Florida, Georgia, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maryland, Massachusetts, Minnesota, Mississippi, Missouri, Montana, Nebraska, Nevada, New Jersey, New Mexico, New York, North Carolina, North Dakota, Ohio, Oklahoma, Pennsylvania, South Dakota, Tennessee, Texas, Utah, Virginia, Wyoming and ~~Wyoming. In addition, we operate~~Sonora, Mexico. The Supply Chain Services segment operates supply chain installations in 5055 of our customers’ facilities in Alabama, Arkansas, Arizona, California, Florida, Georgia, Illinois, Indiana, Louisiana, Maryland, Massachusetts, Michigan, Missouri, Nebraska, New Jersey, New York, North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, South Carolina, Tennessee, Texas, ~~and~~ Virginia, and ~~as well as~~Wisconsin. The Innovative Pumping Solutions segment operates out of 8 facilities located in ~~Ontario, Canada. The Electrical Contractor segment owns one service center facility in Tennessee.~~Texas, Louisiana, Colorado, Arizona and Nebraska. Our owned facilities range from 5,000 square feet to 65,000 square feet in size. We lease facilities for terms generally ranging from one to ~~seven~~fifteen years. The leased facilities range from 1,500 square feet to 170,000 square feet in size. The leases provide for periodic specified rental payments and certain leases are renewable at our option. We believe that our facilities are suitable and adequate for the needs of our existing business. We believe that if the leases for any of our facilities were not renewed, other suitable facilities could be leased with no material adverse effect on our business, financial condition or results of operations. One of the facilities owned by us is pledged to secure our indebtedness.

ITEM 3. Legal Proceedings

On July 22, 2004, DXP and Ameron International Corporation, DXP’s vendor of fiberglass reinforced pipe, were sued in the Twenty-Fourth Judicial District Court, Parish of Jefferson, State of Louisiana by BP America Production Company regarding the failure of Bondstrand PSX JFC pipe, a recently introduced type of fiberglass reinforced pipe which had been installed on four energy production platforms. BP American Production Company alleges negligence, breach of contract, breach of warranty and that damages exceed $20 million. DXP believes the failures were not caused ~~by the failure of the pipe itself and not~~ by work performed by DXP. We intend to vigorously defend these claims. Our insurance carrier has agreed, under a reservation of rights to deny coverage, to provide a defense against these claims. The maximum amount of our insurance coverage, if any, is $6 million. Under certain circumstances, our insurance may not cover this claim. DXP currently believes ~~that this~~the claim is without ~~merit.~~

In 2003, we were notified that we had been sued in various state courts in Nueces County, Texas. The twelve suits allege personal injury resulting from products containing asbestos allegedly sold by us. The suits do not specify what products ormerit and the dates we allegedly sold the products. The plaintiffs’ attorney has agreed to a global settlement of all suits for a nominal amount to be paid by our insurance carriers. Settlement has been consummated as to more than 85%possibility of the ~~133 plaintiffs, and the remaining settlements are in process. The cases are all dismissed~~claim having a material adverse effect on our business, financial condition, cash flows or ~~dormant pending the remaining settlements.~~results of operations is remote.

From time to time, the Company is a party to various legal proceedings arising in the ordinary course of its business. The Company believes that the outcome of any of these various proceedings will not have a material adverse effect on its business, cash flows, financial condition or results of operations.

ITEM 4. ~~Submission of Matters to a Vote of Security Holders~~Mine Safety Disclosures

~~None.~~Not applicable.

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PART II

ITEM 5.

Market for the Registrant's Common Equity, Related Stockholder Matters and ~~Issuer Purchases of Equity Securities~~

Issuer Purchases of Equity Securities

Our common stock trades on The NASDAQ Global Market under the stock symbol "DXPE".

The following table sets forth on a per share basis the high and low sales prices for our common stock as reported by NASDAQ for the periods indicated.

	High	Low	High	Low
2009
2010
First Quarter	$ 15.84	$ 8.47	$ 13.59	$ 10.75
Second Quarter	$ 16.40	$ 9.52	$ 17.98	$ 11.25
Third Quarter	$ 12.44	$ 9.21	$ 21.59	$ 14.84
Fourth Quarter	$ 13.36	$ 10.48	$ 24.76	$ 17.61

2008
2011
First Quarter	$ 23.74	$ 14.80	$ 24.99	$ 18.43
Second Quarter	$ 22.82	$ 18.83	$ 26.71	$ 22.01
Third Quarter	$ 34.14	$ 18.72	$ 27.81	$ 17.89
Fourth Quarter	$ 28.89	$ 9.67	$ 33.58	$ 17.01

On March ~~19, 2010,~~5, 2012, we had approximately ~~541~~499 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”.

We anticipate that future earnings will be retained to finance the continuing development of our business. In addition, our bank credit facility prohibits us from declaring or paying any cash dividends or other distributions on our capital stock, except for the monthly $0.50 per share dividend on our Series B convertible preferred stock, which amounts to $90,000 in the aggregate per year. Accordingly, we do not anticipate paying cash dividends on our common stock in the foreseeable future. The payment of any future dividends will be at the discretion of our Board of Directors and will depend upon, among other things, future earnings, the success of our business activities, regulatory and capital requirements, ~~our~~ lenders, ~~our~~and general financial ~~condition~~ and ~~general~~ business conditions.

Stock Performance

The following performance graph compares the performance of DXP Common Stock to the NASDAQ Industrial Index and the NASDAQ Composite (US). The graph assumes that the value of the investment in DXP Common Stock and in each index was $100 at December 31, ~~2004~~2006 and that all dividends were reinvested.

1214

Investors are cautioned against drawing conclusions from the data contained in the graph as past results are not necessarily indicative of future performance.

Equity Compensation Table

The following table provides information regarding shares covered by the Company’s equity compensation plans as of December 31, ~~2009:~~2011:

Plan category	Number of Shares to be issued on exercise of outstanding options	Weighted average exercise price of outstanding options	Non-vested restricted shares outstanding	Weighted average grant price	Number of securities remaining available for future issuance under equity compensation plans	Number of Shares to be issued on exercise of outstanding options	Weighted average exercise price of outstanding options	Non-vested restricted shares outstanding	Weighted average grant price	Number of securities remaining available for future issuance under equity compensation plans
Equity compensation plans approved by shareholders	50,000	$ 2.50	223,448	$ 15.29	221,883(1)	N/A	N/A	228,592	$21.10	48,784(1)
Equity compensation plans not approved by shareholders	N/A	N/A		N/A	N/A	N/A	N/A		N/A	N/A
Total	50,000	$ 2.50	223,448	$ 15.29	221,883(1)	N/A	N/A	228,592	$21.10	48,784(1)
(1) Represents shares of common stock authorized for issuance under the 2005 Restricted Stock Plan. Does not include shares to be issued upon exercise of outstanding options.
(1) Represents shares of common stock authorized for issuance under the 2005 Restricted Stock Plan.						(1) Represents shares of common stock authorized for issuance under the 2005 Restricted Stock Plan.

Repurchases of Common Stock

The following table provides information about the Company's purchases of shares of the Company's common stock during the fourth quarter of 2011.

	Total Number of Shares Purchased(1)	Average Price Paid per Share	Total Number of shares Purchased as part of Publicly announced Plans or Programs	Maximum Number of Shares that may yet be Purchased under the Plans or Programs
October 1, 2011 through October 31, 2011	15,171	$17.90	-	-
Totals	15,171	$17.90	-	200,000(2)

(1) Shares were purchased in non-open market transactions. (2) On October 26, 2011, the Board of Directors authorized DXP from time to time to purchase up to 200,000 shares of DXP's common stock over 24 months. DXP publicly announced the authorization that day. Purchases may be made in open market or in privately negotiated transactions. DXP had not purchased any shares under this authorization as of December 31, 2011.

ITEM 6. Selected Financial Data

The selected historical consolidated financial data set forth below for each of the years in the five-year period ended December 31, ~~2009~~2011 has been derived from our audited consolidated financial statements. This information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and notes thereto included elsewhere in this Report.

	Years Ended December 31,
	2007 Restated(1)	2008 Restated(1)	2009(2)	2010	2011
	(in thousands, except per share amounts)
Consolidated Statement of Earnings Data:
Sales	$ 444,547	$ 736,883	$ 583,226	$ 656,202	$ 807,005
Gross Profit	125,692	206,988	151,414	188,395	231,836
Operating income (loss)	31,892	48,191	(49,332)	37,091	55,485
Income (loss) before income taxes	28,897	42,284	(54,482)	32,132	51,995
Net income (loss)	17,347	25,887	(42,412)	19,381	31,437
Per share amounts
Basic earnings (loss) per common share	$ 1.46	$ 1.99	$ (3.24)	$ 1.40	$ 2.19
Common shares outstanding	11,811	12,945	13,117	13,821	14,301
Diluted earnings (loss) per share	$ 1.35	$ 1.87	$ (3.24)	$ 1.32	$ 2.08
Common and common equivalent shares outstanding	12,860	13,869	13,117	14,821	15,141
(1) Basic and diluted earnings per share amounts have been restated due to adoption in the first quarter of 2009 of authoritative guidance which requires awards of unvested restricted stock to be treated as if outstanding in the calculation of earnings per share. On September 30, 2008, DXP paid a two for one common stock dividend. DXP’s financial statements have been restated to reflect the effect of this common stock dividend on all periods presented. (2)The goodwill and other intangibles impairment charge and the Precision inventory impairment charge in 2009 reduced operating income by $66.8 million and increased basic and diluted loss per share by $3.82.

1316

Years Ended December 31,
2005
2006
Restated(1)
2007
Restated(1)
2008
Restated(1)
2009(2)
(in thousands, except per share amounts)
Consolidated Statement of Earnings Data:
Sales $  185,364 $  279,820 $  444,547 $  736,883 $  583,226
Gross Profit 49,714 78,622 125,692 206,988 151,414
Operating income 9,404 20,678 31,892 48,191 (49,332)
Income (loss) before income taxes 8,615 19,404 28,897 42,284 (54,482)
Net income (loss) 5,467 11,922 17,347 25,887 (42,412)
Per share amounts
  Basic earnings (loss) per common share $        0.62 $        1.17 $        1.46 $        1.99 $      (3.24)
  Common shares outstanding 8,698 10,127 11,811 12,945 13,117
  Diluted earnings (loss) per share $        0.47 $        1.04 $        1.35 $        1.87 $      (3.24)
  Common and common equivalent shares
    outstanding

11,578

11,450

12,860

13,869

13,117
(1) Basic and diluted earnings per share amounts have been restated due to adoption in the first quarter of 2009 of authoritative guidance which requires awards of unvested restricted stock to be treated as if outstanding in the calculation of earnings per share.
(2) The goodwill and other intangibles impairment charge and the Precision inventory impairment charge in 2009 reduced operating income by $66.8 million and increased basic and diluted loss per share by $3.82.

Consolidated Balance Sheet Data As of December 31,
2005 2006 2007 2008 2009
Total assets $ 74,924 $ 118,811 $ 288,170 $ 397,856 $ 270,927
Long-term debt obligations 25,109 35,174 101,989 154,591 102,916
Shareholders’ equity 20,791 36,920 102,713 130,188 90,213

Consolidated Balance Sheet Data	As of December 31,
	2007	2008	2009	2010	2011
Total assets	$ 288,170	$ 397,856	$ 270,927	$ 320,624	$ 405,338
Long-term debt obligations	101,989	154,591	102,916	103,621	114,205
Shareholders’ equity	102,713	130,188	90,213	124,120	156,675

ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements and related notes contained elsewhere in this Report.

General Overview

Our products and services are marketed in at least 3742 states in the United States and ~~one province in Canada~~Sonora, Mexico to over ~~40,000~~50,000 customers that are engaged in a variety of industries, many of which may be countercyclical to each other. Demand for our products generally is subject to changes in the United States and global economy and economic trends affecting our customers and the industries in which they compete in particular. Certain of these industries, such as the oil and gas industry, are subject to volatility while others, such as the petrochemical industry and the construction industry, are cyclical and materially affected by changes in the United States and global economy. As a result, we may experience changes in demand within particular markets, segments and product categories as changes occur in our customers' respective markets.

During 2005 the general economy and the oil and gas exploration and production business continued to improve. Our employee headcount increased by 17.9% as a result of two acquisitions and hiring additional personnel to support increased sales. The majority of the 2005 sales increase came from a broad-based increase in sales of pumps, bearings, safety products and mill supplies to customers engaged in oilfield service, oil and gas production, mining, electricity generation and petrochemical processing. Sales by the two businesses acquired in 2005 accounted for $7.3 million of the $24.8 million 2005 sales increase.

During 2006 the general economy and the oil and gas exploration and production business continued to be positive. Our employee headcount increased by 45% a result of four acquisitions and hiring additional personnel to support increased sales. The majority of the 2006 sales increase came from a broad-based increase in sales of pumps, bearings, safety products and mill supplies to customers engaged in oilfield service, oil and gas production, mining, electricity generation and petrochemical processing. Sales by the four businesses acquired in 2006 accounted for $11.8 million of the $94.5 million 2006 sales increase.

~~During~~ 2007, the general economy and the oil and gas exploration and production business continued to be positive. During 2007, our headcount increased by 112% primarily as a result of three acquisitions. Sales by the three businesses acquired in 2007 accounted for $92.3 million of the $164.7 million sales increase. The 2007 sales increase, excluding sales of businesses acquired in 2006 and 2007, resulted from a broad based increase in sales by our service centers, innovative pumping solution locations and supply chain locations. Excluding sales of businesses acquired in 2006 and 2007, on a same store sales basis, 2007 sales increased by 15.7%.

During 2008, the general economy weakened. However, the oil and gas exploration and production business continued to be positive during the first half of 2008, before declining during the second half of 2008. During 2008 our headcount increased by 18% primarily as a result of three acquisitions. Sales by the three businesses acquired in 2008 accounted for $33.4 million of 2008 sales. Sales by the ~~$292.3~~three businesses acquired in 2007 accounted for $200.4 million of 2008 sales, ~~increase. The 2008~~on a same store sales ~~increase, excluding~~basis. Excluding sales of businesses acquired in 2007 and 2008, on a same store sales basis, 2008 sales increased 13.2%. This increase resulted from a broad-based increase in sales by our service centers, innovative pumping solution locations and supply chain locations.

During 2009, the general economy and the oil and gas exploration and production business declined significantly. During 2009, our headcount decreased by approximately 10% as a result of actions taken to reduce operating costs. Sales for 2009 declined by ~~20.9%~~21% from 2008. Sales by businesses acquired during 2008, on a same store sales basis, accounted for $36.1 million of ~~2009~~2010 sales. Excluding these sales by acquired businesses, sales declined by ~~25.8%~~26% from 2008. The 2009 sales decline is primarily due to a broad-based decline in the sales of pumps, bearings, safety products and ~~mill~~industrial supplies in connection with a broad-based decline in the U.S. economy. This economic decline led to the impairment of our goodwill and other intangibles. During the fourth quarter of 2009 the Company recognized an impairment charge of $53.0 million for goodwill and other intangibles and an impairment charge of $13.8 million to reduce the valuation of inventory acquired in the acquisition of Precision. The impairment charges did not result in any cash expenditures, did not adversely affect compliance with covenants under our credit facility, and did not affect our cash position or cash flows from operating activities.

During 2010, the general economy and the oil and gas exploration and production business improved. Our employee headcount increased by approximately 7% as a result of two acquisitions. Excluding the employees at the two acquired businesses headcount declined by approximately 1%, primarily as a result of consolidating back office functions. Sales by Quadna, acquired April 1, 2010 and D&F, acquired December 1, 2010, accounted for $43.6 million of 2010 sales. Excluding Quadna and D&F sales, sales for 2010 increased 5.0%.

During 2011, the general economy and the oil and gas exploration and production business continued to improve. Our employee headcount increased by 18% primarily as a result of two acquisitions and hiring additional personnel to support increased sales. Sales for the year ended December 31, 2011 increased $150.8 million, or 23.0%, to approximately $807.0 million from $656.2 million in 2010. Sales by KC, acquired October 10, 2011, accounted for $11.9 million of 2011 sales. Sales by businesses acquired in 2010, on a same store sales basis, accounted for $35.6 million of 2011 sales. Excluding 2011 sales by businesses acquired in 2010 and 2011, on a same store sales basis, sales increased 15.8% from 2010. The majority of the 2011 sales increase came from a broad-based increase in sales of pumps, bearings, safety products and industrial supplies to customers engaged in oilfield service, oil and gas exploration and production, mining, manufacturing and petrochemical processing.

Our sales growth strategy in recent years has focused on internal growth and acquisitions. Key elements of our sales strategy include leveraging existing customer relationships by cross-selling new products, expanding product offerings to new and existing customers, and increasing business-to-business solutions using system agreements and supply chain solutions for our integrated supply customers. We will continue to review opportunities to grow through the acquisition of distributors and other businesses that would expand our geographic breadth and/or add additional products and services. Our results will depend on our success in executing our internal growth strategy and, to the extent we complete any acquisitions, our ability to integrate such acquisitions effectively.

Our strategies to increase productivity include consolidated purchasing programs, centralizing product distribution centers, ~~centralizing certain~~and customer service and inside sales functions, converting selected locations from full warehouse and customer service operations to service centers, and using information technology to increase employee productivity.

Results of Operations

	Years Ended December 31,
	2009(1)	%	2010	%	2011	%
	(in millions, except percentages and per share amounts)
Sales	$ 583.2	100.0	$ 656.2	100.0	$ 807.0	100.0
Cost of sales	431.8	74.0	467.8	71.3	575.2	71.3
Gross profit	151.4	26.0	188.4	28.7	231.8	28.7
Selling, general & administrative expense	147.8	25.3	151.3	23.1	176.3	21.9
Goodwill and other intangibles impairment	53.0	9.1	-	-	-	-
Operating income (loss)	(49.3)	(8.5)	37.1	5.7	55.5	6.9
Interest expense	5.2	0.9	5.2	0.8	3.5	0.4
Other income	(0.1)	-	(0.2)	-	-	-
Income (loss) before income taxes	(54.5)	(9.3)	32.1	4.9	52.0	6.4
Provision (benefit) for income taxes	(12.1)	(2.1)	12.7	2.0	20.6	2.5
Net income (loss)	$(42.4)	(7.3%)	$ 19.4	3.0	$ 31.4	3.9
Per share
Basic earnings (loss) per share	$(3.24)		$ 1.40		$ 2.19
Diluted earnings (loss) per share	$(3.24)		$ 1.32		$ 2.08
(1) The goodwill and other intangibles impairment charge and the Precision inventory impairment charge in 2009 reduced operating income by $66.8 million and increased basic and diluted loss per share by $3.82.

DXP is organized into three business segments: Service Centers, Supply Chain Services (“SCS”) and Innovative Pumping Solutions (“IPS”). The Service Centers are engaged in providing maintenance, repair and operating products, equipment and services, including logistics capabilities, to industrial customers. The Service Centers provide a wide range of MRO products in the rotating equipment, bearing, power transmission equipment, fastener, cutting tools, industrial supplies and safety product categories. The IPS segment fabricates and assembles custom-made engineered pump packages. The SCS segment manages all or part of customer’s supply chain, including inventory.

1519

~~Results of Operations~~

Years Ended December 31,

2007
Restated(1)
    %
2008
Restated(1)
%
2009(2)

%
(in millions, except percentages and per share amounts)
Sales $ 444.5 100.0 $ 736.9 100.0 $ 583.2 100.0
Cost of sales 318.8 71.7 529.9 71.9 431.8 74.0
Gross profit 125.7 28.3 207.0 28.1 151.4 26.0
Selling, general & administrative expense 93.8 21.1 158.8 21.6 147.8 25.3
Goodwill and other intangibles impairment   53.0 9.1
Operating income (loss) 31.9 7.2 48.2 6.5 (49.3) (8.5)
Interest expense 3.3 0.7 6.1 0.8 5.2 0.9
Other income (0.3) - (0.2) - (0.1) -
Income (loss) before income taxes 28.9 6.5 42.3 5.7 (54.5) (9.3)
Provision (benefit) for income taxes 11.6 2.6 16.4 2.2 (12.1) (2.1)
Net income (loss) $   17.3 3.9% $  25.9 3.5% $(42.4) (7.3%)
Per share
     Basic earnings (loss) per share $   1.46 $  1.99 $(3.24)
     Diluted earnings (loss) per share $   1.35 $  1.87 $(3.24)
(1) Basic and diluted earnings per share amounts have been restated due to adoption in the first quarter of 2009 of authoritative guidance which requires awards of unvested restricted stock to be treated as if standing in the calculation of earnings per share.
(2) The goodwill and other intangibles impairment charge and the Precision inventory impairment charge in 2009 reduced operating income by $66.8 million and increased basic and diluted loss per share by $3.82.

Year Ended December 31, ~~2009 Compared~~2011 compared to Year Ended December 31, ~~2008~~2010

SALES. Sales for the year ended December 31, ~~2009 decreased $153.7~~2011 increased $150.8 million, or ~~20.9%~~23.0%, to approximately ~~$583.2~~$807.0 million from ~~$736.9~~$656.2 million in ~~2008.~~2010. Sales by KC, acquired October 10, 2011, accounted for ~~the MRO segment decreased $152.8~~$11.9 million ~~or 20.8%, to $580.5 million for the year ended December 31, 2009, from $733.3 million for 2008.~~of 2011 sales. Sales by businesses acquired in ~~2008,~~2010, on a same store sales basis, accounted for ~~$36.1~~$35.6 million of ~~2009~~2011 sales. Excluding ~~these~~2011 sales by ~~the~~businesses acquired ~~businesses,~~in 2010 and 2011, on a same store sales ~~for the MRO segment decreased 25.8%. This~~basis, sales decrease is primarily due to a broad-based decrease in sales of pumps, bearings, safety products and mill supplies in connection with a broad-based decline in the U. S. economy. Sales for the Electrical Contractor segment decreased by $0.9 million, or 24.4%, to $2.7 million for the year ended December 31 , 2009increased 15.8% from ~~$3.6 million for 2008, resulting from the decline in the U. S. economy. Sales of commodity and specialty type electrical products declined.~~2010.

GROSS PROFIT. Gross profit as a percentage of sales ~~decreased by approximately 2.1%~~was 28.7% for 2009, to 26.0% from 28.1% for 2008. Gross profit as a percentage of sales for the MRO segment decreased to 25.9% for 2009, from 28.1% for 2008. This decrease is the result of the $13.8 million charge in the fourth quarter of 2009 to reduce the value of inventory acquired in connection with the acquisition of Precision on September 10, 2007. Gross profit as a percentage of sales for the Electrical Contractor segment decreased to 35.4% for 2009, from 35.9% for 2008. This decrease resulted from sales of higher margin specialty-type electrical products decreasing more than sales of commodity products decreased.2011 and 2010.

SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative expense for ~~2009 decreased~~2011 increased by approximately ~~$11.0~~$25.0 million when compared to ~~$147.8 million from $158.8 million for 2008. Selling, general and administrative expense associated with the three businesses acquired in 2008, on a same store basis, accounted for $11.2 million~~2010. A portion of the ~~2009 expense. On a same store basis,~~increase relates to $9.6 million of selling, general and administrative expense ~~decreased approximately $36.5 million. This decrease~~for businesses acquired in 2010 and 2011, on a same store sales basis. Excluding the expenses of businesses acquired in 2010 and 2011, on a same store sales basis, the increase primarily resulted from ~~reduced~~increased salaries, incentive compensation, employee benefits and travel expenses compared to ~~2008.~~2010. As a percentage of ~~sales,~~revenue, the ~~2009~~2011 expense decreased to 21.9% from 23.1% for 2010.

OPERATING INCOME. Operating income for 2011 increased ~~by approximately 3.8%,~~49.6% compared to ~~25.3% for 2009 from 21.6% for 2008.~~2010. This increase is ~~primarily~~ the result of ~~sales decreasing more than~~ gross profit increasing 23.1% while selling, general and administrative ~~expenses decreased combined with the effect of accruing $1.8 million of future rent and related expenses associated with locations closed during 2009.~~

GOODWILL AND OTHER INTANGIBLES IMPAIRMENT. During the fourth quarter of 2009, the Company performed the annual goodwill impairment test based on current and expected market conditions, including reduced operating results. As a result of this test, the Company determined that goodwill and other intangibles associated with the MRO segment were impaired as of December 31, 2009. Accordingly, the Company recognized an impairment charge of $53.0 million for goodwill and other intangibles in the fourth quarter of 2009.

~~OPERATING INCOME (LOSS)~~expense increased only 16.6%. Operating loss for 2009 was $49.3 million compared to $48.2 million of income for 2008. Operating loss for the MRO segment was $49.6 million for 2009 compared to $47.7 million of income for 2008 as a result of a $55.2 million decrease in gross profit and the $53.0 million impairment charge, partially offset by a $10.9 million decrease in selling, general and administrative expense. Operating income for the Electrical Contractor segment decreased 46.2%, to $0.3 million for 2009, from $0.5 million for 2008, primarily as a result of decreased gross profit due to decreased sales.

INTEREST EXPENSE. Interest expense for ~~2009~~2011 decreased by ~~14.4%~~32.5% from ~~2008.~~2010. This decrease primarily resulted from lower average interest rates combined with a reduction in the average amount of debt outstanding compared to 2010. On July 25, 2011 we amended our credit facility. This amendment significantly decreased ~~market~~the interest ~~rates.~~

~~OTHER INCOME. Other income for 2009 decreased to $0.1 million~~rates and commitment fees applicable at various leverage ratios from ~~$0.2 million for 2008 as a result of reduced interest income.~~levels in effect before July 25, 2011.

INCOME TAXES. Our provision for income taxes differed from the U. S. statutory rate of 35% due to state income taxes and non-deductible expenses. Our effective tax rate for ~~2009 decreased~~2011 of 39.6% was consistent with the 39.7% rate for 2010.

SERVICE CENTERS SEGMENT. Sales for the Service Centers segment increased $107.5 million, or 23.7%. Excluding $9.1 million of first quarter 2011 Quadna Service Centers segment sales, first eleven months of 2011 sales by D&F of $23.2 million and $5.9 million of fourth quarter 2011 KC Service Centers segment sales, Service Center segment sales for 2011 increased 15.3% from ~~38.8%~~2010, on a same store sales basis. This sales increase is primarily due to improvement in the oil and gas and manufacturing portions of the U.S. economy. Operating income for ~~2008~~the Service Centers segment increased 27.6%, primarily as a result of the ~~non-deductible impairment charge~~23.7% increase in sales combined with an increase in gross profit as a percentage of sales.

SUPPLY CHAIN SERVICES SEGMENT. Sales for ~~PFI, LLC goodwill.~~the SCS segment increased by $18.0 million, or 14.2%, for 2011 when compared to 2010. Excluding KC SCS segment sales of $5.9 million, SCS segment sales for 2011 increased 9.5% from 2010, on a same store sales basis. Operating income for the SCS segment increased 18.7% primarily as a result of the 14.2% increase in sales for this segment.

INNOVATIVE PUMPING SOLUTIONS SEGMENT. Sales for the IPS segment increased by $25.3 million, or 32.8% for 2011 when compared to 2010. Excluding first quarter 2011 Quadna IPS sales of $3.3 million, IPS sales for 2011 increased 28.5% from 2010, on a same store sales basis. The sales increase resulted from the increase in capital spending by our oil and gas and mining related customers. Operating income for the IPS segment increased 63.7% as a result of the 32.8% increase in sales combined with relatively consistent selling, general and administrative expenses.

Year Ended December 31, ~~2008 Compared~~2010 compared to Year Ended December 31, ~~2007~~2009

SALES. Sales for ~~2008~~the year ended December 31, 2010 increased ~~$292.3~~$73.0 million, or ~~65.8%~~12.5%, to approximately ~~$736.9~~$656.2 million from ~~$444.5~~$583.2 million in 2007. Sales for the MRO segment increased $292.0 million, or 66.2% primarily due to sales by businesses acquired in 2007 and 2008 and partially due to a broad-based increase in sales of pumps, safety products and mill supplies to companies engaged in oilfield service, oil and gas production, food processing, agriculture, mining, electricity generation and petrochemical processing.2009. Sales by ~~businesses~~Quadna, acquired ~~during 2007~~April 1, 2010 and ~~2008,~~D&F, acquired December 1, 2010, accounted for $43.6 million of 2010 sales. Excluding Quadna and D&F sales, sales for 2010 increased 5.0%, on a same store sales basis, accounted for $233.8 million of the 2008 MRO sales increase. Excluding sales of the acquired businesses, on a same store sales basis, sales for the MRO segment increased 13.2%. Sales for the Electrical Co ntractor segment increased $0.3 million, or 9.5%, to $3.6 million from $3.3 million for 2007. The sales increase for the Electrical Contractor segment resulted from the sale of more commodity type electrical products.basis.

GROSS PROFIT. ~~Gross profit for 2008 increased 64.7% compared to 2007.~~ Gross profit as a percentage of sales ~~decreased by~~increased to approximately ~~0.2%~~28.7% for ~~2008, when compared~~2010 from 26.0% for 2009. This increase is primarily the result of the $13.8 million charge in the fourth quarter of 2009 to reduce the value of inventory acquired with the acquisition of Precision on September 10, 2007. ~~Gross~~Excluding this $13.8 million charge, gross profit as a percentage of sales for ~~the MRO segment decreased to 28.1%~~2009 would have been 28.3%. The increase in ~~2008 from 28.2% in 2007. This decrease can be primarily attributed to the lower~~ gross ~~profit on sales by Precision Industries, Inc., which was acquired on September 7, 2007. Gross~~ profit as a percentage of sales in 2010 from this 28.3% for 2009 is primarily the ~~Electrical Contractor segment decreased to 35.9% for 2008, from 37.1%~~result of improvement in ~~2007. This decrease resulted from~~ the ~~sale of more lower margin commodity type electrical products.~~U.S. economy.

SELLING, GENERAL AND ~~ADMINISTRATIVE.~~ADMINISTRATIVE EXPENSE. Selling, general and administrative expense for ~~2008~~2010 increased by approximately ~~$65.0~~$3.5 million, or ~~69.3%~~2.4%, when compared to ~~2007. The increase is primarily attributed to selling,~~2009. Selling, general and administrative ~~expenses of acquired businesses~~expense for Quadna and ~~increased compensation expense related to increased gross profit. The majority of our employees receive incentive compensation, which is based upon gross profit.~~D&F for 2010 was $7.6 million. As a percentage of revenue, the ~~2008~~2010 expense ~~increased by approximately 0.5%~~decreased to ~~21.6%~~23.1%, from ~~21.1%~~25.3% for ~~2007.~~2009. This ~~increase resulted from~~decrease is primarily the ~~$3.7 million increase in the amortization~~result of ~~intangibles associated with acquisitions.~~sales increasing 12.5% and expenses increasing only 2.4%.

OPERATING INCOME. ~~Operating income for 2008 increased by approximately $16.3~~Excluding the effect of the $13.8 million ~~or 51.1%, when compared to 2007. This increase was~~inventory impairment charge and the ~~net of a 51.5% increase~~$53.0 million goodwill and other intangible impairment charges recorded in 2009, operating income for ~~the MRO segment and a 20.8% increase in operating income for the Electrical Contractor segment. Operating income for the MRO segment~~2010 increased ~~as a result of increased gross profit, partially offset by increased selling, general, and administrative~~ ~~expense. Operating income for the Electrical Contractor segment increased as a result of increased gross profit combined with stable selling, general and administrative costs.~~

112% compared to 2009.

INTEREST EXPENSE. Interest expense for ~~2008~~2010 decreased by 0.7% from 2009. On March 15, 2010 we amended our credit facility. This amendment significantly increased the interest rates and commitment fees applicable at various leverage ratios from levels in effect before March 15, 2010. The amendment increased the cost of funds borrowed under our credit facility by ~~83.3% from 2007.~~approximately 200 basis points beginning on March 16, 2010. This increase ~~primarily resulted from increased~~in interest rates was offset by the effect of lower average debt outstanding during 2010 compared to ~~fund acquisitions and internal growth.~~

~~OTHER INCOME. Other income for 2008 decreased to $0.2 million from $0.3 million for 2007 as a result of reduced interest income.~~2009.

INCOME TAXES. Our provision for income taxes differed from the U. S. statutory rate of 35% due to state income taxes and non-deductible expenses. Our effective tax rate for ~~2008 decreased to 38.8%~~2010 of 39.7% increased from ~~40.0%~~22.2% for ~~2007~~2009. The 2009 tax rate was unusually low primarily as a result of the non-deductible goodwill and other intangibles impairment charge for PFI, LLC recorded in 2009.

SERVICE CENTERS SEGMENT. Sales for the Service Centers segment increased $61.7 million, or 15.8%. Excluding Quadna and D&F Service Centers sales of $26.2 million, Service Centers segment sales for 2010 increased 9.1% from 2009. This sales increase is primarily due to improvement in the industrial portion of the U.S. economy. Operating income for the Service Centers segment increased $26.2 million. Excluding the effect of the $12.8 million of inventory impairment charges recorded by the Service Centers segment during 2009, operating income for the Service Centers segment increased 35.9% as a result of the 15.8% increase in sales combined with the effect of cost reduction measures implemented during 2009 and 2010.

SUPPLY CHAIN SERVICES SEGMENT. Sales for the SCS segment decreased ~~effective state~~by $9.8 million, or 7.2%, from 2009. The sales decrease by SCS resulted from sales to customers in 2009 which subsequently terminated supply agreements, exceeding sales to customers which had been added since 2009. Operating income ~~tax rate.~~for the SCS segment increased 28.3%. Excluding the $1.0 million of inventory impairment charges recorded by the SCS segment during 2009, operating income for the SCS segment increased by 8.7%, primarily as a result of the reduced administrative costs for this segment.

INNOVATIVE PUMPING SOLUTIONS SEGMENT. Sales for the IPS segment increased by $21.1 million, or 37.8%, for 2010 when compared to 2009. Excluding Quadna IPS sales of $17.4 million for 2010, IPS sales increased 6.6% from 2009. The sales increase resulted from the improvement in the economy and the associated increase in capital spending by our customers. Operating income for the IPS segment increased 37.5% as a result of the 37.8% increase in sales.

Pro Forma Results

The pro forma unaudited results of operations for the Company on a consolidated basis for the years ended December 31, 2009 and 2010, assuming the acquisitions of businesses completed in 2010 were consummated as of January 1, 2009 follows:

	Years Ended December 31,
	2009	2010
	(Unaudited)
	In Thousands, except for per share data
Net sales	$653,175	$ 689,675
Net (loss) income	$(39,967)	$ 20,843
Per share data
Basic Earnings	$(3.04)	$1.50
Diluted Earnings	$(3.04)	$1.42

The pro forma unaudited results of operations for the Company on a consolidated basis for the years ended December 31, 2010 and 2011, assuming the acquisitions of businesses completed in 2011 were consummated as of January 1, 2010 follows:

	Years Ended December 31,
	2010	2011
	(Unaudited)
	In Thousands, except for per share data
Net sales	$ 778,267	$ 903,240
Net income	$ 22,898	$ 35,511
Per share data
Basic Earnings	$ 1.65	$ 2.48
Diluted Earnings	$ 1.56	$2.35

Liquidity and Capital Resources

General Overview

As a distributor of MRO products and ~~Electrical Contractor products,~~services, we require significant amounts of working capital to fund inventories and accounts receivable. Additional cash is required for capital items such as information technology and warehouse equipment. We also require cash to pay our lease obligations and to service our debt.

We generated approximately ~~$51.6~~$25.8 million of cash in operating activities in ~~2009~~2011 as compared to generating ~~$18.5~~$23.9 million in ~~2008.~~2010. This change between the two years was primarily attributable to the ~~$24.1~~$12.1 million ~~decrease~~increase in ~~accounts receivable and~~net income, partially offset by the ~~$46.5 million reduction in inventories in 2009 compared to a $10.9~~$21.5 million increase in accounts receivable ~~and~~in 2011 compared to a ~~$11.2~~$14.5 million increase in ~~inventories~~accounts receivable in ~~2008.~~2010.

During ~~2009~~2011 we paid ~~$0.5~~$18.4 million of cash for two businesses acquired during 2011 compared to paying $18.2 million of cash related to the purchase of two businesses during 2010 and $0.2 million related to businesses acquired ~~in earlier years compared to paying $73.9~~before 2009. The $18.4 million of cash paid for acquisitions in ~~2008.~~2011 excludes $36.7 million in outstanding checks at December 31, 2011 related to the acquisition of CW Rod and approximately $2.2 million expected to be paid due to a working capital adjustment.

We purchased approximately ~~$1.6~~$4.1 million of capital assets during ~~2009~~2011 compared to ~~$5.1~~$1.2 million for ~~2008.~~2010. Capital expenditures during ~~2009~~2011 and ~~2008~~2010 were related primarily to computer equipment, computer software, production equipment, inventory handling equipment, safety rental equipment and building improvements. Capital expenditures for ~~2010~~2012 are expected to be ~~more than~~in the range of the 2009, ~~amount.~~2010 and 2011 amounts.

At December 31, ~~2009,~~2011, our total long-term debt, including the current portion, was ~~$115.5~~$114.9 million compared to total capitalization (total long-term debt plus shareholders’ equity) of ~~$205.7~~$271.6 million. Approximately ~~$113.5~~$110.8 million of this outstanding debt bears interest at various floating rates. Therefore, as an example, a 200 basis point increase in interest rates would increase our annual interest expense by approximately ~~$2.3~~$2.2 million.

Our normal trade terms for our customers require payment within 30 days of invoice date. In response to competition and customer demands we will offer extended terms to selected customers with good credit history. Customers that are financially strong tend to request extended terms more often than customers that are not financially strong. Many of our customers, including companies listed in the Fortune 500, do not pay us within stated terms for a variety of reasons, including a general business philosophy to pay vendors as late as possible. ~~We generally collect the amounts due from these large, slow-paying customers.~~

During ~~2009,~~2011, the amount available to be borrowed under our credit facility increased from ~~$37.0~~$50.0 million at December 31, ~~2008,~~2010, to ~~$37.3~~$78.2 million at December 31, ~~2009.~~2011. The increase in availability is primarily the result of the effect of ~~reduced borrowings on the loan covenant ratios.~~increased accounts receivable and inventories. Our total long-term debt ~~decreased $53.0~~increased $0.3 million during ~~2009.~~2011. Management believes that the liquidity of our balance sheet at December 31, ~~2009,~~2011, provides us with the ability to meet our working capital needs, scheduled principal payments, capital expenditures and Series B convertible preferred stock dividend payments during ~~2010.~~2012.

To hedge a portion of our floating rate debt, as of January 10, 2008, DXP entered into an interest rate swap agreement with the lead bank of our Facility. Through January 11, 2010, this interest rate swap effectively fixed the ~~interest rate on $40 million of floating rate LIBOR borrowings under the Facility at 3.68% plus the margin (1.75% at December 31, 2009) in effect under the Facility.~~

Credit Facility

On August 28, 2008, DXP entered into a credit agreement with Wells Fargo Bank, National Association, as lead arranger and administrative agent for the lenders (the ~~“Facility)~~“Facility"). The Facility was amended on March 15, 2010. The March 15, 2010 amendment to the Facility significantly increased the interest rates and commitment fees applicable at various leverage ratios from levels in effect before March 15, 2010. Effective July 25, 2011 DXP entered into a Second Amendment to the Credit Facility with Wells Fargo Bank, National Association. The Second Amendment reduced interest rates; deleted the Senior Leverage Ratio; increased the maximum leverage ratio to not greater than 4.00 to 1.00 as of the last day of each quarter; allows DXP to purchase, redeem and retire equity for aggregate consideration not exceeding $5.0 million; and modified covenants to increase DXP's ability to complete future acquisitions. The term loan was repaid using funds from the $150 million line of credit. Effective December 30, 2011 DXP entered into a Third Amendment to the Facility. The Third Amendment increased the maximum amount of the Facility from $150 million to $200 million. The Facility provides the option of interest at LIBOR plus a margin ranging from 1.25% to 2.75%, or prime plus a margin of minus 0.25% to 1.25%. Commitment fees of 0.15% to 0.40% per annum are payable on the portion of the Facility capacity not in use for borrowings or letters of credit at any given time. The Facility expires on July 25, 2016. The Facility consists of ~~a $50 million term loan and~~ a revolving credit facility that provides a ~~$150~~$200 million line of credit to the Company. ~~The term loan requires principal payments of $2.5 million per quarter beginning on December 31, 2008. The Facility matures on August 11, 2013.~~ The Facility contains financial covenants defining various financial measures and levels of these measures with which the Company must comply. Covenant compliance is assessed as of each quarter end and certain month ends for the asset test. The asset test is defined under the Facility as the sum of ~~85%~~90% of the Company’s net accounts receivable, ~~60%~~65% of net inventory, and 50% of the net book value of non real estate property and equipment. The Company’s borrowing and letter of credit capacity under the revolving credit portion of the Facility at any given time is ~~$150~~$200 million less borrowings under the revolving credit portion of the facility and letters of credit outstanding, subject to the asset test described above.

On December 31, ~~2009,~~2011, the LIBOR based rate ~~on the revolving credit portion~~ of the Facility was LIBOR plus ~~l.75%~~1.5%, the prime based rate ~~on the revolving credit portion~~ of the Facility was prime plus ~~0.25%,~~0.0% and the commitment fee was ~~0.25%, the LIBOR based rate for the term loan was LIBOR plus 2.50% and the prime based rate for the term loan was prime plus 1.00%~~0.2%. At December 31, ~~2009,~~2011, $110.5 million was borrowed under the Facility at a weighted average interest rate of approximately ~~3.5%~~1.78% under the LIBOR options ~~including the effect of the interest rate swap,~~ and ~~nothing~~$0.3 million was borrowed at 3.25% under the prime options under the Facility. Beginning on March 15, 2010, the March 15, 2010 amendment to the Facility significantly increases the interest rates and commitment fees applicable at various leverage ratios from levels in effect before Marc h 15, 2010. The revolving credit portion of the Facility provides the option of interest at LIBOR plus a margin ranging from 2.25% to 4.00% or prime plus a margin of 1.25% to 3.00%. If the increased rates had been in effect on December 31, 2009, the LIBOR based rate on the revolving credit portion of the Facility would have been LIBOR plus 4.00%. If the increased rates had been in effect on December 31, 2009 the prime based rate on the revolving credit portion of the Facility would have been prime plus 3.00%. Commitment fees of 0.25% to 0.625% per annum are payable on the portion of the Facility capacity not in use for borrowings or letters of credit at any given time. If the increased rates had been in effect on December 31, 2009, the commitment fee would have been 0.625%. The term loan provides the option of interest at LIBOR plus a margin ranging from 2.75% to 4.50% or prime plus a margin of 1.75% to 3.50%. If the increased rates had been in effect on December 31, 2009, the LIBOR based rate for the term loan would have been LIBOR plus 4.50%. If the increased rates had been in effect on December 31, 2009, the prime based rate for the term loan would have been prime plus 3.50%.option. Borrowings under the Facility are secured by all of the Company’s accounts receivable, inventory, general intangibles and non real estate property and equipment. The Facility was amended to waive the Fixed Charge Coverage Ratio for the period ended December 31, 2009, and modify the Leverage Ratio for the period ended December 31, 2009, to allow DXP to be in compliance with all financial covenants. DXP would not have been in compliance with the Fixed Charge Coverage Ratio or the Leverage Ratio without the amendment. At December 31, ~~2009,~~2011, we had ~~$37.3~~$78.2 million available for borrowing under ~~the most restrictive covenant of~~ the Facility.

The Facility’s principal financial covenants include:

Fixed Charge Coverage Ratio – ~~For the 12 month period ending December 31, 2009, the Fixed Charge Coverage Ratio has been waived. The~~–The Facility requires that the Fixed Charge Coverage Ratio for the 12 month period ending on the last day of each quarter ~~from March 31, 2010 through September 30, 2010~~ be not less than ~~1.0 to 1.0, stepping up to 1.25 to 1.0 for the quarter ending December 31, 2010 and to~~ 1.50 to 1.0 ~~for the quarter ending March 31, 2011,~~ with “Fixed Charge Coverage Ratio” defined as the ratio of (a) EBITDA for the 12 months ending on such date minus cash taxes ~~minus~~and Capital Expenditures for such period (excluding acquisitions) to (b) the aggregate of interest expense paid in cash, scheduled principal payments in respect of long-term debt ~~a nd~~and current portion of capital leases for such 12-month period, determined in each case on a consolidated basis for DXP and its subsidiaries. At December 31, 2011, the Company's Fixed Charge Coverage Ratio was 14.2.

Leverage Ratio – The Facility requires that the Company’s Leverage Ratio, determined at the end of each fiscal quarter, not exceed ~~3.75 to 1.0 as of December 31, 2009, 4.25 to 1.0 as of March 31, 2010, 4.00 to 1.00 as of June~~ ~~30, 2010, 3.75 to 1.0 as of September 30, 2010, and 3.25~~4.0 to 1.0 as of the last day of each ~~quarter thereafter.~~quarter. The Leverage Ratio is defined as the outstanding Indebtedness divided by EBITDA for the ~~twelve~~12 months then ended. At December 31, 2011, the Company’s Leverage Ratio was 1.49 to 1.00. Indebtedness is defined under the Facility for financial covenant purposes as: (a) all obligations of DXP for borrowed money including but not limited to senior bank debt, senior notes and subordinated debt; (b) capital ~~leas es;~~leases; (c) issued and outstanding letters of credit; and (d) contingent obligations for funded indebtedness.

The following is the computation of the Leverage Ratio as of December 31, 2011 (in thousands, except for ratios):

For the Year ended December 31, 2011	Leverage Ratio

Income before taxes	$51,995
Interest expense	3,518
Depreciation and amortization	10,082
Stock compensation expense	1,256
Pro forma acquisition EBITDA	10,871
Reduction of closed location accrual	(123)
(A) Defined EBITDA	77,599

As of December 31, 2011
Total long-term debt	114,899
Letters of credit outstanding	951
(B) Defined indebtedness	$115,850

Leverage Ratio (B)/(A)	1.49

EBITDA as defined under the Facility for financial covenant purposes means, without duplication, for any period the consolidated net income (excluding any extraordinary gains or losses) of DXP plus, to the extent deducted in calculating consolidated net income, depreciation, amortization, other non-cash items and non-recurring items (including, without limitation, impairment charges, or asset write-offs and accruals in respect of closed locations), interest expense and tax expense for taxes based on income and minus, to the extent added in calculating consolidated net income, any non-cash items and non-recurring items; provided that, if DXP acquires the equity interests or assets of any person during such period under circumstances permitted under the Facility, EBITDA shall be adjusted to give pro forma effect to such acquisition ~~assu ming~~assuming that such transaction had occurred on the first day of such period and provided further that, if DXP divests the equity interests or assets of any person during such period under circumstances permitted under ~~this~~the Facility, EBITDA shall be adjusted to give pro forma effect to such divestiture assuming that such transaction had occurred on the first day of such period. Add-backs allowed pursuant to Article 11, Regulation S-X, of the Securities Act of 1933, as amended, will also be included in the calculation of EBITDA.

~~Borrowings~~

December 31,
Increase
(Decrease)
2008 2009
(in thousands)
Current portion of long-term debt $     13,965 $     12,595 $    (1,370)
Long-term debt, less current portion   154,591 102,916     (51,675)
Total long-term debt $   168,556 $  115,511
$  (53,045)(2)
Amount available (1)
$     36,951 $    37,276
$         325(3)
(1) Represents amount available to be borrowed under the Facility at the indicated date.
(2) The funds obtained from operations, including reduced inventories and receivables, were used to reduce debt.
(3) The $0.3 million increase in the amount available is primarily a result of the effect of reduced debt on the loan covenant ratios.

Performance Metrics

December 31,
Increase
(Decrease)
2008 2009
Days of sales outstanding (in days) 48.5 50.1 1.6
Inventory turns 4.7 5.9 1.2
Results for businesses acquired in 2008 were annualized to compute these performance metrics.

	December 31,		Increase (Decrease)
	2011	2010	Increase (Decrease)
Days of sales outstanding (in days)	58.6	57.5	1.1
Inventory turns	7.1	6.2	0.9
Results for businesses acquired during each year were annualized to compute these performance metrics.

Accounts receivable days of sales outstanding were ~~50.1~~58.6 at December 31, ~~2009~~2011 compared to ~~48.5~~57.5 days at December 31, ~~2008.~~2010. The increase resulted primarily from a change in customer mix which resulted in slower collection of accounts receivable. Annualized inventory turns were ~~5.9~~7.1 times at December 31, ~~2009~~2011 compared to ~~4.7~~6.2 times at December 31, ~~2008.~~2010. The increase in inventory turns primarily resulted from the ~~reduction in inventories, including the $13.8 million reduction~~improvement in the ~~value of inventory acquired in the acquisition of Precision.~~U. S. economy.

Funding Commitments

We believe our cash generated from operations and available under our Facility will meet our normal working capital needs during the next twelve months. However, we may require additional debt 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. We may not be able to obtain additional financing on acceptable terms, if at all.

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. We may not be able to obtain additional financing on acceptable terms, if at all.

Share Repurchases

During 2011, DXP repurchased 65,171 shares of DXP's common stock in non-open market transactions at an average price per share of $22.18.

On October 26, 2011, the Board of Directors authorized DXP from time to time to purchase up to 200,000 shares of DXP's common stock over 24 months. DXP publicly announced the authorization that day. Purchases may be made in open market or in privately negotiated transactions. DXP had not purchased any shares under this authorization as of December 31, 2011.

Borrowings

	December 31,		Increase (Decrease)
	2011	2010	Increase (Decrease)
	(in thousands)
Current portion of long-term debt	$ 694	$ 10,930	$(10,236)
Long-term debt, less current portion	114,205	103,621	10,584
Total long-term debt	$ 114,899	$ 114,551	$348
Amount available (1)	$ 78,201	$ 50,020	$28,181(2)
(1) Represents amount available to be borrowed under the Facility at the indicated date. (2) The $28.2 million increase in the amount available is primarily a result of the effect of increased accounts receivable and inventories on the loan covenant ratios.

Contractual Obligations

The impact that our contractual obligations as of December 31, ~~2009~~2011 are expected to have on our liquidity and cash flow in future periods is as follows (in thousands):

	Payments Due by Period					Payments Due by Period
	Total	Less than 1 Year	1–3 Years	3-5 Years	More than 5 Years	Total	Less than 1 Year	1–3 Years	3-5 Years	More than 5 Years
Long-term debt, including current portion (1)	$ 115,511	$ 12,595	$ 20,779	$ 82,137	$ -	$114,899	$ 694	$ 2,796	$111,409	$ -
Operating lease obligations	36,335	9,700	13,286	5,889	7,460	44,710	11,191	17,972	8,754	6,793
Estimated interest payments (2)	430	156	223	51	-	553	320	218	15	-
Total	$ 152,276	$ 22,451	$ 34,288	$ 88,077	$ 7,460	$160,162	$12,205	$20,986	$120,178	$ 6,793
(1) Amounts represent the expected cash payments of our long-term debt and do not include any fair value adjustment. (2) Assumes interest rates in effect at December 31, 2009. Assumes debt is paid on maturity date and not replaced. Does not include interest on the revolving line of credit as borrowings under the Facility fluctuate. The amounts of interest incurred for borrowings under the revolving lines of credit were $2,595,000, $4,900,000 and $4,700,000 for 2007, 2008 and 2009, respectively. Management anticipates an increased level of interest payments on the Facility in 2010 as a result of increased interest rates.
(1) Amounts represent the expected cash payments of our long-term debt and do not include any fair value adjustment. (2) Assumes interest rates in effect at December 31, 2011. Assumes debt is paid on maturity date and not replaced. Does not include interest on the revolving line of credit as borrowings under the Facility fluctuate. The amounts of interest incurred for borrowings under the revolving lines of credit were approximately $4,700,000, $4,900,000, and $3,000,000 for 2009, 2010 and 2011, respectively. Management anticipates an increased level of interest payments on the Facility in 2012 as a result of expected increased borrowings to fund expected acquisitions.						(1) Amounts represent the expected cash payments of our long-term debt and do not include any fair value adjustment. (2) Assumes interest rates in effect at December 31, 2011. Assumes debt is paid on maturity date and not replaced. Does not include interest on the revolving line of credit as borrowings under the Facility fluctuate. The amounts of interest incurred for borrowings under the revolving lines of credit were approximately $4,700,000, $4,900,000, and $3,000,000 for 2009, 2010 and 2011, respectively. Management anticipates an increased level of interest payments on the Facility in 2012 as a result of expected increased borrowings to fund expected acquisitions.

Off-Balance Sheet Arrangements

As part of our ongoing business, we do not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities ("SPE's"), which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As of December 31, ~~2009,~~2011, we were not involved in any unconsolidated SPE ~~transactions.~~transactions, nor did we have any other off-balance sheet arrangements.

Indemnification

In the ordinary course of business, DXP enters into contractual arrangements under which DXP may agree to indemnify customers from any losses incurred relating to the services we perform. Such indemnification obligations may not be subject to maximum loss clauses. Historically, payments made related to these indemnities have been immaterial.

Discussion of Critical Accounting Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us 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 us in the accompanying financial statements relate to reserves for accounts receivable collectability, inventory valuations, valuation of intangibles, impairment analysis, income taxes, self-insured liability claims and self-insured medical claims. Actual results could differ from those estimates. Management periodically re-evaluates these estimates as events and circumstances change. Together with the effects of the ~~matter s~~matters discussed above, these factors may significantly impact the Company’s results of operations from period-to-period.

Critical accounting 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. Below is a discussion of what we believe are our critical accounting policies. Also, see Note 1 of the Notes to the Consolidated Financial Statements.

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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.

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. Revenues recognized include product sales and billings for freight and handling charges.

Allowance for Doubtful Accounts

Provisions to the allowance for doubtful accounts are made monthly and adjustments are made periodically (as circumstances warrant) based upon the expected collectability of all such accounts. Write-offs could be materially different from the reserve provided if economic conditions change or actual results deviate from historical trends.

Inventory

Inventory consists principally of finished goods and is priced at lower of cost or market, cost being determined using the first-in, first-out (FIFO) method. Reserves are provided against inventory for estimated obsolescence based upon the aging of the inventory and market trends. Actual obsolescence could be materially different from the reserve if economic conditions or market trends change significantly.

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, ~~2009~~2011 and ~~2008~~2010 was approximately ~~$1.3~~$2.4 million and ~~$2.0~~$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. ~~We review~~In prior years we compared the carrying value of the net assets of each reporting unit to the net present value of estimated discounted ~~future~~anticipated cash flows of ~~the~~each reporting ~~unit.~~unit, discounted using a weighted average cost of capital rate. If the carrying value ~~exceeds~~exceeded the net present value of estimated discounted ~~future~~anticipated cash flows, an impairment indicator ~~exists~~existed and an estimate of the impairment loss iswas calculated. The fair value calculation ~~includes~~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 ~~e stimates~~estimates could ~~result~~have resulted in goodwill impairment that could have materially adversely ~~impact~~impacted our financial position or results of operations. All of our goodwill is related to our MRO segment and was included in its two reporting units which are DXP and PFI. Goodwill of $101.0 million, before impairment, was primarily recorded in connection with the 13 acquisitions of the MRO businesses completed since 2004, all of which was included in the two reporting units for our MRO segment. Assets, liabilities, deferred taxes and goodwill for each reporting unit were determined using the balance sheets maintained for each reporting unit. ~~We recorded a partial impairment of goodwill for the PFI reporting unit and a partial impairment of the goodwill for the DXP reporting unit.~~

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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.

~~When estimating fair values~~Goodwill of a$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 ~~unit~~units for our Service Centers segment which are DXP and PFI. Approximately $2.9 million of goodwill impairment test, we use an income approach which incorporates management’s views. The income approach provides an estimated fair value based on each reporting unit’s anticipated cash flows that are discounted using a weighted average cost of capital rate. The primary assumptions usedis included in the income approach were estimated cash flows and weighted average cost of capital. Estimated cash flows were primarily based on projected revenues, operating costs and capital expenditures and are discounted based on comparable industry average rates for weighted average cost of capital. We utilized discount rates based on weighted average cost of capital ranging from 12.0% to 14.5% when we estimated fair values of our reporting unit s as of December 31, 2009. To ensure the reasonableness of the estimated fair values of our reporting units, we performed a reconciliation of our total market capitalization to the total estimated fair value of all our reporting units. The assumptions used in estimating fair values of reporting units and performing the goodwill impairment test are inherently uncertain and required management judgment. The assumptions and methodologies used for valuing goodwill in the current year are consistent with those used in the prior year.

Supply Chain Services segment.

During ~~2009 there were significant declines in~~2011 the U.S. economy improved and ~~global economies and in~~ oil ~~and natural gas~~ prices increased, which led to ~~declines~~improvements in our sales, margins and cash flows. Our sales and profitability ~~declined~~improved throughout the ~~year particularly in the fourth quarter.~~year. We considered the impact of these ~~significant adverse~~ changes in the economic and business climate as we performed our annual impairment ~~assessment~~assessments of goodwill as of December 31, ~~2009. The estimated~~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 ~~values~~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 ~~were negatively impacted by significant reductions in estimated cash flows for~~substantially exceeds 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. If we increased, or decreased, our discount rates by 10% when estimating the fair valuescarrying value of our reporting units, the recognized impairment would have been approximately 7% less, or approximately 10% greater, respectively. If we increased, or decreased, our expected growth rates by 10% when estimating the fair values of our reporting units, the recognized impairment would have been approximately 1% greater, or approximately 1% less, resp ectively. This impairment charge did not have an impact on our liquidity or financial covenants under our Facility; however it was a reflection of the overall downturn in our industry and decline in our projected cash flows.units.

Long-lived assets, including property, plant and equipment and amortizable intangible assets ~~also~~ 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 management believes impairment indicators may exist, projections of the undiscounted future cash flows associated with the use of and eventual disposition of long-lived assets held for use are prepared. If the projectionsevents or changes in circumstances indicate that ~~the~~a long-lived asset carrying ~~values of the~~amount may not be recoverable, a long-lived asset or assets ~~are not recoverable, we reduce the carrying values to fair value. For long-lived~~shall be grouped with other assets ~~held for sale, we compare the carrying values to an estimate of fair value less selling costs to determine potential impairment. We test for imp airment of long-lived assets~~and liabilities at the lowest level for which identifiable cash flows are ~~measurable.~~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. ~~In connection with our goodwill impairment test we~~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~~DXP did not have an 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 MRO segment.long-lived assets during 2011.

Purchase Accounting

The Company 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

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.

Stock-Based Compensation

No future grants will be made under the Company’s existing stock option plans. The Company currently uses restricted stock for share-based compensation programs. Compensation expense recognized for share-based compensation programs in the years ended December 31, ~~2007, 2008~~2009, 2010 and ~~2009~~2011 was ~~$591,000, $930,000~~$1,555,000, $973,000 and ~~$1,555,000,~~$1,256,000, respectively. Unrecognized compensation expense under the Restricted Stock Plan was ~~$3,092,000~~$2,423,000 and ~~$2,601,000,~~$4,051,000, respectively, at December 31, ~~2008~~2010 and ~~2009.~~2011. As of December 31, ~~2009,~~2011, the weighted average period over which the unrecognized compensation expense is expected to be recognized is ~~30.9~~29.6 months.

Recent Accounting Pronouncements

See Note 2 of the Notes to the Consolidated Financial Statements for discussion of recent accounting pronouncements.

Inflation

We do not believe the effects of inflation have any material adverse effect on our results of operations or financial condition. We attempt to minimize inflationary trends by passing manufacturer price increases on to the customer whenever practicable.

ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk

Our market risk results primarily from volatility in interest rates. Our exposure to interest rate risk relates primarily to our debt portfolio. Using floating interest rate debt outstanding at December 31, ~~2009,~~2011, a 100 basis point increase in interest rates would increase our annual interest expense by approximately $1.1 million.

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The table below provides information about the Company’s market sensitive financial instruments and constitutes a forward-looking statement.

Principal Amount By Expected Maturity (in thousands, except percentages)	Principal Amount By Expected Maturity (in thousands, except percentages)								Principal Amount By Expected Maturity (in thousands, except percentages)
	2010	2011	2012	2013	2014	Thereafter	Total	Fair Value	2012	2013	2014	2015	2016	Thereafter	Total	Fair Value
Fixed Rate Long- term Debt	$ 128	$ 106	$ 113	$ 1,637	-	-	$ 1,984	$ 1,984	$694	$2,216	$580		-	-	$4,070	$4,070
Average Interest Rate	5.88%	6.25%		6.25%		-			5.2%	5.92%	5.00%		-	-
Floating Rate Long-term Debt	$12,467	$10,560	$10,000	$80,500	-	-	$113,527	$113,527	-		-		$110,829	-	$110,829	$110,829
Average Interest Rate (1)	2.52%	2.67%	2.74%	2.04%									1.79%
Total Maturities	$12,595	$10,666	$10,113	$82,137		-	$115,511	$115,511	$694	$2,216	$580		$110,829	-	$114,899	$114,899
(1) Assumes floating interest rates in effect at December 31, 2009.
(1) Assumes floating interest rates in effect at December 31, 2011.									(1) Assumes floating interest rates in effect at December 31, 2011.

To hedge a portion of our floating rate debt, as of January 10, 2008, DXP entered into an interest rate swap agreement with the lead bank of our Facility. Through January 11, 2010 this interest rate swap effectively fixed the interest rate on $40 million of floating rate “LIBOR” borrowings under the Facility at 3.68% plus the margin (1.75% at December 31, 2009) in effect under the Facility.

ITEM 8. Financial Statements and Supplementary Data

TABLE OF CONTENTS
	Page
Reports of Independent Registered Public Accounting Firm	2630

Management Report on Internal Controls	2832

Consolidated Balance Sheets	2933

Consolidated Statements of Operations	3034

Consolidated Statements of Shareholders’ Equity	3135

Consolidated Statements of Cash Flows	3236

Notes to Consolidated Financial Statements	3337

2530

Report Of Independent Registered Public Accounting Firm on Financial Statements

To the Board of Directors and Shareholders of

DXP Enterprises, Inc., and Subsidiaries

Houston, Texas

We have audited the accompanying consolidated balance sheets of DXP Enterprises, Inc. and Subsidiaries as of December 31, ~~2008~~2010 and ~~2009,~~2011, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended December 31, ~~2009.~~2011. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing 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 consolidated financial position of DXP Enterprises, Inc., and Subsidiaries at December 31, ~~2008~~2010 and ~~2009,~~2011, and the results of their operations and their cash flows for each of the three years in the period ended December 31, ~~2009,~~2011, in conformity with accounting principles generally accepted in the United States of America.

We were engaged to audit, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of DXP Enterprises, Inc. and Subsidiaries internal control over financial reporting as of December 31, ~~2009,~~2011, based on criteria established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Our report dated March ~~23, 2010,~~9, 2012, expressed an unqualified opinion on the effectiveness of internal control over financial reporting.

Hein & Associates LLP

Houston, Texas

March ~~23, 2010~~9, 2012

2631

Report of Independent Registered Public Accounting Firm

on Internal Control over Financial Reporting

To the Board of Directors and Shareholders of

DXP Enterprises, Inc.

Houston, Texas

We were engaged to audit DXP Enterprises, Inc.’s (the “Company”) internal control over financial reporting based upon criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, ~~2009,~~2011, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of DXP Enterprises, Inc. as of December 31, ~~2009~~2010 and ~~2008,~~2011, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the years in the three year period ended December 31, ~~2009.~~2011. Our report thereon dated March ~~23, 2010~~9, 2012 expressed an unqualified opinion.

Hein & Associates LLP

Houston, Texas

March ~~23, 2010~~9, 2012

2732

MANAGEMENT’S REPORT

ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The Company has assessed the effectiveness of its internal control over financial reporting as of December 31, ~~2009~~2011 based on criteria established by Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO Framework”). The Company’s management is responsible for establishing and maintaining adequate internal controls over financial reporting. The Company’s independent registered public accountants that audited the Company’s financial statements as of December 31, ~~2009,~~2011, have issued an attestation report on the Company’s internal control over financial reporting, which appears on page ~~27.~~31.

Internal control over financial reporting is a process designed by, or under the supervision of, a company’s principal executive and principal financial officers, and effected by the Company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of ~~f inancial~~financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies or procedures may deteriorate.

The Company’s assessment of the effectiveness of its internal control over financial reporting included testing and evaluating the design and operating effectiveness of its internal controls with the participation of its principal executive and principal financial officers. In management’s opinion, the Company has maintained effective internal control over financial reporting as of December 31, ~~2009,~~2011, based on criteria established in the COSO Framework.

/s/ David R. Little /s/ Mac McConnell

David R. Little Mac McConnell

Chairman of the Board and Senior Vice President/Finance and

Chief Executive Officer Chief Financial Officer

2833

DXP ENTERPRISES, INC., AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In Thousands, Except Share and Per Share Amounts)	DXP ENTERPRISES, INC., AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In Thousands, Except Share and Per Share Amounts)		DXP ENTERPRISES, INC., AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In Thousands, Except Share and Per Share Amounts)

	December 31,		December 31,
	2008	2009	2010	2011
ASSETS
Current assets:
Cash	$ 5,698	$ 2,344	$ 770	$ 1,507
Trade accounts receivable, net of allowances for doubtful accounts
of $3,494 in 2008 and $3,006 in 2009	101,191	77,066
of $3,540 in 2010 and $6,202 in 2011			99,781	137,024
Inventories, net	119,097	72,581	75,887	93,901
Prepaid expenses and other current assets	2,851	3,533	2,550	2,230
Federal income tax recoverable	-	235
Federal income tax receivable			402	-
Deferred income taxes	3,863	7,833	5,919	4,539
Total current assets	232,700	163,592	185,309	239,201
Property and equipment, net	20,331	16,955	14,917	16,911
Goodwill	98,718	60,542	84,942	101,764
Other intangibles, net of accumulated amortization of $9,605 in 2008 and $13,779 in 2009	45,227	25,727
Other intangibles, net of accumulated amortization of $19,603 in 2010 and $26,175 in 2011			32,236	43,194
Non-current deferred income taxes	-	3,289	2,289	1,588
Other assets	880	822	931	2,680
Total assets	$ 397,856	$ 270,927	$ 320,624	$ 405,338
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt	$ 13,965	$ 12,595	$ 10,930	$ 694
Trade accounts payable	57,551	51,185	55,019	62,123
Outstanding checks related to acquisition			-	36,697
Accrued wages and benefits	12,869	6,633	11,826	12,713
Customer advances	2,719	1,008	5,824	3,767
Federal income taxes payable	7,894	-	-	2,409
Other accrued liabilities	8,660	6,377	9,284	16,055
Total current liabilities	103,658	77,798	92,883	134,458
Long-term debt, less current portion	154,591	102,916	103,621	114,205
Deferred income taxes	9,419	-
Commitments and contingencies (Note 11)
Commitments and contingencies (Note 10)
Shareholders’ equity:
Series A preferred stock, 1/10th vote per share; $1.00 par value; liquidation preference of $100 per share ($112 at December 31, 2009); 1,000,000 shares authorized; 1,122 shares issued and outstanding	1	1
Series B convertible preferred stock, 1/10th vote per share; $1.00 par value; $100 stated value; liquidation preference of $100 per share ($1,500 at December 31, 2009); 1,000,000 shares authorized; 15,000 shares issued and outstanding	15	15
Common stock, $0.01 par value, 100,000,000 shares authorized; 12,863,304 and 12,935,201 shares issued and outstanding, respectively.	128	129
Series A preferred stock, 1/10th vote per share; $1.00 par value; liquidation preference of $100 per share ($112 at December 31, 2011); 1,000,000 shares authorized; 1,122 shares issued and outstanding			1	1
Series B convertible preferred stock, 1/10th vote per share; $1.00 par value; $100 stated value; liquidation preference of $100 per share ($1,500 at December 31, 2011); 1,000,000 shares authorized; 15,000 shares issued and outstanding			15	15
Common stock, $0.01 par value, 100,000,000 shares authorized; 14,079,608 and 14,118,220 shares issued and outstanding, respectively.			140	141
Paid-in capital	56,206	58,037	72,616	75,204
Retained earnings	74,559	32,057	51,348	82,695
Accumulated other comprehensive income (loss)	(721)	(26)
Accumulated other comprehensive income			-	64
Treasury stock, at cost (65,171 shares)			-	(1,445)
Total shareholders’ equity	130,188	90,213	124,120	156,675
Total liabilities and shareholders’ equity	$ 397,856	$ 270,927	$ 320,624	$ 405,338
The accompanying notes are an integral part of these consolidated financial statements.

2934

DXP ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Amounts)

Years Ended December 31,
2007 2008 2009
Sales $         444,547 $         736,883 $         583,226
Cost of sales 318,855 529,895 431,812
Gross profit 125,692 206,988 151,414
Selling, general and administrative expense 93,800 158,797 147,795
Goodwill and other intangible impairment - - 52,951
Operating income (loss) 31,892 48,191 (49,332)
Other income 349 223 95
Interest expense (3,344) (6,130) (5,245)
Income (loss) before provision for income taxes 28,897 42,284 (54,482)
Provision (benefit) for income taxes 11,550 16,397 (12,070)
Net income (loss) 17,347 25,887 (42,412)
Preferred stock dividend (90) (90) (90)
Net income (loss) attributable to common  shareholders $           17,257 $         25,797 $        (42,502)

Per share and share amounts
  Basic earnings (loss) per common share –
    restated (Note 2)
$              1.46 $               1.99 $            (3.24)
  Common shares outstanding – restated (Note 2) 11,811 12,945 13,117
  Diluted earnings (loss) per share – restated (Note 2) $               1.35 $               1.87 $            (3.24)
  Common and common equivalent shares
   Outstanding – restated (Note 2)

12,860

13,869

13,117

The accompanying notes are an integral part of these consolidated financial statements.

DXP ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In Thousands, Except Per Share Amounts)

	Years Ended December 31,
	2009	2010	2011
Sales	$ 583,226	$ 656,202	$ 807,005
Cost of sales	431,812	467,807	575,169
Gross profit	151,414	188,395	231,836
Selling, general and administrative expense	147,795	151,304	176,351
Goodwill and other intangibles impairment	52,951	-	-
Operating income (loss)	(49,332)	37,091	55,485
Other income	95	249	28
Interest expense	(5,245)	(5,208)	(3,518)
Income (loss) before provision for income taxes	(54,482)	32,132	51,995
Provision (benefit) for income taxes	(12,070)	12,751	20,558
Net income (loss)	(42,412)	19,381	31,437
Preferred stock dividend	(90)	(90)	(90)
Net income (loss) attributable to common shareholders	$ (42,502)	$ 19,291	$ 31,347

Net income (loss)	$ (42,412)	$ 19,381	$ 31,437
Gain from interest rate swap, net of income taxes	695	26	-
Gain on long-term investment, net of income taxes	-	-	64
Comprehensive income (loss)	$ (41,717)	$ 19,407	$ 31,501

Per share and share amounts
Basic earnings (loss) per common share	$ (3.24)	$ 1.40	$ 2.19
Common shares outstanding	13,117	13,821	14,301
Diluted earnings (loss) per share	$ (3.24)	$ 1.32	$ 2.08
Common and common equivalent shares	13,117	14,821	15,141
The accompanying notes are an integral part of these consolidated financial statements.

DXP ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
Years Ended December 31, 2007, 2008 and 2009
(in Thousands, Except Share Amounts)

Series A
Preferred
Stock

Series B
Preferred
Stock

Common
Stock

Paid-In
Capital

Retained
Earnings

Treasury
Stock
Notes
Receivable
From
Share-
holders

Accumulated
Other
Comprehensive
Income (Loss)

Total
BALANCES AT
DECEMBER 31, 2006

$     1

$        15

$      102

$  6,096

$31,505

$        -

$(799)

$        -

$  36,920
Exchange of note receivable for
  40,098 shares of common stock

-

-

-

-

-

(825)

799

-

(26)
Dividends paid - - - - (90) - - - (90)
Compensation expense
  for restricted stock

-

-

-

591

-

-

-

-

591
Exercise of stock options for
  399,910 shares of common stock

-

-

4

3,394

-

-

-

-

3,398
Sale of 2,000,000 shares from
  public offering

-

-

20

44,553

-

-

-

-

44,573
Net income - - - - 17,347 - - - 17,347
BALANCES AT
DECEMBER 31, 2007

$        1

$        15

$      126

$54,634

$48,762

$(825)

-

-

$102,713
Dividends paid - - - - (90) - - - (90)
Compensation expense
  for restricted stock

-

-

-

930

-

-

-

-

930
Exercise of stock options and
  vesting of restricted stock for
  219,160 of common stock

-

-

2

642

-

825

-

-

1,469
Net loss on interest rate swap
for comprehensive income

-

-

-

-

-

-

-

(721)

(721)
Net Income - - - - 25,887 - - - 25,887
BALANCES AT
DECEMBER 31, 2008

$        1

$        15

$      128

$56,206

$74,559

-

-

$(721)

$130,188
Dividends paid - - - - (90) - - (90)
Compensation expense
  for restricted stock

-

-

-

1,555

-

-

-

1,555
Net gain on interest rate swap
for comprehensive income

695

695
Excess tax benefit from exercise
  of stock options and vesting of
  restricted stock

-

-

-

266

-

-

-

-

266
Exercise of stock options and
  vesting of restricted stock for
  71,897 shares of common stock

-

-

1

10

-

-

-

-

11
  Net loss - - - - (42,412) - - (42,412)
BALANCES AT
DECEMBER 31, 2009

$        1

$        15

$      129

$58,037

$32,057

-

-

$(26)

$90,213

The accompanying notes are an integral part of these consolidated financial statements

3135

DXP ENTERPRISES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
Years Ended December 31
2007 2008 2009
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income (loss) $                 17,347 $                 25,887 $              (42,412)
  Adjustments to reconcile net income (loss) to net cash
    provided by operating activities – net of acquisitions

  Goodwill and other intangible impairment - - 52,951
  Precision inventory impairment - - 13,800
  Depreciation 2,258 4,629 4,260
  Amortization 2,704 6,363 7,216
  Deferred income taxes (559)   143 (16,678)
  Stock-based compensation expense 591 930 1,555
  Tax benefit related to exercise of stock options and
    vesting of restricted stock

(3,197)

(1,362)

(266)
  Gain on sale of property and equipment (8) (116) -
  Changes in operating assets and liabilities, net of assets
    and liabilities acquired in business combinations:

     Trade accounts receivable (9,253) (10,876) 24,125
     Inventories (6,882) (11,161) 32,716
     Prepaid expenses and other assets 3,263 366 (1,665)
     Accounts payable and accrued expenses 7,212 3,655 (24,027)
     Net cash provided by operating activities 13,476 18,458 51,575
CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchase of property and equipment (1,902) (5,134) (1,593)
  Purchase of businesses, net of cash acquired (125,869) (73,943) (491)
  Proceeds from the sale of property and equipment 8 158 16
  Net cash used in investing activities (127,763) (78,919) (2,068)
CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from debt 191,779 165,466 133,716
  Principal payments on revolving line of credit,
    long-term debt and notes payable

(123,940)

(104,662)

(186,763)
  Dividends paid in cash (90) (90) (90)
  Proceeds from exercise of stock options 202 105 10
  Proceeds from sale of common stock 44,573 - -
  Tax benefit related to exercise of stock options 3,197 1,362 266
    Net cash provided by (used in) financing activities 115,721 62,181 (52,861)
INCREASE (DECREASE) IN CASH 1,434 1,720 (3,354)
CASH AT BEGINNING OF YEAR 2,544 3,978 5,698
CASH AT END OF YEAR $                   3,978 $                   5,698 $                   2,344
SUPPLEMENTAL DISCLOSURES:
  Cash paid for  --
    Interest $                   3,158 $                   6,207 $                   5,338
    Income taxes $                   5,879 $                   9,263 $                 15,053
  Cash income tax refunds $                        20 $                           - $                        73

The accompanying notes are an integral part of these consolidated financial statements.

DXP ENTERPRISES, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY Years Ended December 31, 2009, 2010 and 2011 (in Thousands, Except Share Amounts)
	Series A Preferred Stock	Series B Preferred Stock	Common Stock	Paid-In Capital	Retained Earnings	Treasury Stock	Accumulated Other Comprehensive Income (Loss)	Total
BALANCES AT DECEMBER 31, 2008	$ 1	$ 15	$ 128	$56,206	$74,559	-	$(721)	$130,188
Dividends paid	-	-	-	-	(90)	-	-	(90)
Compensation expense for restricted stock	-	-	-	1,555	-	-	-	1,555
Net gain on interest rate swap for comprehensive income	-	-	-	-	-	-	695	695
Exercise of stock options and vesting of restricted stock for 71,897 shares of common stock	-	-	1	276	-	-	-	277
Net loss	-	-	-	-	(42,412)	-	-	(42,412)
BALANCES AT DECEMBER 31, 2009	$ 1	$ 15	$ 129	$58,037	$32,057	-	$(26)	$90,213
Dividends paid	-	-	-	-	(90)	-	-	(90)
Compensation expense for restricted stock	-	-	-	973	-	-	-	973
Net gain on interest rate swap for comprehensive income	-	-	-	-	-	-	26	26
Issuance of 498,730 shares in connection with acquisitions	-	-	5	7,061	-	-	-	7,066
Issuance of 493,791 shares upon conversion of notes to common stock	-	-	5	6,206	-	-	-	6,211
Exercise of stock options and vesting of restricted stock for 149,886 shares of common stock	-	-	1	339	-	-	-	340
Net income	-	-	-	-	19,381	-	-	19,381
BALANCES AT DECEMBER 31, 2010	$ 1	$ 15	$ 140	$72,616	$51,348	-	-	$124,120
Dividends paid	-	-	-	-	(90)	-	-	(90)
Compensation expense for restricted stock	-	-	-	1,256	-	-	-	1,256
Net gain on long-term investment for comprehensive income	-	-	-	-	-	-	$64	64
Issuance of 35,714 shares in connection with acquisitions	-	-	-	1,143	-	-	-	1,143
Vesting of restricted stock for 68,069 shares of common stock	-	-	1	189	-	-	-	190
Acquisition of 65,171 shares of common stock	-	-	-	-	-	$(1,445)	-	(1,445)
Net income	-	-	-	-	31,437	-	-	31,437
BALANCES AT DECEMBER 31, 2011	$ 1	$ 15	$ 141	$75,204	$82,695	$(1,445)	$64	$156,675

The accompanying notes are an integral part of these consolidated financial statements.

3236

DXP ENTERPRISES, INC., AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands)
	Years Ended December 31
	2009	2010	2011
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$ (42,412)	$ 19,381	$ 31,437
Adjustments to reconcile net income (loss) to net cash provided by operating activities – net of acquisitions
Goodwill and other intangible impairment	52,951	-	-
Precision inventory impairment	13,800	-	-
Depreciation	4,260	3,744	3,510
Amortization	7,216	5,824	6,572
Deferred income taxes	(16,678)	2,914	2,081
Stock-based compensation expense	1,555	973	1,256
Tax benefit related to exercise of stock options and vesting of restricted stock	(266)	(215)	(198)
Gain on sale of property and equipment	-	(188)	-
Changes in operating assets and liabilities, net of assets and liabilities acquired in business combinations:
Trade accounts receivable	24,125	(14,528)	(21,548)
Inventories	32,716	2,028	(4,258)
Prepaid expenses and other assets	(1,665)	1,165	(2,617)
Accounts payable and accrued expenses	(24,027)	2,810	9,593
Net cash provided by operating activities	51,575	23,908	25,828
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment	(1,593)	(1,184)	(4,096)
Purchase of businesses, net of cash acquired	(491)	(18,394)	(18,434)
Proceeds from the sale of property and equipment	16	1,428	-
Long-term investment	-	-	(1,572)
Net cash used in investing activities	(2,068)	(18,150)	(24,102)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt	133,716	141,216	224,307
Principal payments on revolving line of credit, long-term debt and notes payable	(186,763)	(148,798)	(223,959)
Dividends paid in cash	(90)	(90)	(90)
Proceeds from exercise of stock options	10	125	-
Purchase of treasury stock	-	-	(1,445)
Tax benefit related to exercise of stock options and vesting of restricted stock	266	215	198
Net cash used in financing activities	(52,861)	(7,332)	(989)
INCREASE (DECREASE) IN CASH	(3,354)	(1,574)	737
CASH AT BEGINNING OF YEAR	5,698	2,344	770
CASH AT END OF YEAR	$ 2,344	$ 770	$ 1,507
SUPPLEMENTAL DISCLOSURES:
Cash paid for --
Interest	$ 5,338	$ 5,240	$ 3,490
Income taxes	$ 15,053	$ 8,342	$ 14,190
Income tax refunds	$ 73	$ 250	$ 293
Purchase of businesses in 2010 excludes $20 million of common stock, notes and convertible notes issued in connection with acquisitions during 2010. Proceeds from debt exclude $6.3 million of convertible notes issued in connection with an acquisition in 2010 and converted to common stock in 2010. Purchases of businesses in 2011 excludes $36.7 million in outstanding checks at December 31, 2011 and $1.1 million of common stock issued in connection with an acquisition. The accompanying notes are an integral part of these consolidated financial statements.

DXP ENTERPRISES INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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..~~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 ~~two~~three business segments: ~~Maintenance, Repair~~Service Centers, Supply Chain Services (“SCS”) and ~~Operating (MRO) and Electrical Contractor.~~Innovative Pumping Solutions (“IPS”). See Note 1614 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

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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, ~~2008~~2010 and ~~2009~~2011 is as follows (in thousands):

	2008		2009		2010		2011
	Carrying Value	Fair Value	Carrying Value	Fair Value	Carrying Value	Fair Value	Carrying Value	Fair Value
Cash	$ 5,698	$ 5,698	$2,344	$2,344	$770	$770	$1,507	$1,507
Marketable securities					-	-	$1,679	$1,679
Long-term debt, including current portion	168,556	168,556	115,511	115,511	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 109 – 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. ~~The extent~~Under this method, revenues are recognized as costs are incurred and include estimated profits calculated on the basis of ~~completion is measured as cost~~the relationship between costs incurred ~~divided by the~~and total estimated ~~cost.~~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, ~~2008~~2010 and ~~2009, $1.9~~2011, $2.8 million and ~~$0.1~~$7.4 million, respectively, of unbilled costs and estimated earnings are included in accounts receivable.

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, ~~determination of goodwill impairments,~~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.

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Self-insured Insurance and Medical Claims

The accrual for these claims at December 31, ~~2009~~2011 and ~~2008~~2010 was approximately ~~$1.3~~$2.4 million and ~~$2.0~~$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. ~~We compare~~In prior years we compared the carrying value of the net assets of each reporting unit to the net present value of estimated discounted ~~future~~anticipated cash flows of ~~the~~each reporting ~~unit.~~unit, discounted using a weighted average cost of capital rate. If the carrying value ~~exceeds~~exceeded the net present value of estimated discounted ~~future~~anticipated cash flows, an impairment indicator ~~exists~~existed and an estimate of the impairment loss iswas calculated. The fair value calculation ~~includes~~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 ~~result~~have resulted in goodwill impairment that could have materially adversely ~~impact~~impacted our financial position or results of operations. All of our goodwill is related to our MRO segment and was included in its two reporting units which are DXP and PFI. Goodwill of $101.0 million, before impairment, was primarily recorded in connection with the 13 acquisitions of the MRO businesses completed since 2004, all of which was included in the two reporting units for our MRO segment. Assets, liabilities, deferred taxes and goodwill for each reporting unit were determined using the balance sheets maintained for each reporting unit. We

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

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 ~~a partial impairment~~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 ~~the PFI reporting unit~~our Service Centers segment which are DXP and ~~a partial impairment~~PFI. Approximately $2.9 million of ~~the~~ goodwill ~~for the DXP reporting unit during 2009.~~is included in our Supply Chain Services segment.

~~When estimating~~

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 ~~values~~value of a reporting unit ~~for our goodwill impairment test, we use an income approach which incorporates management’s views. The income approach provides an estimated~~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 ~~based on~~of each reporting ~~unit’s anticipated cash flows that are discounted using~~unit is not less than its carrying value and therefore, did not perform a ~~weighted average cost~~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 ~~rate. The primary assumptions used~~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 ~~income approach were estimated cash flows and weighted average cost~~magnitude of capital. Estimated cash flows were primarily based on projected revenues, operating costs and capital expenditures and are discounted based on comparable industry average rates for weighted average costthe excess of ~~capital. We utilized discount rates based on weighted average cost~~fair value over the carrying amount of ~~capital ranging from 12.0% to 14.5% when we estimated fair values of our~~each reporting unit s as ~~of December 31, 2009. To ensure~~determined in prior years' quantitative testing and other factors. We believe the ~~reasonableness of the estimated~~ fair ~~values~~value of our reporting units ~~we performed~~substantially exceeds the carrying value of our reporting units.

Long-lived assets, including property, plant and equipment and amortizable intangible assets comprise a ~~reconciliation~~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 ~~capitalization to~~information is available that would more clearly indicate the ~~total estimated~~ fair value of ~~all our reporting units. The assumptions used in estimating fair values~~an asset or asset group. To the extent estimates of ~~reporting units~~future cash flows are utilized, only the future cash flows (cash inflows less associated cash outflows) that are directly associated with, and ~~performing~~that are expected to arise as a direct result of the ~~goodwill~~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 ~~test~~tests are ~~inherently uncertain and required management judgment. The~~heavily influenced by assumptions and ~~methodologies used for valuing goodwill in the current year~~estimates that are ~~consistent with those used in the prior year.~~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 ~~the~~ 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. ~~If we increased, or decreased, our discount rates by 10% when estimating the fair values of our~~ reporting units, the recognized impairment would have been approximately 7% less, or approximately 10% greater, respectively. If we increased, or decreased, our expected growth rates by 10% when estimating the fair values of our reporting units, the recognized impairment would have been approximately 1% greater, or approximately 1% less, respectively. This impairment charge did not have an impact on our liquidity or financial covenants under our Facility; however it was a reflection of the overall downturn in our industry and decline in our projected cash flows.

Long-lived assets, including property, plant and equipment and amortizable intangible assets, also 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 management believes impairment indicators may exist, projections of the undiscounted future cash flows associated with the use of and eventual disposition of long-lived assets held for use are prepared. If the projections indicate that the carrying values of the long-lived assets are not recoverable, we reduce the carrying values to fair value. For long-lived assets held for sale, we compare the carrying values to an estimate of fair value less selling costs to determine potential impairment. We test for imp airment of long-lived assets at the lowest level for which cash flows are measurable. These impairment tests are heavily influenced by assumptions and estimates that are subject to change as additional information becomes available. 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~~"Goodwill and other intangible ~~impairment”~~impairment" expense on the Consolidated Statements of Operations. The PFI reporting unit is part of the ~~MRO~~Service Centers segment.

Goodwill and Other Intangible Assets

The ~~$43.9~~$24.2 million increase in goodwill and the ~~$29.4~~$12.3 million increase in other intangibles ~~from December 31, 2006 to December 31, 2007~~acquired during 2010 results from recording the ~~estimated~~goodwill and other intangibles ~~for~~associated with the acquisitions of ~~Delta Process Equipment, Precision Industries,~~the assets of Quadna, Inc., (“Quadna”) and ~~Indian Fire and Safety and changes~~D&F Distributors, Inc. (“D&F”). The $0.2 million increase in ~~the estimates of intangibles~~goodwill for businesses acquired during 2006. The changes made in 2007 to the estimates for other intangibles for the 2006 acquisitions relate primarily to increasing the value of customer relationships for Production Pump, Safety International, Safety Alliance and Gulf Coast Torch. The adjustment to goodwill related primarily to the payment of earn out in 2010 relates to contingent purchase price for ~~Production~~the 2008 acquisition of Falcon Pump. ~~At December 31, 2008, $98.7 million and $45.2 million (net of $9.6 million of amortization) of total purchas e price for acquisitions were allocated to goodwill and other intangibles, respectively.~~ The ~~$37.9~~$15.8 million increase in goodwill and the ~~$9.4~~$17.5 million increase in other intangibles ~~from December 31, 2007 to December 31, 2008~~acquired during 2011 results from recording the goodwill and ~~estimated~~other intangibles ~~for~~associated with the acquisitions of ~~Rocky Mtn. Supply, PFI~~the assets of KC and ~~Falcon Pump,~~CW Rod. The $1.0 million increase in goodwill for payment of earn out in 2011 relates to contingent purchase price for ~~acquisitions completed in prior years, and changes in~~ the ~~estimates~~2007 acquisition of goodwill and intangibles for businesses acquired in 2007. The changes made in 2008 to the estimates for other intangibles associated with 2007 acquisitions relate primarily to increasing the value of customer relationships for Indian Fire and Safety. The changes made to goodwill during 2008 primarily relate to reducing the value of acquired inventories for Precision and the payment of contingent purchase price for Production Pump. The $2.5 million adjustment to increase goodwill during 2009 primarily results from a $0.9 million reduction in the value of acquired inventories for Rocky Mtn. Supply, Inc. and a $1.2 million reduction in acquired fixed assets for PFI, LLC, both of which were acquired in 2008. Other intangible assets are generally amortized on a straight line basis over the useful lives of the assets. ~~All~~Approximately $82.9 million of goodwill and $27.9 million of other intangible assets pertain to the ~~MRO~~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 ~~2007, 2008~~2010 and ~~2009~~2011 are as follows (in thousands):

Total

Goodwill

Other
Intangibles
Net balance as of December 31, 2006 $    23,428 $    16,964 $      6,464
Acquired during the year 75,286 48,067 27,219
Adjustments to prior year estimates 691 (4,182) 4,873
Amortization (2,704) - (2,704)
Balance as of December 31, 2007 $    96,701 $   60,849 $    35,852
Acquired during the year 45,682 31,402 14,280
Adjustments to prior year estimates 7,925 6,467 1,458
Amortization (6,363) - (6,363)
Balance as of December 31, 2008 $  143,945 $    98,718 $    45,227
Adjustments to prior year estimates 2,491 2,491 -
Amortization (7,216) - (7,216)
Impairment (52,951) (40,667) (12,284)
Balance as of December 31, 2009 $    86,269 $   60,542 $   25,727

	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, 2008		As of December 31, 2009		As of December 31, 2010		As of December 31, 2011
	Gross Carrying Amount	Accumulated Amortization	Gross Carrying Amount	Accumulated Amortization	Gross Carrying Amount	Accumulated Amortization	Gross Carrying Amount	Accumulated Amortization
Vendor agreements	$ 2,496	$ (582)	$ 2,496	$ (706)	$ 2,496	$ (831)	$ 2,496	$ (956)
Customer relationships	50,416	(8,289)	35,390	(11,908)	47,363	(17,237)	64,262	(23,508)
Non-compete agreements	1,920	(734)	1,620	(1,165)	1,980	(1,535)	2,611	(1,711)
Total	$ 54,832	$ (9,605)	$ 39,506	$ (13,779)	$ 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):

~~2010 $ 5,113~~

~~2011 $ 4,841~~

2012 $ ~~4,708~~8,531

2013 $ ~~3,988~~7,804

2014 $ ~~3,728~~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, ~~7.0~~9.0 years and ~~3.1~~4.3 years, ~~respectively.~~respectively, at December 31, 2011. The weighted average useful life of amortizable intangible assets in total is ~~7.6 years.~~9.3 years at December 31, 2011.

Of the ~~$86.3~~$145.0 million net balance of goodwill and other intangibles at December 31, ~~2009, $71.6~~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 ~~its~~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

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 ~~exclusively~~ of changes in the value of an interest rate ~~swap.~~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 ~~2003.~~2007. The ~~Company̵ 7;s~~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, ~~2009.~~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.

2. RECENT ACCOUNTING PRONOUNCEMENTS:

In September 2006, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance which defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles and expands disclosures about fair value measurements. This authoritative guidance does not require any new fair value measurements; rather, it applies under other accounting pronouncements that require or permit fair value measurements. The provisions of this authoritative guidance are to be applied prospectively as of the beginning of the fiscal year in which this is initially applied, with any transition adjustment recognized as a cumulative-effect adjustment to the opening balance of retained earnings. The provisions of this authoritative guidance are effective for the fiscal years beginnin g after November 15, 2007. In February 2008, the FASB issued authoritative guidance which delayed the effective date of this authoritative guidance to fiscal years beginning after November 15, 2008 and interim periods within those years for all nonfinancial assets and nonfinancial liabilities, except those that are recognized at fair value in the financial statements on a recurring basis (at least annually). See Note 14 “Fair Value of Financial Assets and Liabilities” for additional information on the adoption of this authoritative guidance.

In December 2007, the FASB issued authoritative guidance which requires the acquiring entity in a business combination to measure the identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree at their fair values on the acquisition date, with goodwill being the excess value over the net identifiable assets acquired. In addition, immediate expense recognition is required for transaction costs. This authoritative guidance is effective for financial statements issued for fiscal years beginning after December 15, 2008, and adoption is prospective only. As such, if the Company enters into any business combinations in the future, a transaction may significantly affect the Company’s financial position and earnings, but, not cash flows, as compared to the Company’s past acquisitions.

In March 2008, the FASB issued authoritative guidance which amends and expands the disclosure requirements of previous authoritative guidance to provide a better understanding of how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for, and their effect on an entity’s financial position, financial performance, and cash flows. This authoritative guidance also requires disclosure of the fair values of derivative instruments and their gains and losses in a tabular format. This authoritative guidance is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, or the Company’s quarter ended March 31, 2009. As this pronouncement is only disclosure-related, it did not have an impact on DXP& #8217;s financial position and results of operations.

In April 2008, the FASB issued authoritative guidance which amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset. This authoritative guidance requires expanded disclosure related to the determination of useful lives for intangible assets and should be applied to all intangible assets recognized as of, and subsequent to December 31, 2008. The impact of this authoritative guidance will depend on the size and nature of acquisitions completed by the Company on or after January 1, 2009.

In June 2008, the FASB issued authoritative guidance which provides that unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share using the two-class method. The authoritative guidance is effective for fiscal years beginning after December 15, 2008 on a retrospective basis and was adopted by the Company in the first quarter of 2009. The Company has granted awards of restricted stock that contain non-forfeitable rights to dividends which are considered participating securities under this authoritative guidance. Because these awards are participating securities under the authoritative guidance, the Company is required to include these instruments in the calcula tion of earnings per share using the two-class method. The adoption of the authoritative guidance reduced basic and diluted earnings per share by $0.01 for 2007 and by $0.02 for 2008. Basic earnings per share, diluted earnings per share, weighted average common shares outstanding and weighted average common and common equivalent shares outstanding for 2007 and 2008 have been restated.

In May 2009, the FASB issued authoritative guidance which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before the financial statements are issued or are available to be issued. The authoritative guidance provides guidance on the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements and the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. The Company adopted the authoritative guidance during the second ~~quar ter~~quarter of 2009, and its application had no impact on the Company’s consolidated condensed financial statements. The Company evaluated subsequent events through the date this report was filed with the SEC.

~~3. ACCOUNTING METHODS ADOPTED JANUARY 1, 2008~~

On January 1, 2008, we elected to change our costing method for our inventories accounted for on the last-in, first-out method (“LIFO”) to the first-in, first-out (“FIFO”) method. The percentage of total inventories accounted for under the LIFO method was approximately 46% at December 31, 2007. We believe the FIFO method is preferable as it conforms the inventory costing methods for all of our inventories to a single method. The FIFO method also better reflects current acquisition costs of those inventories on our consolidated balance sheets and enhances the matching of future cost of sales with revenues. In accordance with authoritative guidance, all prior periods presented have been adjusted to apply the new method retrospectively. The effect of the change in our inv entory costing method includes the LIFO reserve and related impact on the obsolescence reserve. This change increased our inventory balance by $2.0 million and increased retained earnings, net of income tax effects, by $1.2 million as of January 1, 2004. The effect of this change in accounting principle was immaterial to the results of operations for all prior periods presented from January 1, 2004 through December 31, 2007.

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~~On January 1, 2008, we also changed our~~In October 2009, the FASB issued new standards for revenue recognition with multiple deliverables. These new standards impact the determination of when the individual deliverables included in a multiple-element arrangement may be treated as separate units for accounting purposes. Additionally, these new standards modify the manner in which the arrangement consideration is allocated across the separately identified deliverables by no longer permitting the residual method ~~from~~of allocating arrangement consideration. These new standards were adopted in the ~~completed-contract method to the percentage~~first quarter of ~~completion method for binding agreements to fabricate tangible assets to customers’ specifications in accordance with authoritative guidance.~~2011. The ~~percentage-of-completion method presents the economic substance~~adoption of these transactions more clearly and timely than the completed-contract method. The effect of this change in accounting principle was immaterial to results of operations and balance sheets for all prior periods presented.new standards did not significantly impact our consolidated financial statements.

4.In September 2011, the FASB issued an accounting standards update with new guidance on annual goodwill impairment testing. The standards update 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. If based on its qualitative assessment an entity concludes it is more likely than not that the fair value of a reporting unit is less than its carrying amount, quantitative impairment testing is required. However, if an entity concludes otherwise, quantitative impairment testing is not required. The standards update is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, with early adoption permitted. We have elected to early adopt the standards update effective December 31, 2011. We completed a qualitative assessment of goodwill at December 31, 2011 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 assessment.

3. ACQUISITIONS

All of the Company’s acquisitions have been accounted for using the purchase method of accounting. Revenues and expenses of the acquired businesses have been included in the accompanying consolidated financial statements beginning on their respective dates of acquisition. The allocation of purchase price to the acquired assets and liabilities is based on estimates of fair market value and may be prospectively revised if and when additional information the Company is awaiting concerning certain asset and liability valuations is obtained, provided that such information is received no later than one year after the date of acquisition. Any contingent purchase price on acquisitions completed before January 1, 2009 will increase goodwill when paid.

The initial purchase price allocation for the 2006 acquisitions was adjusted in 2007 to allocate $4.9 million of purchase price to intangibles other than goodwill and record $0.7 million of additional purchase price. The changes made in 2007 to the estimates for other intangibles for the 2006 acquisitions relate primarily to increasing the value of customer relationships for Production Pump, Safety International, Safety Alliance and Gulf Coast Torch. The adjustment to goodwill related primarily to the payment of contingent purchase price for Production Pump.

On May 4, 2007, DXP completed the acquisition of the business of Delta Process Equipment. DXP paid $10.0 million in cash for the business of Delta Process Equipment. DXP acquired this business to diversify DXP’s customer base in the municipal, wastewater and downstream industrial pump markets. The purchase price was funded by utilizing available capacity under DXP’s credit facility.

On September 10, 2007, DXP completed the acquisition of Precision Industries, Inc. (“Precision”). DXP acquired this business to expand DXP’s geographic presence and strengthen DXP’s integrated supply offering. The Company paid $106 million in cash for Precision. The purchase price was funded using approximately $24 million of cash on hand and approximately $82 million borrowed from a new credit facility. In addition, DXP paid $0.1 million additional purchase price contingent upon 2008 and 2009 product savings.

On October 19, 2007, DXP completed the acquisition of the business of Indian Fire & Safety. DXP acquired this business to strengthen DXP’s expertise in safety products and services in New Mexico and Texas. DXP paid $6.0 million in cash, $3.0 million in a seller note and $3.0 million in future payments contingent upon future earnings for the business of Indian Fire & Safety. The seller note bears interest at prime minus 1.75%. The cash portion was funded by utilizing available capacity under DXP’s credit facility.

During 2008 the initial purchase price allocation for 2007 acquisitions was adjusted to allocate $1.5 million of purchase price to other intangibles and increase goodwill by $6.5 million. The changes made in 2008 to the estimates for other intangibles associated with 2007 acquisitions relate primarily to increasing the value of customer relationships for Indian Fire & Safety. The changes made to goodwill primarily relate to reducing the value of acquired inventories for Precision and the payment of contingent purchase price for Production Pump.

On August 28, 2008, DXP completed the acquisition of PFI, LLC. DXP acquired this business to strengthen DXP’s expertise in the distribution of fasteners. DXP paid $66.4 million in cash for this business. The cash was funded by utilizing a new credit facility.

On December 1, 2008, DXP completed the acquisition of the business of Falcon Pump. DXP acquired this business to strengthen DXP’s pump offering in the Rocky Mountain area. DXP paid $3.1 million in cash, $0.8 million in ~~seller notes and up to $1.0 million in future payments contingent upon future earnings of the acquired business. The seller notes bear interest at ninety day LIBOR plus 0.75%.~~

The allocation of purchase price for all acquisitions completed in 2008 was preliminary in the December 31, 2008 consolidated balance sheets. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed during 2008 as reflected in the December 31, 2008 consolidated financial statements (in thousands):

~~Cash~~	~~$ 678~~
~~Accounts Receivable~~	~~10,336~~
~~Inventory~~	~~27,793~~
~~Property and equipment~~	~~2,757~~
~~Goodwill and intangibles~~	~~45,375~~
~~Other assets~~	~~339~~
~~Assets acquired~~	~~87,278~~
~~Current liabilities assumed~~	~~(6,039)~~
~~Non-current liabilities assumed~~	~~(5,775)~~
~~Net assets acquired~~	~~$ 75,464~~

During 2009 the initial purchase price allocation for the 2008 acquisitions was adjusted to allocate $2.5 million of purchase price to goodwill. These increases in goodwill primarily related to reducing the value of inventories and fixed assets for the ~~2008 acquisitions.~~acquisitions completed during 2008. During ~~the fourth quarter of~~ 2009 the Company recognized an impairment charge of $53.0 million for goodwill and other intangibles associated with the ~~MRO segment.~~Service Centers and SCS segments. During 2010 the Company paid $0.2 million in contingent purchase price related to the acquisition of Falcon Pump. During 2011 the Company paid $1.0 million in contingent purchase price related to the acquisition of Indian Fire & Safety in 2007.

On April 1, 2010, DXP acquired substantially all the assets of Quadna, Inc. (“Quadna”). The purchase price of approximately $25.0 million (net of $3.0 million of acquired cash) consisted of $11 million paid in cash, $10 million in the form of convertible promissory notes bearing interest at a rate of 10% and approximately $4.0 million in the form of 343,337 shares of DXP common stock. On April 9, 2010, $4.5 million principal amount of the convertible promissory notes, along with accrued interest, were converted into 376,417 shares of DXP’s common stock. On August 18, 2010, $3.7 million of the convertible promissory notes were paid off using funds obtained from DXP’s credit facility and $1.8 million of the convertible promissory notes were converted to 117,374 shares of DXP common stock. The $11 million cash portion of the purchase price was funded by borrowings under DXP’s existing credit facility. DXP completed this acquisition to expand its pump business in the Western U.S. Goodwill of $18.8 million was recognized for this acquisition and is calculated as the excess of the consideration transferred over the net assets recognized and represents the future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. It specifically includes the expected synergies and other benefits that we believe will result from combining the operations of Quadna with the operations of DXP and any intangible assets that do not qualify for separate recognition such as the assembled workforce.

On November 30, 2010, DXP acquired substantially all of the assets of D&F Distributors, Inc. (“D&F”). The purchase price of $13.4 million consisted of approximately $7.4 million paid in cash, approximately $2.9 million in the form of promissory notes bearing interest at a rate of 5%, and approximately $3.1 million in the form of 155,393 shares of DXP common stock. The cash portion of the purchase price was funded by borrowings under DXP’s existing credit facility. DXP completed this acquisition to expand its pump business in Indiana, Kentucky, Tennessee and Ohio. Goodwill of $5.4 million was recognized for this acquisition and is calculated as the excess of the consideration transferred over the net assets recognized and represents the future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. It specifically includes the expected synergies and other benefits that we believe will result from combining the operations of D&F with the operations of DXP and any intangible assets that do not qualify for separate recognition such as the assembled workforce.

On October 10, 2011, DXP acquired substantially all of the assets of Kenneth Crosby ("KC"). DXP acquired this business to expand DXP's geographic presence in the eastern U.S. and strengthen DXP's metal working offering. DXP paid approximately $16 million for KC, which was borrowed under our existing credit facility. Goodwill of $5.8 million was recognized for this acquisition and is calculated as the excess of the consideration transferred over the net assets recognized and represents the future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. It specifically includes the expected synergies and other benefits that we believe will result from combining the operations of KC with the operations of DXP and any intangible assets that do not qualify for separate recognition such as the assembled workforce.

On December 30, 2011, DXP acquired substantially all of the assets of C.W. Rod Tool Company ("CW Rod"). DXP acquired this business to strengthen DXP's metal working offering. DXP paid approximately $1.1 million of DXP's common stock (35,714 shares) and approximately $42 million in cash for CW Rod, which was borrowed during 2011 and 2012 under our recently expanded credit facility. The $42 million of cash paid for CW Rod includes $36.7 million paid in the form of checks which did not clear our bank until 2012. Goodwill of $10.0 million was recognized for this acquisition and is calculated as the excess of the consideration transferred over the net assets recognized and represents the future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. It specifically includes the expected synergies and other benefits that we believe will result from combining the operations of CW Rod with the operations of DXP and any intangible assets that do not qualify for separate recognition such as the assembled workforce.

The value assigned to the non-compete agreements and customer relationships for Quadna, D&F, KC and CW Rod were determined by discounting the estimated cash flows associated with non-compete agreements and customer relationships as of the date the acquisition was consummated. The estimated cash flows were based on estimated revenues net of operating expenses and net of capital charges for assets that contribute to the projected cash flow from these assets. The projected revenues and operating expenses were estimated based on management estimates. Net capital charges for assets that contribute to projected cash flow were based on the estimated fair value of those assets. Discount rates of 17.0% to 17.2% were deemed appropriate for valuing these assets and were based on the risks associated with the respective cash flows taking into consideration the acquired company’s weighted average cost of capital.

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed during 2011 in connection with the acquisitions described above (in thousands):

Cash	3
Accounts Receivable	15,696
Inventory	13,754
Property and equipment	1,415
Goodwill and intangibles	33,352
Other assets	142
Assets acquired	64,362
Current liabilities assumed	(5,873)
Non-current liabilities assumed	-
Net assets acquired	58,489

The pro forma unaudited results of operations for the Company on a consolidated basis for the years ended December 31, ~~2007~~2009 and ~~2008,~~2010, assuming the ~~purchases~~acquisition of businesses completed in ~~2007 and 2008~~2010 were consummated as of January 1, ~~of each year~~2009 follows:

Years Ended
December 31,
2007 2008
(Unaudited)

In Thousands,
except for per share data

Net sales $740,059 $796,164
Net income $ 22,709 $ 27,828

Per share data
Basic earnings $1.78 $2.14
Diluted earnings $1.64 $2.01

	Years Ended December 31,
	2009	2010
	(Unaudited)
	In Thousands, except for per share data
Net sales	$653,175	$ 689,675
Net (loss) income	$(39,967)	$ 20,843
Per share data
Basic Earnings	$(3.04)	$1.50
Diluted Earnings	$(3.04)	$1.42

The pro forma unaudited results of operations for the Company on a consolidated basis for the years ended December 31, 2010 and 2011, assuming the acquisition of businesses completed in 2011 were consummated as of January 1, 2010 follows:

	Years Ended December 31,
	2010	2011
	(Unaudited)
	In Thousands, except for per share data
Net sales	$ 778,267	$ 903,240
Net income	$ 22,898	$ 35,511
Per share data
Basic Earnings	$1.65	$2.48
Diluted Earnings	$1.56	$2.35

4. PRECISION INVENTORY IMPAIRMENT IN 2009

During ~~the fourth quarter of~~ 2009 the Company determined that the value of inventory acquired in connection with the acquisition of Precision on September 10, 2007, was overstated by $13.8 million because the inventory iswas obsolete, expired, old and/or slow moving. The $13.8 million charge to reduce the value of this inventory is included in cost of sales for 2009.

4146

6.5. INVENTORIES:

The carrying values of inventories are as follows:

December 31,
2008 2009
(in Thousands)
Finished goods $117,582 $ 72,270
Work in process 1,515 311
Inventories $119,097 $ 72,581

	December 31,
	2010	2011
	(in Thousands)
Finished goods	$ 94,270	$102,645
Work in process	2,466	5,246
Obsolescence reserve	(20,849)	(13,990)
Inventories	$ 75,887	$ 93,901

6. PROPERTY AND EQUIPMENT:

Property and equipment consisted of the following:

	December 31,		December 31,
	2008	2009	2010	2011
	(in Thousands)		(in Thousands)
Land	$ 1,775	$ 1,775	$ 1,652	$ 1,652
Buildings and leasehold improvements	7,480	7,672	7,508	7,956
Furniture, fixtures and equipment	24,202	22,325	23,700	28,756
	33,457	31,772	32,860	38,364
Less – Accumulated depreciation and amortization	(13,126)	(14,817)
	$20,331	$16,955
Less – Accumulated depreciation			(17,943)	(21,453)
Total Property and Equipment			$ 14,917	$ 16,911

7. LONG-TERM DEBT:

Long-term debt consisted of the following:

December 31,
2008 2009
(in Thousands)
Line of credit $112,000 $  75,000
Term loan,  payable in quarterly installments of $2.5 million through August 2013 47,500 35,500
Unsecured notes payable to individuals at 6.0%, payable in monthly
  installments through December 2009

862

-
Unsecured notes payable to individuals, at variable rates (1.25% to 3.5%
  at December 31, 2009) payable in monthly installments through November 2011

5,901

3,027
Mortgage loans payable to financial institutions, 6.25% collateralized by real estate,
payable in monthly installments through January 2013

2,050

1,956
Other notes 243 28
168,556 115,511
Less:  Current portion (13,965) (12,595)
$154,591 $102,916

	December 31,
	2010	2011
	(in Thousands)
Line of credit	$ 83,664	$110,828
Term loan, payable in quarterly installments of $2.5 million through August 2013	25,500	-
Unsecured notes payable to individuals, at variable rates (1.0% to 1.75% at December 31, 2010) payable in monthly and quarterly installments through November 2011	630	-
Unsecured subordinated notes payable in quarterly installments at 5% through November 2015	2,900	2,320
Mortgage loan payable to financial institution, 6.25% collateralized by real estate, payable in monthly installments through January 2013	1,857	1,751
	114,551	114,899
Less: Current portion	(10,930)	(694)
Total Long-term Debt	$ 103,621	$114,205

4247

On December 31, ~~2009,~~2011, the LIBOR based rate ~~on the revolving credit portion~~ of the Facility was LIBOR plus ~~l.75%~~1.5%, the prime based rate ~~on the revolving credit portion~~ of the Facility was prime plus ~~0.25%,~~0.0% and the commitment fee was ~~0.25%, the LIBOR based rate for the term loan was LIBOR plus 2.50% and the prime based rate for the term loan was prime plus 1.00%~~0.2%. At December 31, ~~2009,~~2011, $110.5 million was borrowed under the Facility at a weighted average interest rate of approximately ~~3.5%~~1.78% under the LIBOR options ~~including the effect of the interest rate swap,~~ and ~~nothing~~$0.3 million was borrowed at 3.25% under the prime options under the Facility. Beginning on March 15, 2010, the March 15, 2010 amendment to the Facility significantly increases the interest rates and commitment fees applicable at various leverage ratios from levels in effect before March 15, 2010. The revolving credit portion o f the Facility provides the option of interest at LIBOR plus a margin ranging from 2.25% to 4.00% or prime plus a margin of 1.25% to 3.00%. If the increased rates had been in effect on December 31, 2009, the LIBOR based rate on the revolving credit portion of the Facility would have been LIBOR plus 4.00%. If the increased rates had been in effect on December 31, 2009 the prime based rate on the revolving credit portion of the Facility would have been prime plus 3.00%. Commitment fees of 0.25% to 0.625% per annum are payable on the portion of the Facility capacity not in use for borrowings or letters of credit at any given time. If the increased rates had been in effect on December 31, 2009, the commitment fee would have been 0.625%. The term loan provides the option of interest at LIBOR plus a margin ranging from 2.75% to 4.50% or prime plus a margin of 1.75% to 3.50%. If the increased rates had been in effect on December 31, 2009, the LIBOR b ased rate for the term loan would have been LIBOR plus 4.50%. If the increased rates had been in effect on December 31, 2009, the prime based rate for the term loan would have been prime plus 3.50%.option. Borrowings under the Facility are secured by all of the Company’s accounts receivable, inventory, general intangibles and non real estate property and equipment. The Facility was amended to waive the Fixed Charge Coverage Ratio for the period ended December 31, 2009, and to amend the Leverage Ratio for the period ended December 31, 2009, to allow DXP to be in compliance with all financial covenants. DXP would not have been in compliance with the Fixed Charge Coverage Ratio or the Leverage Ratio without the amendment. At December 31, ~~2009,~~2011, we had ~~$37.3~~$78.2 million available for borrowing under ~~the most restrictive covenant of~~ the Facility.

The Facility’s principal financial covenants include:

Fixed Charge Coverage Ratio – ~~For the 12 month period ending December 31, 2009, the Fixed Charge Coverage Ratio has been waived. The~~–The Facility requires that the Fixed Charge Coverage Ratio for the 12 month period ending on the last day of each quarter ~~from March 31, 2010 through September 30, 2010~~ be not less than ~~1.0 to 1.0, stepping up to 1.25 to 1.0 for the quarter ending December 31, 2010 and to~~ 1.50 to 1.0 ~~for the quarter ending March 31, 2011,~~ with “Fixed Charge Coverage Ratio” defined as the ratio of (a) EBITDA for the 12 months ending on such date minus cash taxes, minus Capital Expenditures for such period (excluding acquisitions) to (b) the aggregate of interest expense paid in cash, scheduled principal payments in respect of long-term debt ~~a nd~~and current portion of capital leases for such 12-month period, determined in each case on a consolidated basis for DXP and its subsidiaries. At December 31, 2011, the Company's Fixed Charge Coverage Ratio was 14.2.

Leverage Ratio – The Facility requires that the Company’s Leverage Ratio, determined at the end of each fiscal quarter, not exceed ~~3.75 to 1.0 as of December 31, 2009, 4.25 to 1.0 as of March 31, 2010, 4.00 to 1.00 as of June 30, 2010, 3.75 to 1.0 as of September 30, 2010, and 3.25~~4.0 to 1.0 as of the last day of each ~~quarter thereafter.~~quarter. The Leverage Ratio is defined as the outstanding Indebtedness divided by EBITDA for the ~~twelve~~12 months then ended. At December 31, 2011, the Company’s Leverage Ratio was 1.49 to 1.00. Indebtedness is defined under the Facility for financial covenant purposes as: (a) all obligations of DXP for borrowed money including but not limited to senior bank debt, senior notes and subordinated debt; (b) capital leases; (c) issued and outstanding letters of credit; and (d) contingent obligations for funded indebtedness.

The following is the computation of the Leverage Ratio as of December 31, 2011 (in thousands, except for ratios):

For the Year ended December 31, 2011	Leverage Ratio

Income before taxes	$ 51,995
Interest expense	3,518
Depreciation and amortization	10,082
Stock compensation expense	1,256
Pro forma acquisition EBITDA	10,871
Reduction of closed location accrual	(123)
(A) Defined EBITDA	$ 77,599

As of December 31, 2011
Total long-term debt	$114,899
Letters of credit outstanding	951
(B) Defined indebtedness	$115,850

Leverage Ratio (B)/(A)	1.49

EBITDA as defined under the Facility for financial covenant purposes means, without duplication, for any period the consolidated net income (excluding any extraordinary gains or losses) of DXP plus, to the extent deducted in calculating consolidated net income, depreciation, amortization, other non-cash items and non-recurring items (including, without limitation, impairment charges, or asset write-offs and accruals in respect of closed locations), interest expense and tax expense for taxes based on income and minus, to the extent added in calculating consolidated net income, any non-cash items and non-recurring items; provided that, if DXP acquires the equity interests or assets of any person during such period under circumstances permitted under the ~~Facilit y,~~Facility, EBITDA shall be adjusted to give pro forma effect to such acquisition assuming that such transaction had occurred on the first day of such period and provided further that, if DXP divests the equity interests or assets of any person during such period under circumstances permitted under ~~this~~the Facility, EBITDA shall be adjusted to give pro forma effect to such divestiture assuming that such transaction had occurred on the first day of such period. Add-backs allowed pursuant

to Article 11, Regulation S-X, of the Securities Act of 1933, as amended, will also be included in the calculation of EBITDA.

The Facility prohibits the payment of cash dividends on the Company’s common stock.

The maturities of long-term debt for the next five years and thereafter are as follows (in thousands):

2010	$ 12,595
2011	10,666
2012	10,113	694
2013	82,137	2,216
2014	-	580
2015		580
2016		110,829
Thereafter	-	-

9.8. INCOME TAXES:

The provision for income taxes consists of the following:

	Years Ended December 31,			Years Ended December 31,
	2007	2008	2009	2009	2010	2011
	(in Thousands)			(in Thousands)
Current -
Federal	$ 10,939	$ 14,605	$ 3,849	$ 3,849	$ 7,952	$15,401
State	1,170	1,649	759	759	1,885	3,076
	12,109	16,254	4,608	4,608	9,837	18,477
Deferred	(559)	143	(16,678)	(16,678)	2,914	2,081
	$ 11,550	$ 16,397	$(12,070)	$(12,070)	$12,751	$20,558

The difference between income taxes computed at the federal statutory income tax rate (35%) and the provision for income taxes is as follows:

	Years Ended December 31,			Years Ended December 31,
	2007	2008	2009	2009	2010	2011
	(in Thousands)			(in Thousands)
Income taxes computed at federal statutory rate	$ 10 ,114	$ 14,799	$(19,069)	$(19,069)	$ 11,246	$18,198
State income taxes, net of federal benefit	760	1,072	492	492	1,225	1,999
Nondeductible impairment expense	-	-	6,852	6,852	-	-
Other	676	526	(345)	(345)	280	361
	$ 11,550	$ 16,397	$(12,070)	$(12,070)	$ 12,751	$20,558

4449

The net current and noncurrent components of deferred income tax balances are as follows:

	December 31,		December 31,
	2008	2009	2010	2011
	(in Thousands)		(in Thousands)
Net current assets	$ 3,863	$ 7,833	$ 5,919	$ 4,539
Net non-current assets	-	3,289	2,289	1,588
Net non-current liabilities	(9,419)	-	-	-
Net assets (liabilities)	$(5,556)	$ 11,122	$ 8,208	$ 6,127

Deferred tax liabilities and assets were comprised of the following:

	December 31,		December 31,
	2008	2009	2010	2011
	(in Thousands)		(in Thousands)
Deferred tax assets:
Goodwill	$ 440	$ 5,778	$ 4,871	$3,575
Allowance for doubtful accounts	1,340	1,052	1,230	2,077
Inventories	1,316	6,792	3,615	1,707
State net operating loss carryforwards	16	-
Accruals	401	936	740	889
Interest rate swap	481	16
Other	366	280	180	229
Total deferred tax assets	4,360	14,854	10,636	8,477
Less valuation allowance	(16)	-	-	-
Total deferred tax assets, net of valuation allowance	4,344	14,854	10,636	8,477
Deferred tax liabilities
Goodwill	(1,356)	(1,028)
Intangibles	(7,009)	(1,106)	(907)	(786)
Property and equipment	(1,409)	(1,499)	(1,421)	(1,421)
Other	(126)	(99)	(100)	(143)
Net deferred tax asset (liability)	$(5,556)	$11,122	$ 8,208	$6,127

~~10.~~9. SHAREHOLDERS' EQUITY:

~~On September 30, 2008, DXP paid a two for one common stock dividend. DXP’s financial statements have been restated to reflect the effect of this common stock dividend on all periods presented.~~

~~Series A and B~~ Preferred Stock

The holders of Series A preferred stock are entitled to one-tenth of a vote per share on all matters presented to a vote of shareholders generally, voting as a class with the holders of common stock, and are not entitled to any dividends or distributions other than in the event of a liquidation of the Company, in which case the holders of the Series A preferred stock are entitled to a $100 liquidation preference per share. Each share of the Series B convertible preferred stock is convertible into 28 shares of common stock and a monthly dividend per share of $.50. The holders of the Series B convertible stock are also entitled to a $100 liquidation preference per share after payment of the distributions to the holders of the Series A preferred stock and to one-tenth of a vote per share on all matters presented to a vote of shareholders generally, voting as a class with the holders of the common stock. Of the 10,000,000 authorized shares of Preferred Stock, 8,000,000 shares are available for future designation.

Restricted Stock

Under a restricted stock plan approved by DXP’s shareholders in July 2005 (the “Restricted Stock Plan”), directors, consultants and employees may be awarded shares of DXP’s common stock. The shares of restricted stock granted to employees as of December 31, ~~2009,~~2011, vest 20% each year for five years after the date of grant, 33.3% each year for three years

after the grant date or 10% each year for ten years after the grant date. The shares of restricted stock granted to non-employee directors of DXP vest 100% one year after the grant date. The Restricted Stock Plan provides for a grant to each non-employee director of DXP, consisting of the number of whole shares calculated by dividing $75,000 by the closing price of the common stock on the July 1 of the award year. 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.

The following table provides certain information regarding the shares authorized, granted and available for future grant under the Restricted Stock Plan at December 31, ~~2009:~~

2011

Number of shares authorized for grants	600,000
Number of shares granted	~~400,881~~611,954
Number of shares forfeited	~~22,764~~60,738
Number of shares available for future grants	~~221,883~~48,784
Weighted-average grant price of granted shares	$ ~~15.34~~17.19

Changes in non-vested restricted stock for ~~2007, 2008~~2009, 2010 and ~~2009~~2011 were as follows:

	Number Of Shares	Weighted Average Grant Price	Number Of Shares	Weighted Average Grant Price
Non-vested at December 31, 2006	87,396	$12.33
Granted	161,120	$18.54
Vested	36,064	$13.65
Non-vested at December 31, 2007	212,452	$16.81
Granted	57,506	$13.21
Vested	(54,708)	$16.60
Non-vested at December 31, 2008	215,250	$15.91
Non-vested at December 31, 2009			223,448	$15.29
Granted	94,859	$13.96	93,781	$15.92
Forfeited	(22,764)	$13.15	(37,287)	$17.08
Vested	(63,897)	$16.17	(99,886)	$12.32
Non-vested at December 31, 2009	223,448	$15.29
Non-vested at December 31, 2010			180,056	$16.15
Granted			117,292	$24.79
Forfeited			(687)	$17.29
Vested			(68,069)	$14.40
Non-vested at December 31, 2011			228,592	$21.10

Compensation expense recognized for restricted stock in the years ended December 31, ~~2007, 2008~~2009, 2010 and ~~2009~~2011 was ~~$591,000, $930,000~~$1,555,000, $973,000 and ~~$1,555,000,~~1,256,000 respectively. Related income tax benefits recognized in earnings were approximately ~~$236,000, $372,000~~$622,000, $389,000 and ~~$622,000~~$502,000 in ~~2007, 2008~~2009, 2010 and ~~2009,~~2011, respectively. Unrecognized compensation expense under the Restricted Stock Plan was ~~$3,092,000~~$2,423,000 and ~~$2,601,000,~~$4,051,000, respectively, at December 31, ~~2008~~2010 and ~~2009.~~2011. As of December 31, ~~2009,~~2011, the weighted average period over which the unrecognized compensation expense is expected to be recognized is ~~30.9~~29.6 months.

Stock Options

The DXP Enterprises, Inc. 1999 Employee Stock Option Plan, the DXP Enterprises, Inc. Long-Term Incentive Plan and the DXP Enterprises, Inc. Director Stock Option Plan authorized the grant of options to purchase 1,800,000, 660,000 and 400,000 shares of the Company’s common stock, respectively. In accordance with these stock option plans that were approved by the Company’s shareholders, options were granted to key personnel for the purchase of shares of the Company’s common stock at prices not less than the fair market value of the shares on the dates of grant. Most options could be exercised not earlier than 12 months nor later than 10 years from the date of grant. No future grants will be made under these stock option plans. Activity during ~~2007, 2008~~2009, 2010 and ~~2009~~2011 with respect to the stock options follows:

	Shares	Options Price Per Share	Weighted Average Exercise Price	Aggregate Intrinsic Value
Outstanding and exercisable at December 31, 2008	58,000	$1.25 - $3.36	$2.33	$ 712,000
Exercised	(8,000)	$1.25	$1.25	$ 85,000
Outstanding and exercisable at December 31, 2009	50,000	$1.25 - $3.36	$2.50	$ 529,000
Exercised during 2010	(50,000)	$1.25 - $3.36	$2.50	$ 489,000
Outstanding and exercisable at December 31, 2010 and 2011	-	-	-	-

Shares

Options Price
Per Share
Weighted
Average
Exercise
Price

Aggregate
Intrinsic
Value
Outstanding at December 31, 2006 622,362 $0.46 - $3.36 $0.70 $10,464,000
  Exercised (399,910) $0.46 - $1.25 $0.50 $  8,511,000
Outstanding at December 31, 2007 222,452 $0.50 - $3.36 $1.07 $  4,953,000
  Exercised (164,452) $0.50 - $0.68 $0.64 $  3,511,000
Outstanding and exercisable at
  December 31, 2008

58,000

$1.25 - $3.36

$2.33

$     712,000
  Exercised (8,000) $1.25 $1.25 $       85,000
Outstanding and exercisable at
  December 31, 2009

50,000

$1.25 - $3.36

$2.50

$     529,000

The total intrinsic value, or the difference between the exercise price and the market price on the date of exercise, of all options exercised during 2007, 2008 and 2009, was approximately $8.5 million, $3.5 million and $0.1 million, respectively. Cash received from stock options exercised during ~~2007, 2008 and~~ 2009, ~~was $202,000, $105,000 and $10,000, respectively.~~

~~Stock options outstanding and currently exercisable at December 31, 2009 are as follows:~~

Options Outstanding and Exercisable
Weighted Average
Remaining Weighted
Range of Number Contractual Life Average
Exercise Prices Outstanding (in years) Exercise Price
$1.25 10,000 0.3 $1.25
$2.26 to $3.36 40,000 4.9 $2.81

~~The options outstanding at December 31, 2009, expire between April~~ 2010 and ~~May 2015.~~2011 was $10,000, $125,000 and zero, respectively. The weighted average remaining contractual life was ~~3.2 years, 4.5 years and~~ 4.0 years at December 31, ~~2007, 2008 and 2009, respectively.~~2009.

Certain Equity Related Transactions

During ~~2007, 2008~~2009 and ~~2009,~~2010, employees and directors of DXP exercised non-qualified stock options. DXP received a tax deduction for the amount of the difference between the exercise price and the fair market value of the shares recognized as income by the individuals exercising the options. The after tax benefit of the tax deduction is accounted for as an increase in paid-in capital.

~~During June 2007, DXP sold 2,000,000 shares of common stock in a public offering for proceeds of $44.6 million, net of placement agent commissions and expenses.~~

On October 24, 2007, DXP exchanged a note receivable from Mr. David Little, Chief Executive Officer, with a value of $825,000, including accrued interest, for 40,098 shares of common stock owned by Mr. Little. The shares were valued at the $20.57 per share closing price on October 24, 2007.

Earnings Per Share

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 years ended December 31, ~~2007, 2008~~2009, 2010 and ~~2009.~~

2007 2008 2009
(in Thousands, except per share amounts)
Basic:
Basic weighted average shares outstanding 11,811 12,945 13,117
Net income (loss) $17,347 $25,887 $(42,412)
Convertible preferred stock dividend (90) (90) (90)
Net income (loss) attributable to common shareholders $17,257 $25,797 $(42,502)
Per share amount $1.46 $1.99 $(3.24)

Diluted:
Basic weighted average shares outstanding 11,811 12,945 13,117
Net effect of dilutive stock options based on
the treasury stock method

209

84

-
Assumed conversion of convertible preferred stock 840 840 -
Total common and common equivalent shares outstanding 12,860 13,869 13,117
Net income (loss) attributable to common shareholders $17,257 $25,797 $(42,502)
Convertible preferred stock dividend 90 90 -
Net income (loss) for diluted earnings per share $17,347 $25,887 $(42,502)
Per share amount $1.35 $1.87 $(3.24)
2011.

	2009	2010	2011
	(in Thousands, except per share amounts)
Basic:
Basic weighted average shares outstanding	13,117	13,821	14,301
Net income (loss)	$(42,412)	$ 19,381	$ 31,437
Convertible preferred stock dividend	(90)	(90)	(90)
Net income (loss) attributable to common shareholders	$(42,502)	$ 19,291	$ 31,347
Per share amount	$(3.24)	$1.40	$2.19

Diluted:
Basic weighted average shares outstanding	13,117	13,821	14,301
Net effect of dilutive stock options based on the treasury stock method	-	7	-
Assumed conversion of convertible notes	-	153	-
Assumed conversion of convertible preferred stock	-	840	840
Total common and common equivalent shares outstanding	13,117	14,821	15,141
Net income (loss) attributable to common shareholders	$(42,502)	$ 19,291	$ 31,347
Interest on convertible notes, net of income taxes	-	142	-
Convertible preferred stock dividend	-	90	90
Net income (loss) for diluted earnings per share	$(42,502)	$ 19,523	$ 31,437
Per share amount	$(3.24)	$1.32	$2.08

~~11.~~10. COMMITMENTS AND CONTINGENCIES:

The Company leases equipment, automobiles and office facilities under various operating leases. The future minimum rental commitments as of December 31, ~~2009,~~2011, for non-cancelable leases are as follows (in thousands):

2010	$ 9,700
2011	7,991
2012	5,295	$11,191
2013	3,452	8,765
2014	2,437	9,207
2015	985	5,816
2016		2,938
2017		1,331
Thereafter	6,475	5,462

Rental expense for operating leases was ~~$5,637,000, $10,351,000~~$12,201,000, $12,495,000 and ~~$12,201,000~~$14,151,000 for the years ended December 31, ~~2007, 2008~~2009, 2010 and ~~2009~~2011, respectively.

In 2004, DXP and DXP’s vendor of fiberglass reinforced pipe were sued in Louisiana by a major energy company regarding the failure of Bondstrand PSX JFC pipe, a recently introduced type of fiberglass reinforced pipe which had been installed on four energy production platforms. Plaintiff alleges negligence, breach of contract, warranty and that damages exceed $20 million. DXP believes the failures were not caused ~~by the failure of the pipe itself and not~~ by work performed by DXP. DXP intends to vigorously defend these claims. DXP’s insurance carrier has agreed, under a reservation of rights to deny coverage, to provide a defense against these claims. The maximum amount of our insurance coverage, if any, is $6 million. Under certain circumstance, our insurance may not cover ~~t his~~this claim. DXP currently believes ~~that this~~the claim is without ~~merit.~~merit and the possibility of the claim having a material adverse effect on our business, financial condition, cash flows or results of operations is remote.

In 2003, DXP was notified that it had been sued in various state courts in Nueces County, Texas. The suits allege personal injury resulting from products containing asbestos allegedly sold by the Company. The suits do not specify products or the dates on whichFrom time to time, the Company ~~allegedly sold~~is a party to various legal proceedings arising in the ~~products. The plaintiffs’ attorney has agreed to a global settlement~~ordinary course of ~~all suits for a nominal amount to be paid by the Company’s insurance carriers. Settlement has~~ ~~been consummated as to more than 85% of the 133 plaintiffs, and the remaining settlements are in process. The cases are all dismissed or dormant pending the remaining settlements.~~

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.

~~12.~~11. EMPLOYEE BENEFIT PLANS:

The Company offers a ~~401(k)~~401(K) plan which is eligible to substantially all employees. During ~~2007, 2008~~2011, part of 2010 and part of 2009, the Company elected to match employee contributions at a rate of 50 percent of up to 4 percent of salary deferral. During 2009 the Company stopped matching employee contributions. During 2010 the Company resumed matching of employee contributions. The Company contributed ~~$847,000, $1,450,000~~$823,000, $540,000 and ~~$823,000~~$1,537,000 to the ~~401(k)~~401(K) plan in the years ended December 31, ~~2007, 2008~~2009, 2010 and ~~2009,~~2011, respectively.

~~13. RELATED-PARTY TRANSACTIONS:~~

Prior to 2002, the Board of Directors of the Company had approved the Company making advances and loans to the CEO. During 2001, the advances and loans to the CEO were consolidated into three notes receivable, each bearing interest at 3.97 percent per annum and due December 30, 2010. Accrued interest was due annually. On March 31, 2004, DXP exchanged two of the notes receivable from the CEO, with a value of $338,591 including accrued interest, for 161,238 shares of DXP’s common stock held by three trusts for the benefit of Mr. Little’s children. The shares were valued at $2.10 per share, the closing market price of the common stock on March 31, 2004. The balance of the remaining note was $799,000 at December 31, 2006. The note was secured by 1,354,534 shares of the Comp any’s common stock. The note receivable was reflected as a reduction of shareholders’ equity. On October 24, 2007, DXP exchanged the note receivable from Mr. David Little with a value of $825,000, including accrued interest, for 40,098 shares of common stock owned by Mr. Little. The shares were valued at the $20.57 per share closing price on October 24, 2007.

~~14:~~12. FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES

Effective January 1, 2008, we adopted authoritative guidance for financial assets and liabilities measured on a recurring basis. This authoritative guidance 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 marketable securities and an interest rate swap to which the Company iswas a party, which must be classified in one of the following categories:

Level 1 Inputs

These inputs come from quoted prices (unadjusted) in active markets for identical assets or liabilities.

Level 2 Inputs

These 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

These 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.

4953

~~The following table summarizes the valuation of our financial instruments (an interest rate swap) by input levels as of December 31, 2009 (in thousands):~~

Fair Value Measurement
Description (Liabilities) Level 1 Level 2 Level 3 Total
Current liabilities – Other accrued liabilities $ - $ - $ (42) $ (42)
Non-current liabilities - - - -
Total $ - $ - $ (42) $ (42)

The following presents the changes in Level 3 liabilities for ~~2007, 2008,~~2009, 2010, and ~~2009~~2011 (in thousands):

	2007	2008	2009	2009	2010	2011
Fair value at January 1,	$ -	$ -	$ ( 1,202)	$ ( 1,202)	$ ( 42)	-
Realized and unrealized gains (losses) included in other comprehensive income	-	(1,202)	1,160
Realized and unrealized gains included in other comprehensive income				1,160	42	-
Fair value at December 31,	$ -	$ (1,202)	$ ( 42)	$ ( 42)	$ -	-

During 2011, the Company paid $1,572,000 for an investment with quoted market prices in an active market for identical instruments. The $106,000 increase in the market value of this investment was included in other comprehensive income in 2011.

To hedge a portion of our floating rate debt, as of January 10, 2008, DXP entered into an interest rate swap agreement with the lead bank of the Facility. Through January 11, 2010, this interest rate swap effectively ~~fixes~~fixed the interest rate on $40 million of floating rate LIBOR borrowings under the Facility at one-month LIBOR of 3.68% plus the margin ~~(1.75% at December 31, 2009)~~ in effect under the Facility. Amounts paid or received in connection with the swap ~~are~~were included in interest expense. This swap iswas designated as a cash flow hedging instrument. Changes in the fair value of the swap ~~are~~were included in other comprehensive income. See Note 1513 “Other Comprehensive Income” for gain, ~~and (loss),~~ net of income taxes, on the interest rate swap.

The Company measures certain non-financial assets and liabilities, including long-lived assets, at fair value on a non-recurring basis. In 2009, the Company recorded a charge of $53.0 million related to the impairment of goodwill and other ~~intangibles~~tangibles at the ~~DXP~~Service Centers, SCS and PFI reporting units. The fair market value of these reporting units was determined using the income approach and Level 3 inputs, which required management to make estimates about future cash flows. Management estimated the amount and timing of future cash flows based on its experience and knowledge of the business environment in which the reporting units operate. This impairment charge is included in operating expenses in the accompanying consolidated statements of income. The Company was not required to measure any oth er significant non-financial assets and liabilities at fair value.

13. OTHER COMPREHENSIVE INCOME

~~15: OTHER COMPREHENSIVE INCOME~~

Other ~~Comprehensive~~comprehensive income generally represents all changes in shareholders’ equity during the period, except those resulting from investments by, or distributions to, shareholders. ~~The~~During 2009 and 2010 the Company ~~has~~had other comprehensive income related to changes in interest rates in connection with an interest rate ~~swap, which is recorded as follows:~~

Years Ended December 31,
(in thousands)
2007 2008 2009
Net income (loss) $17,347 $25,887 $(42,412)
Gain (loss) from interest rate swap, net of income taxes - (721) 695
Comprehensive income (loss) $17,347 $25,166 $(41,717)

swap. At December 31, ~~2007, 2008~~2009, 2010 and ~~2009,~~2011, the accumulated derivative ~~loss,~~(loss) income, net of income tax was $(26,000), zero ~~$721,000~~ and ~~$26,000,~~zero, respectively. During 2011, the Company had other comprehensive income of $106,000 ($64,000 net of tax) related to changes in the market value of an investment with quoted market prices in an active market for identical instruments. At December 31, 2011, the accumulated gain on an investment, net of income tax was $64,000. Comprehensive income (loss) for the years ending December 31, 2009, 2010 and 2011 was $(41,717,000), $19,407,000, and $31,501,000, respectively.

~~16.~~14. SEGMENT DATA:

The ~~MRO~~Service Centers segment is engaged in providing maintenance, repair and operating products, equipment and ~~integrated~~ services, including ~~engineering expertise and~~ logistics capabilities, to industrial customers. The ~~Company~~Service Centers segment provides a wide range of MRO products in the ~~fluid handling~~rotating equipment, bearing, power transmission equipment, ~~general mill,~~fastener, industrial supplies, metal working and safety ~~supply and electrical products~~product categories. The ~~Electrical Contractor~~Innovative Pumping Solutions segment ~~sells a broad range~~fabricates and assembles custom-made engineered pump packages. The Supply Chain Services segment manages all or part of electrical products, such as wire conduit, wiring devices, electrical fittings and boxes, signaling devices, heaters, tools, switch gear, lighting, lamps, tape, lugs, wire nuts, batteries, fans and fuses, to electrical contractors. The Company began offering electrical products to electrical contractors following its acquisition of the assets of an electrical suppl y business in 1998. All business segments operate in the United States.customers’ supply chains, including inventory.

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.

Financial information relating to the Company’s segments is as ~~follows:~~follows (in thousands):

Electrical
MRO Contractor Total
(in Thousands)
2007
Sales $     441,250 $       3,297 $    444,547
Operating income 31,483 409 31,892
Income before tax 28,597 300 28,897
Income tax provision 11,430 120 11,550
Identifiable assets 286,693 1,477 288,170
Capital expenditures 1,891 11 1,902
Depreciation and amortization 4,958 4 4,962
Interest expense 3,236 108 3,344

2008
Sales $     733,273 $   3,610 $    736,883
Operating income 47,697 494 48,191
Income before tax 41,922 362 42,284
Income tax provision 16,252 145 16,397
Identifiable assets 396,328 1,528 397,856
Capital expenditures 5,134 - 5,134
Depreciation and amortization 10,988 4 10,992
Interest expense 5,999 131 6,130

2009
Sales $     580,497 $   2,729 $    583,226
Impairment of goodwill and
other intangibles

52,951

-

52,951
Operating income (loss) (49,598) 266 (49,332)
Income (loss) before tax (54,629) 147 (54,482)
Income tax provision (12,129) 59 (12,070)
Identifiable assets 269,607 1,320 270,927
Capital expenditures 1,498 95 1,593
Depreciation and amortization 11,473 3 11,476
Interest expense 5,126 119 5,245


	Service Centers	Innovative Pumping Solutions	Supply Chain Services	Total
2011
Sales	$560,233	$102,305	$144,467	$807,005
Operating income for reportable segments	64,491	16,920	8,455	89,866
Identifiable assets at year end	293,925	51,058	58,192	403,175
Capital expenditures	3,713	310	73	4,096
Depreciation	2,908	326	276	3,510
Amortization	4,725	675	1,172	6,572
Interest expense	2,073	986	459	3,518

2010
Sales	$452,719	$ 77,024	$126,459	$656,202
Operating income for reportable segments	50,549	10,335	7,120	68,004
Identifiable assets at year end	234,773	40,038	45,813	320,624
Capital expenditures	1,075	17	92	1,184
Depreciation	2,987	368	389	3,744
Amortization	4,055	604	1,165	5,824
Interest expense	4,115	700	393	5,208

2009
Sales	$391,060	$ 55,913	$136,253	$583,226
Operating income for reportable segments	24,398	7,519	5,548	37,465
Identifiable assets at year end	199,937	22,604	48,386	270,927
Capital expenditures	1,475	29	89	1,593
Depreciation	3,458	348	454	4,260
Amortization	5,683	338	1,195	7,216
Interest expense	3,890	831	524	5,245

~~On March 5, 2010, the Company sold all of the assets of the Electrical Contractor segment for approximately $1.4 million~~


	Years Ended December 31,
	2009	2010	2011
Operating income for reportable segments	$ 37,465	$ 68,004	$ 89,866
Adjustment for:
Amortization of intangibles	7,216	5,824	6,572
Impairment of goodwill and other intangibles	52,951	-	-
Corporate and other expense, net	26,630	25,089	27,809
Total operating income (loss)	(49,332)	37,091	55,485
Interest expense, net	5,245	5,208	3,518
Other expenses (income), net	(95)	(249)	(28)
Income (loss) before income taxes	$(54,482)	$ 32,132	$ 51,995

5155

~~17.~~15. QUARTERLY FINANCIAL INFORMATION (Unaudited)

Summarized quarterly financial information for the years ended December 31, ~~2007, 2008~~2009, 2010 and ~~2009~~2011 is as follows:

	First	Second	Third	Fourth
	Quarter
2007
Sales	$ 83.6	$ 85.3	$ 106.8	$ 168.8
Gross profit	24.9	24.5	29.9	46.4
Net income	3.7	3.4	4.5	5.7
Earnings per share – basic (Restated) – Note 2	0.36	0.30	0.35	0.44
Earnings per share – diluted (Restated) – Note 2	0.32	0.28	0.33	0.41

2008
Sales	$ 168.5	$ 187.8	$ 186.9	$ 193.6
Gross profit	45.9	51.9	52.3	56.9
Net income	5.4	6.4	7.0
Earnings per share – basic (Restated) – Note 2	0.42	0.49	0.54
Earnings per share – diluted (Restated) – Note 2	0.39	0.46	0.51
					First Quarter	Second Quarter	Third Quarter	Fourth Quarter
2009
Sales	$ 157.6	$ 144.4	$ 143.4	$ 137.8	$ 157.6	$ 144.4	$ 143.4	$ 137.8
Gross profit	46.1	41.4	40.8	23.1	46.1	41.4	40.8	23.1
Goodwill and other intangibles impairment	-			(53.0)	-			(53.0)
Net income (loss)	3.2	2.2	2.7	(50.5)	3.2	2.2	2.7	(50.5)
Earnings (loss) per share - basic	0.24	0.16	0.20	(3.84)	0.24	0.16	0.20	(3.84)
Earnings (loss) per share - diluted	0.23	0.15	0.19	(3.84)	0.23	0.15	0.19	(3.84)

2010
Sales					$ 147.0	$ 167.3	$ 172.2	$ 169.7
Gross profit					42.0	47.9	48.9	49.6
Net income					3.6	4.6	5.3	5.9
Earnings per share - basic					0.27	0.33	0.38	0.41
Earnings per share - diluted					0.26	0.31	0.36	0.39

2011
Sales					$ 183.1	$ 197.7	$ 207.9	$ 218.3
Gross profit					52.4	57.3	59.5	62.6
Net income					6.3	7.6	8.3	9.2
Earnings per share - basic					0.44	0.53	0.58	0.64
Earnings per share - diluted					0.42	0.50	0.55	0.61

The sum of the individual quarterly earnings per share amounts may not agree with year-to-date earnings per share as each quarter’s computation is based on the weighted average number of shares outstanding during the quarter, the weighted average stock price during the quarter and the dilutive effects of the stock options and restricted stock in each quarter.

ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

ITEM 9A. Controls and Procedures

Disclosure Controls and Procedures

DXP carried out an evaluation, under the supervision and with the participation of its management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness as of December 31, ~~2009,~~2011, of the design and operation of DXP’s disclosure controls and procedures pursuant to Exchange Act Rules 13a-15 and 15d-15. Disclosure controls and procedures are the controls and other procedures of DXP that are designed to ensure that information required to be disclosed by DXP in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported, within the time periods specified in the rules and forms of the U.S. Securities and Exchange Commission (the “Commission”). Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by DXP in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that DXP’s disclosure controls and procedures were effective as of the end of the period covered by this Report.

5256

Internal Control Over Financial Reporting

(A) Management’s Annual Report on Internal Control Over Financial Reporting

Management's report on the Company's internal control over financial reporting is included on page 32 of this Report under the heading Management's Report on Internal Control Over Financial Reporting.

The effectiveness of our internal control over financial reporting at December 31, 2011 has been audited by Hein & Associates LLP, the independent registered public accounting firm that also audited our financial statements.

Their report is included on page 31 of this Report under the heading Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting.

Management’s report on the Company’s internal control over financial reporting is included on page 23 of this Report under the heading Management’s Annual Report on Internal Control Over Financial Reporting.

(B) Changes in Internal Control over Financial Reporting

During the fourth quarter of 2009, the control structures between DXP and a significant business acquired in September of 2007 were standardized, including the migration of a large portion of the acquired business systems on to the legacy DXP computer systems. This standardization of control structures, along with improved maintenance of internal control documentation and the testing of general computer controls before the end of 2009 are expected to prevent a recurrence of the material weakness identified at December 31, 2008.None

ITEM 9B. Other Information

None.

5357

PART III

ITEM 10. Directors, Executive Officers and Corporate Governance

The information required by this item will be included in our Definitive Proxy statement for the ~~2010~~2012 Annual Meeting of Shareholders that we will file with the SEC within 120 days of the end of the fiscal year to which this Report relates (the “Proxy Statement”) and is hereby incorporated by reference thereto.

ITEM 11. Executive Compensation

The information required by this item will be included in the Proxy Statement and is hereby incorporated by reference.

ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information required by this item will be included in the Proxy Statement and is hereby incorporated by reference.

ITEM 13. Certain Relationships and Related Transactions, and Director Independence

The information required by this item will be included in the Proxy Statement and is hereby incorporated by reference.

ITEM 14. Principal ~~Auditor~~Accounting Fees and Services.

The information required by this item will be included in the Proxy Statement and is hereby incorporated by reference.

5458

PART IV

ITEM 15. Exhibits, Financial Statement Schedules.

(a) Documents included in this report:

1. Financial Statements (included under Item 8):

DXP Enterprises, Inc. and Subsidiaries:	Page

Reports of Independent Registered Public Accounting Firm	26
~~Consolidated Financial Statements~~	30
Management Report on Internal Controls	2832
Consolidated Balance Sheets	2933
Consolidated Statements of Operations	3034
Consolidated Statements of Shareholders' Equity	3135
Consolidated Statements of Cash Flows	3236
Notes to Consolidated Financial Statements	33
	37

2.	Financial Statement Schedules:

Schedule II – Valuation and Qualifying Accounts

All other schedules have been omitted since the required information is not significant or is included in the Consolidated Financial Statements or notes thereto or is not applicable.

3. Exhibits:

The following exhibits are filed herewith or are incorporated by reference to exhibits previously filed with the Commission.

Exhibit

No. Description

3.1	Restated Articles of Incorporation, as amended (incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form S-8 (Reg. No. 333-61953), filed with the Commission on August 20, 1998).

3.2	Bylaws (incorporated by reference to Exhibit 3.2 to the Company's Registration Statement on Form S-4 (Reg. No. 333-10021), filed with the Commission on August 12, 1996).

3.3	Amendment No. 1 to Bylaws of DXP Enterprises, Inc. (incorporated by reference to Exhibit A to the Company's Current Report on Form 8-K, filed with the Commission on July 28, 2011).

4.1	Form of Common Stock certificate (incorporated by reference to Exhibit 4.3 to the Company's Registration Statement on Form S-8 (Reg. No. 333-61953), filed with the Commission on August 20, 1998).

4.2	See Exhibit 3.1 for provisions of the Company's Restated Articles of Incorporation, as amended, defining the rights of security holders.

4.3	See Exhibit 3.2 for provisions of the Company's Bylaws defining the rights of security holders.

4.4	Form of Senior Debt Indenture of DXP Enterprises, Inc. (incorporated by reference to Exhibit 4.2 to the Company’s Registration Statement on Form S-3 (Reg. No. 333-166582), filed with the SEC on May 6, 2010).

4.5	Form of Subordinated Debt Indenture of DXP Enterprises, Inc. (incorporated by reference to Exhibit 4.3 to the Company’s Registration Statement on Form S-3 (Reg. No. 333-166582), filed with the SEC on May 6, 2010).

+10.1

DXP Enterprises, Inc. 1999 Employee Stock Option Plan (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1999, filed with the Commission on August 16, 1999).

~~+10.2~~

+10.2

DXP Enterprises, Inc. 1999 Non-Employee Director Stock Option Plan (incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1999), filed with the Commission on August 16, 1999.

+10.3

DXP Enterprises, Inc. Long Term Incentive Plan, as amended (incorporated by reference to Exhibit 4.4 to the Company's Registration Statement on Form S-8 (Reg. No. 333-61953), filed with the Commission on August 20, 1998).

+10.4

Amendment Number One to DXP Enterprises, Inc. Non-Employee Director Stock Option Plan (incorporated by reference to Exhibit 10.8 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2003, filed with the Commission on March 11, 2004).

+10.5

Employment Agreement dated effective as of January 1, 2004, between DXP Enterprises, Inc. and David R. Little (incorporated by reference to Exhibit 10.10 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2003, filed with the Commission on March 11, 2004).

+10.6

Employment Agreement dated effective as of June 1, 2004, between DXP Enterprises, Inc. and Mac McConnell (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2004, filed with the Commission on May 6, 2004).

+10.7

Amendment Number One to DXP Enterprises, Inc. 1999 Employee Stock Option Plan (incorporated by reference to Exhibit 10.10 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004, filed with the Commission on March 30, 2005).

+10.8

Summary Description of Director Fees (incorporated by reference to Exhibit 10.11 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004, filed with the Commission on March 30, 2005).

+10.9

Summary Description of Executive Officer Cash Bonus Plan (incorporated by reference to Exhibit 10.12 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004, filed with the Commission on March 30, 2005).

+10.10

Amendment Number Two to DXP Enterprises, Inc. Non-Employee Director Stock Option Plan (incorporated by reference to Exhibit 10.13 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004, filed with the Commission on March 30, 2005).

+10.11

DXP Enterprises, Inc. 2005 Restricted Stock Plan (incorporated by reference to Exhibit 10.14 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005, (filed with the Commission on March 10, 2006).

+10.12

Amendment Number One to Employment Agreement dated effective as of January 1, 2004, between DXP Enterprises, Inc. and David R. Little (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed with the Commission on July 26, 2006).

+10.13

Amendment No. One to DXP Enterprises, Inc. 2005 Restricted Stock Plan (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K, filed with the Commission on July 26, 2006).

10.14

Stock Purchase Agreement among DXP Enterprises, Inc., as Purchaser, Precision Industries, Inc., and the selling stockholders dated August 19, 2007, (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed with the Commission on August 21, 2007).

10.15

Asset Purchase Agreement among DXP Enterprises, Inc., as Purchaser, Lone Wolf Rental, LLC, Indian Fire and Safety, Inc., and the other parties named therein dated October 18, 2007, (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed with the Commission on October 22, 2007).

10.16

Stock Purchase Agreement among DXP Enterprises, Inc., as Purchaser, Vertex Corporate Holdings, Inc., the stockholders of Vertex Corporate Holdings, Inc. and Watermill-Vertex Enterprises, LLC, dated August 28, 2008, (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed with the Commission on August 29, 2008).

10.17

Credit Agreement among DXP Enterprises, Inc., as Borrower, and Bank of America, N.A., as Syndication Agent, and Wells Fargo Bank, National Association, as Lead Arranger and Administrative Agent for the Lenders and the Lenders party thereto dated August 28, 2008 (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K, filed with the Commission on August 29, 2008 and the Company’s Current Report on Form 8-K/A, filed with the Commission on September 23, ~~2009)~~2010).

10.18

Amendment Number Two to Employment Agreement dated effective January 1, 2004 between DXP Enterprises, Inc. and David R. Little (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission on May 22, ~~2009)~~2010).

10.19

Exhibits and schedules to the Credit Agreement among DXP Enterprises, Inc., as Borrower, and Bank of America, N.A., as Syndication Agent, and Wells Fargo Bank, National Association, as Lead Arranger and Administrative Agent for the Lenders and the Lenders party thereto, dated August 28, 2008 (incorporated by reference to Amendment Number Two to the Company’s Current Report on Form 8-K/A, filed with the Commission on September 23, ~~2009)~~2010).

10.20

Amendment Number One to Credit Agreement among DXP Enterprises, Inc., as Borrower, and Bank of America, N.A., as Syndication Agent, and Wells Fargo Bank, National Association, as Lead Arranger and Administrative Agent for the Lenders and the Lenders party thereto, dated August 28, 2008 (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K, filed with the Commission on March 16, 2010).

10.21

Asset Purchase Agreement, dated as of April 1, 2010, whereby DXP Enterprises, Inc. acquired the assets of Quadna, Inc. (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on April 5, 2010).

10.22

Asset Purchase Agreement, dated as of November 22, 2010, whereby DXP Enterprises, Inc. acquired the assets of D&F Distributors, Inc. (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on November 23, 2010).

10.23

Amendment Number One to Employment Agreement dated effective June 1, 2004 between DXP Enterprises, Inc. and Mac McConnell (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the Commission on May 9, 2011).

10.24

David Little Equity Incentive Program dated May 4, 2011 (incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed with the Commission on May 9, 2011).

10.25

Amendment Number Two to Credit Agreement among DXP Enterprises, inc., as Borrower, and Bank of America, N.A., as Syndication Agent, and Wells Fargo Bank, National Association, as Lead Arranger and Administrative Agent for the Lenders and the Lenders party thereto, dated August 28, 2008 (incorporated by reference to Exhibit 10.3 to the Company's Current Report on Form 8-K filed with the Commission on July 27, 2011).

*10.26

Amendment Number Three to Credit Agreement among DXP Enterprises, inc., as Borrower, and Bank of America, N.A., as Syndication Agent, and Wells Fargo Bank, National Association, as Lead Arranger and Administrative Agent for the Lenders and the Lenders party thereto, dated August 28, 2008.

*10.27

Asset Purchase Agreement, dated as of October 10, 2011, whereby DXP Enterprises, Inc. acquired the assets of Kenneth Crosby.

*10.28

Asset Purchase Agreement, dated as of December 30, 2011, whereby DXP Enterprises, Inc. acquired the assets of C.W. Rod Tool Company.

18.1	Letter of Independent Registered Public Accounting Firm Regarding Change in Accounting Principle (incorporated by reference to Exhibit 18.1 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2008, filed with the Commission on May 12, 2008.)

*21.1

Subsidiaries of the Company.

*23.1

Consent of Hein & Associates LLP, Independent Registered Public Accounting Firm.

*31.1

Certification of Principal Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Exchange Act, as amended.

*31.2

Certification of Principal Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Exchange Act, as amended.

*32.1

Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, as amended.

*32.2

Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, as amended.

Exhibits designated by the symbol * are filed with this Annual Report on Form 10-K. All exhibits not so designated are incorporated by reference to a prior filing with the Commission as indicated.

+ Indicates a management contract or compensation plan or arrangement.

The Company undertakes to furnish to any shareholder so requesting a copy of any of the exhibits to this Report on upon payment to the Company of the reasonable costs incurred by the Company in furnishing any such exhibit.

5762

INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM’S

REPORT ON FINANCIAL STATEMENT SCHEDULE

To the Board of Directors and Shareholders

DXP Enterprises, Inc. and Subsidiaries

Houston, Texas

We have audited, in accordance with auditing standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements of DXP Enterprises, Inc. and Subsidiaries included in this Form 10-K and have issued our report thereon dated March ~~23, 2010.~~9, 2012. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The financial statement schedule listed in Item 15 herein (Schedule II-Valuation and Qualifying Accounts) is the responsibility of the Company’s management and is presented for the purpose of complying with the Securities and Exchange Commission’s rules and is not part of the basic financial statements. The financial statement schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, is fairly stated in all material respects with the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.

Hein & Associates, LLP

Houston, Texas

March ~~23, 2010~~9, 2012

SCHEDULE II – VALUATION AND QUALIFYING ACCOUNTS DXP ENTERPRISES, INC. Years Ended December 31, 2009, 2008 and 2007 (in thousands)
SCHEDULE II – VALUATION AND QUALIFYING ACCOUNTS DXP ENTERPRISES, INC. Years Ended December 31, 2011, 2010 and 2009 (in thousands)						SCHEDULE II – VALUATION AND QUALIFYING ACCOUNTS DXP ENTERPRISES, INC. Years Ended December 31, 2011, 2010 and 2009 (in thousands)
Description	Balance at Beginning of Year	Charged to Cost and Expenses	Charged to Other Accounts	Deductions	Balance At End of Year	Balance at Beginning of Year	Charged to Cost and Expenses	Charged to Other Accounts	Deductions	Balance At End of Year
Year ended December 31, 2011 Deducted from assets accounts Allowance for doubtful accounts						$ 3,540	$ 3,101	$ 193	$ 632(1)	$ 6,202
Year ended December 31, 2010 Deducted from assets accounts Allowance for doubtful accounts						$ 3,006	$ 679	$ -	$ 145(1)	$ 3,540
Year ended December 31, 2009 Deducted from assets accounts Allowance for doubtful accounts	$ 3,494	$ 675	$ -	$1,163(1)	$3,006	$ 3,494	$ 675	$ -	$ 1,163(1)	$ 3,006
Valuation allowance for deferred tax assets	$ 16	$ -	$ -	$ (16) (2)	-
Year ended December 31, 2008 Deducted from assets accounts Allowance for doubtful accounts	$ 2,131	$ 1,424	$ 157(3)	$ 218(1)	$ 3,494
Valuation allowance for deferred tax assets	$ 33	$ -	$ -	$ 17(2)	16
Year ended December 31, 2007 Deducted from assets accounts Allowance for doubtful accounts	$ 1,482	$ 552	$ 253(3)	$ 156(1)	$ 2,131
Valuation allowance for deferred tax assets	$ 41	$ -	$ -	$ 8(2)	33	$ 16	$ -	$ -	$ (16) (2)	-
(1) Uncollectible accounts written off, net of recoveries.	(1) Uncollectible accounts written off, net of recoveries.					(1) Uncollectible accounts written off, net of recoveries.
(2) Reduction results from expiration or use of state net operating loss carryforwards.
(3) Reserve for receivables of acquired businesses.

5863

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

DXP ENTERPRISES, INC. (Registrant)

By: /s/DAVID R. LITTLE

David R. Little

Chairman of the Board,

President and Chief Executive Officer

Dated: March ~~23, 2010~~9, 2012

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:

NAME	TITLE	DATE

/s/David R. Little	Chairman of the Board, President	March ~~23, 2010~~9, 2012
David R. Little	Chief Executive Officer and Director
	(Principal Executive Officer)

/s/Mac McConnell	Senior Vice President/Finance and	March ~~23, 2010~~9, 2012
Mac McConnell	Chief Financial Officer
	(Principal Financial and Accounting Officer)

/s/~~Charles R. Strader~~	~~Senior Vice President of Strategic Initiatives~~	~~March 23, 2010~~
~~Charles R. Strader~~

~~/s/~~Cletus Davis	Director	March ~~23, 2010~~9, 2012
Cletus Davis

/s/Timothy P. Halter	Director	March ~~23, 2010~~9, 2012
Timothy P. Halter

/s/Kenneth H. Miller	Director	March ~~23, 2010~~9, 2012
Kenneth H. Miller

5964

	Years Ended December 31,
	2005	2006 Restated(1)	2007 Restated(1)	2008 Restated(1)	2009(2)
	(in thousands, except per share amounts)
Consolidated Statement of Earnings Data:
Sales	$ 185,364	$ 279,820	$ 444,547	$ 736,883	$ 583,226
Gross Profit	49,714	78,622	125,692	206,988	151,414
Operating income	9,404	20,678	31,892	48,191	(49,332)
Income (loss) before income taxes	8,615	19,404	28,897	42,284	(54,482)
Net income (loss)	5,467	11,922	17,347	25,887	(42,412)
Per share amounts
Basic earnings (loss) per common share	$ 0.62	$ 1.17	$ 1.46	$ 1.99	$ (3.24)
Common shares outstanding	8,698	10,127	11,811	12,945	13,117
Diluted earnings (loss) per share	$ 0.47	$ 1.04	$ 1.35	$ 1.87	$ (3.24)
Common and common equivalent shares outstanding	11,578	11,450	12,860	13,869	13,117
(1) Basic and diluted earnings per share amounts have been restated due to adoption in the first quarter of 2009 of authoritative guidance which requires awards of unvested restricted stock to be treated as if outstanding in the calculation of earnings per share. (2) The goodwill and other intangibles impairment charge and the Precision inventory impairment charge in 2009 reduced operating income by $66.8 million and increased basic and diluted loss per share by $3.82.

	Shares	Options Price Per Share	Weighted Average Exercise Price	Aggregate Intrinsic Value
Outstanding at December 31, 2006	622,362	$0.46 - $3.36	$0.70	$10,464,000
Exercised	(399,910)	$0.46 - $1.25	$0.50	$ 8,511,000
Outstanding at December 31, 2007	222,452	$0.50 - $3.36	$1.07	$ 4,953,000
Exercised	(164,452)	$0.50 - $0.68	$0.64	$ 3,511,000
Outstanding and exercisable at December 31, 2008	58,000	$1.25 - $3.36	$2.33	$ 712,000
Exercised	(8,000)	$1.25	$1.25	$ 85,000
Outstanding and exercisable at December 31, 2009	50,000	$1.25 - $3.36	$2.50	$ 529,000

Options Outstanding and Exercisable
		Weighted Average
		Remaining	Weighted
Range of	Number	Contractual Life	Average
Exercise Prices	Outstanding	(in years)	Exercise Price
$1.25	10,000	0.3	$1.25
$2.26 to $3.36	40,000	4.9	$2.81

	Fair Value Measurement
Description (Liabilities)	Level 1	Level 2	Level 3	Total
Current liabilities – Other accrued liabilities	$ -	$ -	$ (42)	$ (42)
Non-current liabilities	-	-	-	-
Total	$ -	$ -	$ (42)	$ (42)

	Years Ended December 31, (in thousands)
	2007	2008	2009
Net income (loss)	$17,347	$25,887	$(42,412)
Gain (loss) from interest rate swap, net of income taxes	-	(721)	695
Comprehensive income (loss)	$17,347	$25,166	$(41,717)

		Electrical
	MRO	Contractor	Total
	(in Thousands)
2007
Sales	$ 441,250	$ 3,297	$ 444,547
Operating income	31,483	409	31,892
Income before tax	28,597	300	28,897
Income tax provision	11,430	120	11,550
Identifiable assets	286,693	1,477	288,170
Capital expenditures	1,891	11	1,902
Depreciation and amortization	4,958	4	4,962
Interest expense	3,236	108	3,344

2008
Sales	$ 733,273	$ 3,610	$ 736,883
Operating income	47,697	494	48,191
Income before tax	41,922	362	42,284
Income tax provision	16,252	145	16,397
Identifiable assets	396,328	1,528	397,856
Capital expenditures	5,134	-	5,134
Depreciation and amortization	10,988	4	10,992
Interest expense	5,999	131	6,130

2009
Sales	$ 580,497	$ 2,729	$ 583,226
Impairment of goodwill and other intangibles	52,951	-	52,951
Operating income (loss)	(49,598)	266	(49,332)
Income (loss) before tax	(54,629)	147	(54,482)
Income tax provision	(12,129)	59	(12,070)
Identifiable assets	269,607	1,320	270,927
Capital expenditures	1,498	95	1,593
Depreciation and amortization	11,473	3	11,476
Interest expense	5,126	119	5,245