DXP ENTERPRISES INC 10-Q

ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following management discussion and analysis ("MD&A") of the financial condition and results of operations of DXP Enterprises, Inc. together with its subsidiaries (collectively "DXP," "Company," "us," "we," or "our") for the three and nine months ended September 30, 2023 should be read in conjunction with our previous Annual Report on Form 10-K and our Quarterly Reports on Form 10-Q, and the consolidated financial statements and notes thereto included in such reports. The Company's consolidated financial statements are prepared in accordance with U.S. GAAP. DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10-Q (this "Report") contains statements that constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, as amended. These forward-looking statements include without limitation those about the Company’s expectations regarding the Company’s business, the Company’s future profitability, cash flow, liquidity, and growth. Such forward-looking statements can be identified by the use of forward-looking terminology such as "believes", "expects", "may", "might", "estimates", "will", "should", "could", "would", "suspect", "potential", "current", "achieve", "plans" or "anticipates" or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy. Any such forward-looking statements are not guarantees of future performance and may involve significant risks and uncertainties, and actual results may vary materially from those discussed in the forward-looking statements or historical performance as a result of various factors. These factors include, but are not limited to, the effectiveness of management's strategies and decisions; our ability to implement our internal growth and acquisition growth strategies; general economic and business conditions specific to our primary customers; changes in government regulations; our ability to effectively integrate businesses we may acquire; new or modified statutory or regulatory requirements; availability of materials and labor; inability to obtain or delay in obtaining government or third-party approvals and permits; non-performance by third parties of their contractual obligations; unforeseen hazards such as weather conditions, acts of war or terrorist acts and the governmental or military response thereto; cyber-attacks adversely affecting our operations; other geological, operating and economic considerations and declining prices and market conditions, including reduced oil and gas prices and supply or demand for maintenance, repair and operating products, equipment and service; decreases in oil and natural gas industry capital expenditure levels, which may result from decreased oil and natural gas prices or other factors; our ability to manage changes and the continued health or availability of management personnel; and our ability to obtain financing on favorable terms or amend our credit facilities, as needed. This Report identifies other factors that could cause such differences. We cannot assure that these are all of the factors that could cause actual results to vary materially from the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in "Risk Factors", in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on April 17, 2023. We assume no obligation and do not intend to update these forward-looking statements. Unless the context otherwise requires, references in this Report to the "Company", "DXP", "we" or "our" shall mean DXP Enterprises, Inc., a Texas corporation, together with its subsidiaries. NON-GAAP FINANCIAL MEASURES In an effort to provide investors with additional information regarding our results of operations as determined by accounting principles generally accepted in the United States of America ("U.S. GAAP"), we disclose non-GAAP financial measures. The non-GAAP financial measures we provide in this report should be viewed in addition to, and not as an alternative for, results prepared in accordance with U.S. GAAP. Our primary non-GAAP financial measures are organic sales ("Organic Sales"), sales per business day ("Sales per Business Day"), organic sales per business day ("Organic Sales per Business Day"), free cash flow ("Free Cash Flow"), earnings before interest, taxes, depreciation and amortization ("EBITDA") adjusted EBITDA ("Adjusted EBITDA"), EBITDA Margin, and Adjusted EBITDA Margin. The non-GAAP financial measures presented may differ from similarly titled non-GAAP financial measures presented by other companies, and other companies may not define these non-GAAP financial measures in the same way. These measures are not substitutes for their comparable U.S. GAAP financial measures. 16 Management uses these non-GAAP financial measures to assist in comparing our performance on a consistent basis for purposes of business decision making by removing the impact of certain items that management believes do not directly reflect our underlying operations. Management believes that presenting our non-GAAP financial measures are useful to investors because it (i) provides investors with meaningful supplemental information regarding financial performance by excluding certain items, (ii) permits investors to view performance using the same tools that management uses to budget, make operating and strategic decisions, and evaluate historical performance, and (iii) otherwise provides supplemental information that may be useful to investors in evaluating our results. We believe that the presentation of these non-GAAP financial measures, when considered together with the corresponding U.S. GAAP financial measures and the reconciliations to those measures, provides investors with additional understanding of the factors and trends affecting our business than could be obtained absent these disclosures. Refer to the Non-GAAP Financial Measures and Reconciliation section below for detailed reconciliations of our non-GAAP financial measures. GENERAL BUSINESS OVERVIEW General DXP Enterprises, Inc. is a business-to-business distributor of MRO products and services to a variety of customers in different end markets across North America and Dubai. Additionally, we fabricate, remanufacture, and assemble custom pump packages along with manufacturing branded private label pumps. Key Business Metrics We regularly monitor several financial and operating metrics to evaluate our business, measure our performance, identify trends affecting our business, formulate financial projections and make strategic decisions. Our key non-GAAP business metrics may be calculated in a different manner than similarly titled metrics used by other companies. See “Non-GAAP Financial Measures and Reconciliations” for additional information on non-GAAP financial measures and a reconciliation to the most comparable GAAP measures. Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Sales by Business Segment Service Centers $ 294,458 $ 260,083 $ 888,116 $ 729,977 Innovative Pumping Solutions 58,963 59,044 184,402 169,890 Supply Chain Services 65,828 68,187 199,038 174,670 Total DXP Sales $ 419,249 $ 387,314 $ 1,271,556 $ 1,074,537 Acquisition Sales 3,868 15,916 30,266 38,273 Organic Sales $ 415,381 $ 371,398 $ 1,241,290 $ 1,036,264 Business Days 63 64 191 191 Sales per Business Day $ 6,655 $ 6,052 $ 6,657 $ 5,626 Organic Sales per Business Day $ 6,593 $ 5,803 $ 6,499 $ 5,425 Gross Profit $ 125,562 $ 111,633 $ 382,455 $ 310,779 Gross Profit Margin 29.9 % 28.8 % 30.1 % 28.9 % EBITDA $ 42,605 $ 32,467 $ 129,681 $ 92,402 EBITDA Margin 10.2 % 8.4 % 10.2 % 8.6 % Adjusted EBITDA $ 44,020 $ 34,324 $ 132,443 $ 95,396 Adjusted EBITDA Margin 10.5 % 8.9 % 10.4 % 8.9 % Free Cash Flow $ 38,272 $ (5,010) $ 56,672 $ (1,170) 17 Organic Sales and Acquisition Sales We define and calculate organic sales to include locations and acquisitions under our ownership for at least twelve months. "Acquisition Sales" are sales from acquisitions that have been under our ownership for less than twelve months and are excluded in our calculation of Organic Sales. Business Days "Business Days" are days of the week, excluding Saturdays, Sundays, and holidays, that our locations are open during the year. Depending on the location and the season, our branches may be open on Saturdays and Sundays; however, for consistency, those days have been excluded from the calculation of Business Days. Sales per Business Day We define and calculate Sales per Business Day as sales divided by the number of Business Days in the relevant reporting period. Organic Sales per Business Days We define and calculate Organic Sales per Business Day as Organic Sales divided by the number of Business Days in the relevant reporting period. EBITDA and Adjusted EBITDA We define and calculate EBITDA as Net income attributable to DXP Enterprises, Inc., plus interest, taxes, depreciation, amortization, and non-controlling interest. We define and calculate Adjusted EBITDA as Net income attributable to DXP Enterprises, Inc., plus interest, taxes, depreciation, amortization minus stock-based compensation expense, non-controlling interest before taxes and all other non-cash charges, adjustments, and non-recurring items. We identify the impact of all other non-cash charges, adjustments and non-recurring items because we believe these items do not directly reflect our underlying operations. EBITDA Margin and Adjusted EBITDA Margin We define and calculate EBITDA Margin as EBITDA divided by sales. We define and calculate Adjusted EBITDA Margin as Adjusted EBITDA divided by sales. Free Cash Flow We define and calculate free cash flow as net cash (used in) provided by operating activities less net purchases of property and equipment. CURRENT MARKET CONDITIONS AND OUTLOOK Inflation Reduction Act In August 2022, the Inflation Reduction Act of 2022 (IRA) was signed into United States (U.S.) law. The IRA establishes a new 15% corporate minimum tax and a new 1% excise tax on stock repurchases, effective after December 31, 2022. In addition, the IRA contains provisions relating to climate change, energy and health care. Based on the Company's current analysis of the provisions, the Company does not anticipate a material impact to the consolidated financial statements as a result of the IRA. 18 Inflation The global commodity and labor markets experienced significant inflationary pressures attributable to economic recovery and supply chain issues tightening caused by the COVID-19 pandemic and the Ukrainian-Russia conflict, among other factors. These inflationary trends increased the cost of many of the products we buy. As a distributor, we often remain neutral to inflation as those costs are generally passed on to customers. The Company was able to pass price increases on to customers and implement other strategies designed to mitigate some of the adverse effects of higher costs during the nine months ended September 30, 2023. Service Centers and Innovative Pumping Solutions Segments The replacement and mission-critical nature of our products and services within the Company's Service Centers and Innovative Pumping Solutions business segments and industrial and manufacturing environments and processes drives a demand and outlook that are correlated with global, national and regional industrial production, capacity utilization and long-term GDP growth. The Company's recent order activity improved as markets strengthened. For the three months ended September 30, 2023 and nine months ended September 30, 2023, we had approximately $353.4 million and $1,072.5 million in sales in our Service Centers and Innovative Pumping Solutions segments, an increase of approximately 10.7 percent and 19.2 percent compared to the three months ended September 30, 2022 and the nine months ended September 30, 2022, respectively. Our performance has been strengthened by price increases from our vendors and suppliers During the nine months ended September 30, 2023, $11.2 million was associated with recent acquisitions in the water and wastewater markets. We expect to benefit from the increased oil and gas activity throughout the remainder of 2023. Additionally, we expect to benefit from the recent water and wastewater acquisitions as we continue to scale this platform both organically and by positioning DXP Water to bid on projects that historically may have not been available to the separate acquisitions on a standalone basis. Supply Chain Services Segment For the three and nine months ended September 30, 2023, we had approximately $65.8 million and $199.0 million in sales in our Supply Chain Services segment, respectively, a decrease of approximately 3.5 percent and an increase of 14.0 percent compared to the three and nine months ended September 30, 2022, respectively. Our performance compared to the previous nine month period has benefited from the addition of a new diversified chemical customer that recently reached its one-year anniversary during the second quarter of 2023. As we move forward, we expect our performance to be driven by either the addition of new customers or an increase in spend by our existing customers. 19 RESULTS OF OPERATIONS (in thousands, except percentages and per share data) DXP is organized into three business segments: Service Centers ("SC"), Innovative Pumping Solutions ("IPS"), and Supply Chain Services ("SCS"). The Service Centers are engaged in providing MRO products, equipment and integrated services, including technical expertise and logistics capabilities, to industrial customers with the ability to provide same day delivery. The Service Centers provide a wide range of MRO products and services in the rotating equipment, bearing, power transmission, hose, fluid power, metal working, industrial supply and safety product and service categories. The IPS segment provides products and services to the water and wastewater market and fabricates and assembles integrated pump system packages custom made to customer specifications, remanufactures pumps, and manufactures branded private label pumps. The SCS segment provides a wide range of MRO products and manages all or part of our customer's supply chain function, and inventory management. Three Months Ended September 30, 2023 % 2022 % Sales $ 419,249 100.0% $ 387,314 100.0% Cost of sales 293,687 70.1% 275,681 71.2% Gross profit 125,562 29.9% 111,633 28.8% Selling, general and administrative expenses 89,706 21.4% 85,094 22.0% Income from operations 35,856 8.6% 26,539 6.9% Other expense (income), net 1,234 0.3% 1,565 0.4% Interest expense 12,684 3.0% 6,833 1.8% Income before income taxes 21,938 5.2% 18,141 4.7% Provision for income tax expense 5,766 1.4% 5,097 1.3% Net income 16,172 3.9% 13,044 3.4% Net income attributable to noncontrolling interest — — (885) — Net income attributable to DXP Enterprises, Inc. $ 16,172 3.9% $ 13,929 3.6% Per share amounts attributable to DXP Enterprises, Inc. Basic earnings per share $ 0.98 $ 0.74 Diluted earnings per share $ 0.93 $ 0.71 Three Months Ended September 30, 2023 compared to Three Months Ended September 30, 2022 SALES. Sales for the three months ended September 30, 2023 increased $31.9 million, or 8.2 percent, to approximately $419.2 million from $387.3 million for the prior year's corresponding period. Sales from acquisitions for the three months ended September 30, 2023, accounted for $3.9 million . The overall increase in sales was the result of an increase in sales in our SC segment of $34.4 million partially offset by decreases in sales in our SCS and IPS segments of $2.4 million and $0.1 million, respectively. The fluctuations in sales are further explained in our business segment discussions below. Three Months Ended September 30, 2023 2022 Change Change% Sales by Business Segment Service Centers $ 294,458 $ 260,083 $ 34,375 13.2 % Innovative Pumping Solutions 58,963 59,044 (81) (0.1) % Supply Chain Services 65,828 68,187 (2,359) (3.5) % Total DXP Sales $ 419,249 $ 387,314 $ 31,935 8.2 % 20 Service Centers segment. Sales for the SC segment increased by approximately $34.4 million, or 13.2 percent, for the three months ended September 30, 2023, compared to the prior year's corresponding period. This sales increase is primarily the result of increased sales of rotating equipment and bearings and power transmission products to customers engaged in variety of markets. Supply Chain Services segment. Sales for the SCS segment decreased by $2.4 million, or 3.5 percent, for the three months ended September 30, 2023, compared to the prior year's corresponding period. The decrease in sales was primarily the result of facility closures with existing customers. GROSS PROFIT. Gross profit as a percentage of sales for the three months ended September 30, 2023 was 29.9 percent versus 28.8 percent in the prior year's corresponding period. The increase in the gross profit percentage is primarily the result of an increase in gross profit within our SC and IPS segments. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A"). SG&A for the three months ended September 30, 2023 increased by approximately $4.6 million, or 5.4 percent, to $89.7 million from $85.1 million for the prior year's corresponding period. The increase in SG&A is primarily the result of increased payroll, incentive compensation and related taxes and 401(k) expenses as a result of increased business activity. OPERATING INCOME. Operating income for the third quarter of 2023 increased by $9.3 million to $35.9 million, from $26.5 million in the prior year's corresponding period. This increase in operating income is the result of the aforementioned increase in business activity across all segments. INTEREST EXPENSE. Interest expense for the third quarter of 2023 increased $5.9 million compared to the prior year's corresponding period. This increase was primarily due to the Company borrowing an additional $105.0 million on its Term Loan during the fourth quarter of 2022 and incurring higher than average interest rates on such debt due to changes in the macroeconomic environment and the associated increasing interest rate policy by the U.S. Federal Reserve Bank. INCOME TAXES. Our effective tax rate from continuing operations was a tax expense of 26.3 percent for the three months ended September 30, 2023, compared to a tax expense of 28.1 percent for the three months ended September 30, 2022. Compared to the U.S. statutory rate for the three months ended September 30, 2023, the effective tax rate was increased by state taxes, foreign taxes, nondeductible expenses, and uncertain tax positions recorded for research and development tax credits and was partially offset by research and development tax credits and other tax credits. 21 Nine Months Ended September 30, 2023 compared to Nine Months Ended September 30, 2022 Nine Months Ended September 30, 2023 % 2022 % Sales $ 1,271,556 100.0% $ 1,074,537 100.0% Cost of sales 889,101 69.9% 763,758 71.1% Gross profit 382,455 30.1% 310,779 28.9% Selling, general and administrative expenses 273,720 21.5% 236,761 22.0% Income from operations 108,735 8.6% 74,018 6.9% Other (income) expense, net 522 —% 2,941 0.3% Interest expense 36,068 2.8% 17,610 1.6% Income before income taxes 72,145 5.7% 53,467 5.0% Provision for income taxes 19,339 1.5% 13,402 1.2% Net income 52,806 4.2% 40,065 3.7% Net loss attributable to noncontrolling interest — — (938) —% Net income attributable to DXP Enterprises, Inc. $ 52,806 4.2% $ 41,003 3.8% Per share amounts attributable to DXP Enterprises, Inc. Basic earnings per share $ 3.08 $ 2.19 Diluted earnings per share $ 2.94 $ 2.10 SALES. Sales for the nine months ended September 30, 2023 increased $197.0 million, or 18.3 percent, to approximately $1,271.6 million from $1,074.5 million for the prior year's corresponding period. Sales from businesses acquired accounted for $30.3 million of sales for the nine months ended September 30, 2023. The overall increase in sales was the result of an increase in sales within our SC, IPS and SCS segments of $158.1 million, $14.5 million and $24.4 million, respectively. The fluctuations in sales are further explained in our business segment discussions below. Nine Months Ended September 30, 2023 2022 Change Change% Sales by Business Segment (in thousands, except change %) Service Centers $ 888,116 $ 729,977 $ 158,139 21.7 % Innovative Pumping Solutions 184,402 169,890 14,512 8.5 % Supply Chain Services 199,038 174,670 24,368 14.0 % Total DXP Sales $ 1,271,556 $ 1,074,537 $ 197,019 18.3 % Service Centers segment. Sales for the SC segment increased by $158.1 million, or 21.7 percent for the nine months ended September 30, 2023, compared to the prior year's corresponding period. Sales from acquisitions for the SC segment was $19.1 million during the nine months ended September 30, 2023. Total sales for the SC segment excluding acquisitions increased $139.0 million from the prior year's corresponding period. This sales increase is primarily the result of increased sales of rotating equipment and bearings product lines to customers engaged in operating and maintenance services in the general industrial, diversified chemical, and oil & gas markets in connection with increased capital spending by oil and gas producers. Innovative Pumping Solutions segment . Sales for the IPS segment increased by $14.5 million, or 8.5% for the nine months ended September 30, 2023 compared to the prior year's corresponding period. Sales from acquisitions for the IPS segment was $11.2 million during the nine months ended September 30, 2023. Total sales for the IPS segment excluding acquisitions increased $3.4 million from the prior year's corresponding period. This increase was primarily the result of an increase in the capital spending by oil and gas producers and renewables sector. 22 Supply Chain Services segment. Sales for the SCS segment increased by $24.4 million, or 14.0 percent, for the nine months ended September 30, 2023, compared to the prior year's corresponding period. The improved sales are primarily related to the addition of a new customer in the diversified chemicals market, as well as sales increases in the medical technology, food and beverage and oil and gas markets. GROSS PROFIT. Gross profit as a percentage of sales for the nine months ended September 30, 2023 increased by approximately 116 basis points from the prior year's corresponding period. The increase in the gross profit percentage is primarily the result of an approximate 91 basis points and 363 basis points increase in the gross profit percentage in our SC and IPS segments, respectively, partially offset by an approximate 48 basis points decrease in our SCS segment. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A"). SG&A for the nine months ended September 30, 2023 increased by approximately $37.0 million, or 15.6 percent, to $273.7 million from $236.8 million for the prior year's corresponding period. The increase in SG&A is primarily the result of increased payroll, incentive compensation and related taxes and 401(k) expenses as a result of increased business activity. OPERATING INCOME. Operating income for the nine months ended September 30, 2023 increased by $34.7 million or 46.9% to $108.7 million from $74.0 million in the prior year's corresponding period. This increase in operating income is primarily related to the aforementioned increased business activity across all segments. INTEREST EXPENSE. Interest expense for the nine months ended September 30, 2023 increased $18.5 million compared with the prior year's corresponding period. This increase was primarily due to the Company borrowing an additional $105.0 million on its Term Loan during the fourth quarter of 2022 and incurring higher than average interest rates on such debt due to changes in the macroeconomic environment and the associated increasing interest rate policy by the U.S. Federal Reserve Bank. INCOME TAXES. Our effective tax rate from continuing operations was a tax expense of 26.8 percent for the nine months ended September 30, 2023, compared to a tax expense of 25.1 percent for the nine months ended September 30, 2022. Compared to the U.S. statutory rate for the nine months ended September 30, 2023, the effective tax rate was increased by state taxes, foreign taxes, nondeductible expenses, and uncertain tax positions recorded for research and development tax credits and was partially offset by research and development tax credits and other tax credits. NON-GAAP FINANCIAL MEASURES AND RECONCILIATIONS Organic Sales and Acquisition Sales We define and calculate organic sales to include locations and acquisitions under our ownership for at least twelve months. "Acquisition Sales" are sales from acquisitions that have been under our ownership for less than twelve months and are excluded in our calculation of Organic Sales. The following table sets forth the reconciliation of Acquisition Sales and Organic Sales to the most comparable U.S. GAAP financial measure (in thousands) : Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Service Centers $ 294,458 $ 260,083 $ 888,116 $ 729,977 Innovative Pumping Solutions 58,963 59,044 184,402 169,890 Supply Chain Services 65,828 68,187 199,038 174,670 Total DXP Sales 419,249 387,314 1,271,556 1,074,537 Acquisition Sales 3,868 15,916 30,266 38,273 Organic Sales $ 415,381 $ 371,398 $ 1,241,290 $ 1,036,264 23 EBITDA, Adjusted EBITDA, EBITDA Margin, and Adjusted EBITDA Margin We define and calculate EBITDA as Net income attributable to DXP Enterprises, Inc., plus interest, taxes, depreciation, amortization, and non-controlling interest. We define and calculate Adjusted EBITDA as Net income attributable to DXP Enterprises, Inc., plus interest, taxes, depreciation, amortization minus stock-based compensation expense, non-controlling interest before taxes and all other non-cash charges, adjustments, and non-recurring items. We identify the impact of all other non-cash charges, adjustments and non-recurring items because we believe these items do not directly reflect our underlying operations. We define and calculate EBITDA Margin as EBITDA divided by sales. We define and calculate Adjusted EBITDA Margin as Adjusted EBITDA divided by sales. The following table sets forth the reconciliation of EBITDA, EBITDA Margin, Adjusted EBITDA, and Adjusted EBITDA Margin to the most comparable U.S. GAAP financial measure (in thousands) : Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Net income attributable to DXP Enterprises, Inc. $ 16,172 $ 13,929 $ 52,806 $ 41,003 Less: Net loss attributable to non-controlling interest — ( 885 ) — ( 938 ) Plus: Interest expense 12,684 6,833 36,068 17,610 Plus: Provision for income taxes 5,766 5,097 19,339 13,402 Plus: Depreciation and amortization 7,983 7,493 21,468 21,325 EBITDA $ 42,605 $ 32,467 $ 129,681 $ 92,402 Plus: NCI income (loss) before tax (1) — 159 — 433 Plus: other non-recurring items (2) 551 1,193 551 1,193 Plus: stock compensation expense 864 505 2,211 1,368 Adjusted EBITDA $ 44,020 $ 34,324 $ 132,443 $ 95,396 Operating Income Margin 8.6 % 6.9 % 8.6 % 6.9 % EBITDA Margin 10.2 % 8.4 % 10.2 % 8.6 % Adjusted EBITDA Margin 10.5 % 8.9 % 10.4 % 8.9 % (1) NCI represents non-controlling interest. (2) Other non-recurring items includes the loss associated with closing an international location for the three and nine months ended September 30, 2023 and the loss associated with the sale of a VIE for the three and nine months ended September 30, 2022. Free Cash Flow We define and calculate free cash flow as net cash (used in) provided by operating activities less net purchases of property and equipment. The following table sets forth the reconciliation of Free Cash Flow to the most comparable U.S. GAAP financial measure (in thousands) : Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Net cash provided by (used in) operating activities $ 39,758 $ (3,432) $ 63,775 $ 2,256 Less: purchases of property and equipment (1,486) (1,578) ( 7,103 ) (3,426) Free Cash Flow $ 38,272 $ (5,010) $ 56,672 $ (1,170) 24 LIQUIDITY AND CAPITAL RESOURCES General Overview As of September 30, 2023, we had cash and restricted cash of $27.3 million and credit facility availability of $131.9 million. We have a $135.0 million asset-backed line of credit (the "ABL Revolver"), partially offset by letters of credit of $3.1 million. We had no borrowings outstanding on our ABL Revolver as of September 30, 2023. We had $424.9 million in borrowings on our Term Loan as of September 30, 2023. Our primary source of capital is cash flow from operations, supplemented as necessary by bank borrowings or other sources of financing. As a distributor of MRO products and services and fabricator of custom pumps and packages, working capital can fluctuate as a result of changes in inventory levels, accounts receivable and costs in excess of billings for project work. Additional cash is required for capital items for information technology, warehouse equipment, leasehold improvements, pump manufacturing and safety services equipment. We also require cash to pay our lease obligations and to service our debt. The following table summarizes our net cash flows generated by operating activities, net cash used in investing activities and net cash used in financing activities for the periods presented (in thousands) : Nine Months Ended September 30, 2023 2022 Net Cash Provided by (Used in): Operating Activities $ 63,775 $ 2,256 Investing Activities (15,951) (51,932) Financing Activities (66,744) 18,293 Effect of Foreign Currency 70 (634) Net Change in Cash $ (18,850) $ (32,017) Operating Activities The Company generated $63.8 million of cash from operating activities during the nine months ended September 30, 2023 compared to $2.3 million of cash generated during the prior year's corresponding period. The $61.5 million increase in the amount of cash provided by operating activities between the two periods was primarily due to increased business activity and higher sales at a higher margin partially offset by a decrease of progress billings as compared to the prior period. Investing Activities For the nine months ended September 30, 2023, net cash used in investing activities was $16.0 million compared to a $51.9 million use of cash during the prior year’s corresponding period. This $36.0 million decrease was primarily driven by a reduction in the total purchase price paid for acquisitions during the nine months ended September 30, 2023 of $8.8 million compared to $48.5 million during the nine months ended September 30, 2022. The decrease was partially offset by purchases of property and equipment of $7.1 million for the nine months ended September 30, 2023 compared to $3.4 million for the nine months ended September 30, 2022. Financing Activities For the nine months ended September 30, 2023, net cash used in financing activities was $66.7 million, compared to net cash provided by financing activities of $18.3 million during the prior year’s corresponding period. The increase was primarily due to share repurchases of $56.2 million for the nine months ended September 30, 2023 compared to $18.5 million for the nine months ended September 30, 2022. During the nine months ended September 30, 2022, the Company had $40.6 million outstanding under the ABL Revolver compared to no borrowings outstanding during the nine months ended September 30, 2023. The Company paid contingent consideration of $5.1 million for the nine months ended September 30, 2023 compared to $0.5 million for the nine months ended September 30, 2022. 25 Funding Commitments We intend to pursue additional acquisition targets, but the timing, size or success of any acquisition and the related potential capital commitments cannot be determined with certainty. We continue to expect to fund future acquisitions primarily with cash flows from operations and borrowings, including the undrawn portion of the credit facility or new debt issuances, but may also issue additional equity either directly or in connection with acquisitions. There can be no assurance that additional financing for acquisitions will be available at terms acceptable to the Company. The Company believes it has adequate funding and liquidity to meet its normal working capital needs during the next twelve months. However, the Company may require additional debt outside of our credit facilities or equity financing to fund potential acquisitions. Such additional financings may include additional bank debt or the public or private sale of debt or equity securities. In connection with any such financing, the Company may issue securities that dilute the interests of our shareholders. DISCUSSION OF SIGNIFICANT ACCOUNTING AND BUSINESS POLICIES Critical accounting and business policies are those that are both most important to the portrayal of a company's financial position and results of operations, and require management's subjective or complex judgments. These policies have been discussed with the Audit Committee of the Board of Directors of DXP. The Company's unaudited condensed financial statements are prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP"). The accompanying unaudited Condensed Consolidated Financial Statements have been prepared on substantially the same basis as our annual Consolidated Financial Statements and should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2022. For a more complete discussion of our significant accounting policies and business practices, refer to the consolidated Annual Report on Form 10-K filed with the Securities and Exchange Commission on April 17, 2023. The results of operations for the nine months ended September 30, 2023 are not necessarily indicative of results expected for the full fiscal year. RECENT ACCOUNTING PRONOUNCEMENTS See Note 3 - Recently Issued Accounting Pronouncements to the Condensed Consolidated Financial Statements for information regarding recent accounting pronouncements. ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. For quantitative and qualitative disclosures about market risk, see Item 7A, 'Quantitative and Qualitative Disclosures About Market Risk' of our Annual Report on Form 10-K for the year ended December 31, 2022. Our exposures to market risk have not changed materially since December 31, 2022. 26