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Item 7. Management’s Discussion and Analysis

2024-03-11 compared with 2023-04-17 · 165 added, 263 removed, 235 unchanged (65% of the section changed)

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Our comprehensive knowledge, specialized services and leading brands serve MRO, OEM and capital equipment end users in virtually all industrial markets through our multi-channel capabilities that provide choice, convenience, expertise, timely response and an overall ease of doing business.

The Company's products are marketed in the United States, Canada and Dubai to customers that are engaged in a variety of industries, many of which may be counter cyclical to each other.

Demand for our products generally is subject to changes in the United States and Canada, and global and macro-economic trends affecting our customers and the industries in which they compete.

Certain of these industries, such as the oil and gas industry, are subject to volatility driven by a variety of factors, 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.

The Company's products are marketed in the U.S., Canada, Mexico, and Dubai to customers that are engaged in a variety of industries, many of which may be counter cyclical to each other.

Demand for our products generally is subject to changes in the U.S.

and Canada, and global and macro-economic trends affecting our customers and the industries in which they compete.

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.

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-U.S.

GAAP business metrics may be calculated in a different manner than similarly titled metrics used by other companies.

See “Non-U.S.

GAAP Financial Measures and Reconciliations” for additional information on non-U.S.

GAAP financial measures and a reconciliation to the most comparable U.S.

GAAP measures.

Twelve Months Ended December 31,

2023 2022 2021

Sales by Business Segment ( in thousands, except percentages and days)

Service Centers $ 1,145,082 $ 1,009,356 $ 816,496

Innovative Pumping Solutions 273,150 231,102 139,591

Supply Chain Services 260,368 240,374 157,834

Total DXP Sales $ 1,678,600 $ 1,480,832 $ 1,113,921

Acquisition Sales $ 33,078 $ 41,527 $ 147,472

Organic Sales 1,645,522 1,439,305 966,449

Business Days 252 253 251

Sales per Business Day $ 6,661 $ 5,853 $ 4,438

Organic Sales per Business Day 6,530 5,689 3,850

Gross Profit $ 505,291 $ 422,038 $ 328,506

Gross Profit Margin 30.1 % 28.5 % 29.5 %

EBITDA $ 170,182 $ 123,535 $ 67,415

EBITDA Margin 10.1 % 8.3 % 6.1 %

Adjusted EBITDA $ 174,305 $ 126,805 $ 70,231

Adjusted EBITDA Margin 10.4 % 8.6 % 6.3 %

Free Cash Flow

$ 93,959 $ 980 $ 32,759

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 provided by operating activities less net purchases of property and equipment.

CURRENT MARKET CONDITIONS AND OUTLOOK

Economic Indices

The Company monitors several economic indices that have been key indicators for industrial and oil & gas economic activity in the United States.

The Company monitors several economic indices that have been key indicators for industrial and oil & gas economic activity in the U.S.

These include the Industrial Production (IP) and Manufacturing Capacity Utilization (MCU) indices published by the Federal Reserve Board and the Purchasing Managers Index (PMI) published by the Institute for Supply Management (ISM).

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A reading above 50 generally indicates expansion.

The Company also monitors various oil & gas indicators including active drilling rigs.

Below are readings for the fourth quarter versus the full year average:

Index Reading

Period MCU PMI IP MBI

Period MCU PMI IP MBI Active Drilling Rigs (1)

October 78.6 46.7 102.4 45.4 1,777

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Fiscal 2021 average 75.4 60.6 100.5 59.7 1,361

* The information contained in this table has been obtained from third party publicly available sources.

The Company also monitors various oil & gas indicators including active drilling rigs, gross U.S.

domestic production and the West Texas Intermediate ("WTI") price of oil.

Below are readings for the last three years:

Operating Environment Overview*

2022 2021 2020

Active Drilling Rigs**

Canada 176 131 90

International 851 755 825

Worldwide 1,747 1,361 1,351

Gross Domestic Product (in billions) $ 25,461.3 $ 22,993.5 $ 20,932.8

West Texas Intermediate ** (per barrel) $ 94.90 $ 68.14 $ 39.16

Purchasing Managers Index 48.4 58.8 60.5

* The information contained in this table has been obtained from third party publicly available sources.

** Averages for the years indicated.

From Baker Hughes’ Worldwide Rig Counts - Current Data

During 2023, the growth rate of the general economy improved, as the macro economy and business cycle began to normalize relative to the pandemic related years of 2020 and 2021.

Sales for the year ended December 31, 2023 increased $197.8 million, or 13.4%, to approximately $1.7 billion from $1.5 billion for the prior corresponding period.

Customer demand was generally healthy throughout fiscal 2022, resulting in industry expected volume growth, complemented by meaningful pricing actions taken by the Company's vendors which ultimately, get passed on to customers.

As such, the majority of the 2022 sales increase is the result of increases in price with volume as well as the contribution from acquisitions and the related sales of rotating equipment and air compressors.

During 2021, the growth rate of the general economy improved from 2020 as well as the rig count.

Sales for the year ended December 31, 2021 increased $108.7 million, or 10.8%, to approximately $1.1 billion from $1.0 billion for the prior corresponding period.

The majority of the 2021 sales increase was primarily due to acquisitions and the related sales of rotating equipment air compressors.

Customer demand was generally healthy throughout fiscal 2023, resulting in industry expected volume growth, complemented by additional pricing actions taken by the Company's vendors after strong pricing action in 2022, which ultimately, gets passed on to customers.

As such, some of the 2023 sales increase is the result of increases in price with increases in volume as well as the contribution from acquisitions and the related sales of rotating equipment and air compressors.

As our operations have generally stabilized from the COVID-19 pandemic, we have seen growth from our supportive served end-markets and our focus on organic and inorganic sales growth.

Our sales volume is expected to deliver sustainable and healthy growth, while our diversification efforts have unlocked gains in margins, cash flow and overall organizational efficiency.

With our strong backlog and improved market environment, we expect to continue to see growth in 2024.

Assuming a positive general macroeconomic environment and continued supportive environments in our end markets, we expect fiscal 2024 to be comparable to 2023 levels with the exception of increased acquisition activity.

We expect our interest expense in 2024 will be relatively higher than the amounts incurred in 2023 due to our refinancing in the fourth quarter of 2023 including the raising of an incremental $125 million.

We expect to generate sufficient cash from operations and have sufficient capacity under our ABL credit facility to fund any working capital, capital expenditures, share repurchases, and debt payments in 2024.

The amount of cash generated or consumed by working capital is dependent on our level of revenues, customer cash advances, backlog, customer-driven delays and other factors.

We will seek to improve our working capital utilization, with a particular focus on improving the management of accounts receivable, inventory and cost in excess of billings.

In 2024, our cash flows for investing activities will be focused on strategic initiatives, information technology software and infrastructure, general upgrades and cost reduction opportunities and we currently estimate capital expenditures to be between $10 million and $20 million, before consideration of any acquisition activity.

Our sales growth strategy in recent years has focused on internal growth and acquisitions.

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Consolidated Results of Operations

Years Ended December 31,

Twelve Months Ended December 31,

2023 % 2022 % 2021 %

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Gross profit 505.3 30.1 422.0 28.5 328.5 29.5

Selling, general & administrative expense 324.3 21.9 288.6 25.9 245.0 24.4

Impairment and other charges — — — — 59.9 6.0

Operating income (loss) 97.7 6.6 39.9 3.6 (27.7) (2.8)

Selling, general and administrative expenses

366.6 21.8 324.3 21.9 288.6 25.9

Income from operations

138.7 8.3 97.7 6.6 39.9 3.6

Other (income) expense, net

(1.4) (0.1) 2.7 0.2 (0.4) —

Interest expense 53.1 3.2 29.1 2.0 21.1 1.9

Income (loss) before income taxes 65.9 4.5 19.2 1.7 (48.4) (4.8)

Provision for income taxes (benefit) 17.8 1.2 3.4 0.3 (18.7) (1.9)

Net income (loss) 48.1 3.2 15.8 1.4 (29.7) (3.0)

Income before income taxes

87.0 5.2 65.9 4.5 19.2 1.7

Provision for income tax expense

18.1 1.1 17.8 1.2 3.4 0.3

68.9 4.1 48.1 3.2 15.8 1.4

Net loss attributable to noncontrolling interest — — (0.1) — (0.7) (0.1)

Net income (loss) attributable to DXP Enterprises, Inc.

Net income attributable to DXP Enterprises, Inc.

$ 68.9 4.1 $ 48.2 3.3 $ 16.5 1.5

Basic earnings per share $ 2.58 $ 0.87 $ (1.65)

Diluted earnings per share $ 2.47 $ 0.83 $ (1.65)

Earning per share:

$ 4.07 $ 2.58 $ 0.87

$ 3.89 $ 2.47 $ 0.83

Year Ended December 31, 2023 compared to Year Ended December 31, 2022

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This sales increase is the result of an increase in sales in our SC, IPS and SCS segments of $135.7 million, $42.0 million and $20.0 million, respectively.

Sales from businesses recently acquired accounted for $41.5 million of the sales for the twelve months ended December 31, 2022.

Excluding the 2022 sales of from businesses acquired, sales for the year increased by $325.4 million, or 29.2% from the prior year's corresponding period.

The fluctuations in sales are further explained in our business segment discussions below.

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2023 2022 Change Change %

Sales by Business Segment (in thousands, except change %)

Sales by Business Segment (in thousands, except percentages)

Service Centers $ 1,145,082 $ 1,009,356 $ 135,726 13.4 %

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Sales for the Service Centers segment increased by $135.7 million, or 13.4% for the year ended December 31, 2023, compared to the year ended December 31, 2022.

Excluding $35.0 million of 2022 Service Centers segment sales from businesses acquired, Service Centers segment sales increased $157.9 million, or 19.3% from the prior year's corresponding period.

Sales from acquisitions for the SC segment was $19.3 million during the twelve months ended December 31, 2023.

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 and gas markets in connection with increased capital spending by oil and gas producers.

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Sales for the IPS segment increased by $42.0 million, or 18.2% for the year ended December 31, 2023, compared to the year ended December 31, 2022.

Excluding $6.6 million of 2022 IPS segment sales from businesses acquired, IPS segment sales increased $85.0 million, or 60.9% 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 related businesses.

Sales from acquisitions for the IPS segment was $13.8 million during the twelve months ended December 31, 2023.

Supply Chain Services Segment.

Sales for the SCS segment increased by $20.0 million, or 8.3%, for the year ended December 31, 2023, compared to the year ended December 31, 2022.

The improvement in sales is 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.

The improved sales are primarily related to the addition of a new customer in the diversified chemicals market.

GROSS PROFIT.

Gross profit as a percentage of sales for the year ended December 31, 2022 decreased by approximately 99 basis points from the prior year's corresponding period.

Excluding the impact of the businesses acquired, gross profit as a percentage of sales decreased by approximately 137 basis points.

The decrease in the gross profit percentage excluding the businesses acquired is primarily the result of an approximate 133 basis point decrease in the gross profit percentage in our IPS segment, a 54 basis point decrease in the gross profit percentage in our SC segment and a 366 basis point decrease in the gross profit percentage in our SCS segment.

Service Centers Segment.

The gross profit percentage for the Service Centers decreased approximately 21 basis points and approximately 54 basis points, excluding the impact for the businesses acquired, from the prior year's corresponding period.

This was primarily as a result of product mix.

Gross profit for the SC segment, excluding businesses acquired, increased $42.9 million, or 17.2 percent, during the twelve months ended December 31, 2022 compared to the prior year’s corresponding period.

This was primarily the result of increased sales of rotating equipment and bearings and power transmission products to customers engaged in non-oil and gas markets.

Innovative Pumping Solutions Segment.

The 2022 gross profit percentage for the IPS segment decreased approximately 66 basis points from the prior year's corresponding period.

Adjusting for the businesses acquired, gross profit as a percentage of sales decreased approximately 133 basis points from the prior year's corresponding period.

The decrease in gross profit percentage as a percentage of sales is primarily due to a mix shift (lower margin oil and gas work versus domestic water and wastewater projects).

Gross profit for the IPS segment, excluding businesses acquired, increased $22.5 million, primarily as a result of an increase in the capital spending by oil and gas producers and related businesses.

Supply Chain Services Segment.

Gross profit dollars for the twelve months ended December 31, 2022 increased $10.9 million or, 28.9 percent, compared to the prior year's corresponding period due to the addition of a new customer during the current year.

As a percentage of sales, or gross margins, for the twelve months ended December 31, 2022 decreased approximately 366 basis points, compared to the prior year's corresponding period, due to the addition of the same customer and the profitability of this contract.

SELLING, GENERAL AND ADMINISTRATIVE ("SG&A").

Gross profit as a percentage of sales for the twelve months ended December 31, 2023 increased by approximately 160 basis points from the prior year's corresponding period.

The increase in the gross profit percentage is primarily the result of an approximate 147 basis points and 349 basis points increase in the gross profit percentage in our SC and IPS segments, respectively, partially offset by an approximate 21 basis points decrease in our SCS segment.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A").

SG&A for the year ended December 31, 2023 increased by approximately $42.3 million, or 13.0%, to $366.6 million from $324.3 million for the prior year's corresponding period.

SG&A expense from businesses acquired accounted for $8.9 million.

Excluding expenses from businesses acquired, SG&A for the twelve months ended December 31, 2022 increased by $26.8 million, or 9.3% from the prior year's corresponding period.

The increase in SG&A excluding businesses acquired is primarily the result of increased payroll, incentive compensation and related taxes and 401(k) expenses as a result of increased business activity associated with recovery from the negative economic impacts of the COVID-19 pandemic.

OPERATING INCOME.

Operating income for the year ended December 31, 2022 increased by $57.9 million to $97.8 million from $39.9 million in 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.

INCOME FROM OPERATIONS.

Income from operations for the year ended December 31, 2023 increased by $41.0 million to $138.7 million from $97.8 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 year ended December 31, 2022 increased $8.0 million compared to the prior year's corresponding period, primarily due to the Company borrowing an additional $105.0 million on its Term Loan B during the fourth quarter of 2022 as well as incurring higher than average interest rates during the year due to changes in the macro-economic environment and the associated increasing interest rate policy by the U.S.

Federal Reserve Bank.

Interest expense for the year ended December 31, 2023 increased $24.0 million compared to the prior year's corresponding period, primarily due to incurring higher than average interest rates during the year due and an increased borrowing base on the Term Loan B.

Both of the Company's facilities are subject to a variable interest rate for the twelve months ended December 31, 2023.

INCOME TAXES.

Our effective tax rate from continuing operations was 27.0 percent for the twelve months ended December 31, 2022, compared to 17.9 percent for the twelve months ended December 31, 2021.

Compared to the U.S.

statutory rate for the twelve months ended December 31, 2022, the effective tax rate was increased by state taxes, foreign taxes, nondeductible expenses, return to provision adjustments, 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.

PROVISION FOR INCOME TAX EXPENSE.

Our effective tax rate from continuing operations was a tax expense of 20.8 percent for the twelve months ended December 31, 2023, compared to a tax expense of 27.0 percent for the twelve months ended December 31, 2022.

Compared to the U.S.

statutory rate for the twelve months ended December 31, 2021, the effective tax rate was decreased by research and development tax credits and other tax credits and foreign tax credits, and was partially offset by state taxes, nondeductible expenses, and uncertain tax positions for research and development tax credits.

statutory rate for the twelve months ended December 31, 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.

Year Ended December 31, 2022 compared to Year Ended December 31, 2021

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Management's Discussion and Analysis of Financial Condition and Results of Operations in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2022 incorporated by reference in this Annual Report on Form 10-K.

Non-GAAP Financial Measures and Reconciliations

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.

Our primary non-GAAP financial measures are organic sales (Organic Sales), sales per business day ("Sales per Business Day"), free cash flow ("Free Cash Flow"), earnings before interest, taxes, depreciation and amortization ("EBITDA") and adjusted EBITDA ("Adjusted EBITDA").

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.

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 ( i .

e ., Organic Sales, Sales per Business Day, Free Cash Flow, EBITDA and Adjusted EBITDA) 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.

Organic Sales is defined as net sales excluding the impact of acquisitions and divestitures for the respective periods.

Organic Sales is a tool that can assist management and investors in comparing our performance on a consistent basis by removing the impact of certain items that management believes do not directly reflect our underlying operations.

Sales per Business Day is defined as total net sales divided by business days for the period.

Sales per Business Day assists management and investors in evaluating the Company's historical performance.

Free Cash Flow is defined as cash provided by operations less net purchases of property and equipment.

We believe Free Cash Flow is an important liquidity metric because it measures, during a given period, the amount of cash generated that is available to fund acquisitions, make investments, repay debt obligations, repurchase shares of the Company's common stock, and for certain other activities.

EBITDA is defined as the sum of consolidated net income in such period, plus to the extent deducted from consolidated net income:

in addition to these adjustments, we exclude, when they occur, the impacts of impairment losses and losses/(gains) on the sale of a business.

EBITDA is a tool that can assist management and investors in comparing our performance on a consistent basis by removing the impact of certain items that management believes do not directly reflect our underlying operations.

From time to time, the Company incurs non-cash, unique or one-time items.

As such, the Company will add these items back to determine an Adjusted EBITDA.

We use EBITDA and Adjusted EBITDA internally to evaluate and manage the Company's operations because we believe it provides useful supplemental information regarding the Company's ongoing economic performance.

We have chosen to provide this information to investors to enable them to perform more meaningful comparisons of operating results.

A reconciliation of the non-GAAP financial measures, to its most comparable U.S.

GAAP financial measure is included below.

The following table sets forth the reconciliation of net sales to organic net sales (in millions) :

Reconciliation of Net Sales to Organic Net Sales

Net Sales Acquisition Sales Divestiture Sales Organic Sales

Service Centers $ 1,009 $ 35 $ — $ 974

Innovative Pumping Solutions 231 7 — 224

Supply Chain Services 240 — — 240

Total Sales $ 1,480 $ 42 $ — $ 1,438

Service Centers $ 816 $ 129 $ — $ 687

Innovative Pumping Solutions 140 18 — 122

Supply Chain Services 158 — — 158

Total Sales $ 1,114 $ 147 $ — $ 967

Year-over-year growth rates

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) :

Twelve Months Ended December 31,

2023 2022 2021

Service Centers $ 1,145,082 $ 1,009,356 $ 816,496

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Supply Chain Services 260,368 240,374 157,834

Total Sales 32.9 % $ (105) — 48.7 %

The Sales per Business Day are as follows (in thousands) :

Years Ended December 31,

2022 2021 2020

Business days 253 251 253

Sales per Business Day $ 5,853 $ 4,500 $ 3,974

We have chosen to provide this information to investors to enable them to perform more meaningful comparisons of operating results.

For further discussion regarding free cash flow as a management metric see the "Liquidity and Capital Resources - Free Cash Flow" below.

The following table sets forth the reconciliation of EBITDA and Adjusted EBITDA to the most comparable U.

Total DXP Sales 1,678,600 1,480,832 1,113,921

Acquisition Sales 33,078 41,527 147,472

Organic Sales $ 1,645,522 $ 1,439,305 $ 966,449

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 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) :

Year Ended December 31,

Twelve Months Ended December 31,

2023 2022 2021

GAAP net income (loss) attributable to DXP Enterprises, Inc.

Net income attributable to DXP Enterprises, Inc.

$ 68,812 $ 48,155 $ 16,496

Loss attributable to non-controlling interest (53) (745) (348)

Provision for income taxes 17,799 3,431 (18,696)

Net loss attributable to non-controlling interest (NCI)

Interest expense

53,146 29,135 21,089

Provision for income tax expense

18,119 17,799 3,431

Depreciation and amortization

Interest and other financing expenses 29,135 21,089 20,571

30,105 28,500 27,143

EBITDA $ 170,182 $ 123,536 $ 67,414

EBITDA margin as % of sales 8.3 % 6.1 % (0.5) %

NCI loss before tax (1)

Loss associated with sale of interest in VIE (2)

Impairment and other charges — — 59,883

NCI income before tax

other non-recurring items (1)

1,051 1,193 —

stock compensation expense 3,072 1,850 1,823

Adjusted EBITDA $ 174,305 $ 126,806 $ 70,230

Adjusted EBITDA margin as % of sales 8.6 % 6.3 % 5.9 %

(1) NCI represents non-controlling interest

(2) The loss associated with the sale of our interest in our VIE is included in other income and expense on our consolidated statement of operations for the year ended December 31, 2022.

Operating Income Margin 8.3 % 6.6 % 3.6 %

EBITDA Margin 10.1 % 8.3 % 6.1 %

Adjusted EBITDA Margin 10.4 % 8.6 % 6.3 %

(1) Other non-recurring items primarily include the loss associated with closing an international location for the year ended December 31, 2023 and the loss associated with the sale of a variable interest entity (VIE) for the year ended December 31, 2022.

Free Cash Flow

We define and calculate free cash flow as net cash 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) :

Twelve Months Ended December 31,

2023 2022 2021

Net cash provided by operating activities

$ 106,222 $ 5,894 $ 37,089

purchases of property and equipment, net (12,263) (4,916) (4,330)

Free Cash Flow

$ 93,959 $ 978 $ 32,759

Liquidity and Capital Resources

General Overview

As of December 31, 2022, we had cash and restricted cash of $46.1 million and credit facility availability of $132.4 million.

We have a $135.0 million asset backed revolving line of credit (the "ABL Revolver"), partially offset by letters of credit of $2.6 million, that were due to mature in August 2022.

The Company also has a Term Loan B with $428.1 million in borrowings as of December 31, 2022.

On July 19, 2022, the Company amended and extended the ABL Revolver.

The ABL Revolver matures on July 19, 2027, under which we had no borrowings outstanding as of December 31, 2022 .

As of December 31, 2023, we had available cash of $173.1 million and credit facility availability of $132.1 million.

We have a $135.0 million asset backed revolving line of credit (the "ABL Revolver"), partially offset by letters of credit of $2.9 million.

Our primary source of capital is cash flow from operations, supplemented as necessary by Company shares, bank borrowings or other sources of debt.

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We also require cash to pay our lease obligations, fund project work-in-process and to service our debt.

The following table summarizes our net cash flows used in and provided by operating activities, net cash used in investing activities and net cash (used in) provided by financing activities for the periods presented ( in thousands ):

Years Ended December 31,

The following table summarizes our net cash flows provided by (used in) operating activities, investing activities, financing activities for the periods presented ( in thousands, except percentages ):

Twelve Months Ended December 31,

2023 2022 Change Change %

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Effect of foreign currency (60) 253 (313) (124) %

Net change in cash $ (2,963) $ (70,339) $ 67,376 (96) %

Net change in cash and restricted cash

$ 127,094 $ (2,963) $ 130,057 (4,389) %

Operating Activities

The Company generated $106.2 million of cash in operating activities during the year ended December 31, 2023 compared to generating $5.9 million of cash during the prior year's corresponding period.

The $31.2 million decrease in the amount of cash generated between the two periods was primarily driven by the increase in accounts receivable, inventory, deferred income taxes and project work activity as a result of increased business activity.

Cash is generally used to fund project costs ahead of actual billings and collection.

The $100.3 million increase in the amount of cash generated between the two periods was primarily driven by the collections of receivables associated with trade accounts receivable partially offset by decreased inventory purchases and accrued expenses as compared to the prior period.

Investing Activities

For the year ended December 31, 2022, net cash used in investing activities was $53.4 million compared to $69.0 million in the corresponding period in 2021.

For the year ended December 31, 2023, net cash used in investing activities was $22.6 million compared to $53.4 million used in the corresponding period in 2022.

This decrease of $30.8 million was primarily driven by a reduction in the total purchase price paid for acquisitions during 2023 of $10.4 million compared to $48.5 million for acquisitions in 2022.

Financing Activities

For the year ended December 31, 2022, net cash generated in financing activities was $44.3 million, compared to net cash used in financing activities of $38.5 million for the corresponding period in 2021.

For the year ended December 31, 2023, net cash generated in financing activities was $43.6 million, compared to net cash generated in financing activities of $44.3 million for the corresponding period in 2022.

For the year ended December 31, 2023, the Company repurchased approximately $56.2 million worth of outstanding shares compared to $47.9 million worth of outstanding shares for the year ended December 31, 2022.

The net inflow of cash from financing activities in 2022 benefited from borrowing an additional $105.0 million on our Term Loan B.

Debt issuance costs associated with the amendment of our Term Loan B and ABL Revolver was $8.4 million for the year ended December 31, 2021.

The net inflow of cash from financing activities in 2023 benefited from refinancing our existing Senior Secured Term Loan B.

Debt issuance costs associated with the amendment of our new Term Loan B was $12.1 million for the year ended December 31, 2023.

During the twelve months ended December 31, 2023 we repurchased 1.7 million shares of the Company's common stock for approximately $54.7 million compared to 1.3 million shares of the Company's stock for approximately $35.2 million for the twelve months ended December 31, 2022.

On December 15, 2022, the Company announced a new share repurchase program pursuant to which we may repurchase up to $85.0 million worth, or 2.8 million shares of the Company's outstanding common stock in the open market or through privately negotiated transactions over the next 24 months.

On November 22, 2022, the Company entered into an amendment on its existing $330 million Senior Secured Term Loan (the "Term Loan Amendment"), borrowing an additional $105.0 million on the $330 million Senior Secured Term Loan (the “Term Loan Agreement”) which matures on December 23, 2027.

$105.0 million that was added to the $330 million Senior Secured Term Loan (the “Term Loan Agreement”) which matures on December 23, 2027.

There was $428.1 million outstanding as of December 31, 2022.

The Company successfully completed the May 2021 repurchase program, whereby, the Company completed the repurchase of 1.5 million shares, under the 2-year program.

On June 15, 2021, the Company entered into a negotiated share repurchase agreement to repurchase certain shares of its common stock from certain of its shareholders agreeing to pay sellers over four equal quarterly installments, which are presented within the purchase of treasury stock in the cash flow statement.

During the twelve months ended December 31, 2022, there were two installment payments totaling $13.6 million.

There are no further installment payments outstanding as of December 31, 2022.

On May 12, 2021, the Company announced that its Board of Directors authorized a share repurchase program (the “program”) under which up to $85.0 million worth or 1.5 million shares of its outstanding common stock may be acquired in the open

market or through privately negotiated transactions over the next 24 months at the discretion of management.

The Company completed the $85.0 million program in December 2022.

There were no further installment payments outstanding as of December 31, 2022 and December 31, 2023

We believe the Company has adequate funding to support its working capital needs within the business.

At December 31, 2022, our total long-term debt, including the current portion, less principal repayments, was $428.1 million, or 54.0% of total capitalization (total long-term debt including current portion plus shareholders’ equity) of $793.5 million.

Approximately $428.1 million of this outstanding debt bears interest at various floating rates.

At December 31, 2023, our total outstanding debt was $548.6 million, or 59.0% of total capitalization (total debt plus shareholders’ equity) of $929.5 million.

All $548.6 million of this outstanding debt bears interest at various floating rates.

Quantitative and Qualitative Disclosure about Market Risk

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GAAP financial measure of cash flows from operations.

The following table sets forth the reconciliation of net cash provided by operating activities to Free Cash Flow:

(in thousands) Years Ended December 31,

The following table sets forth the reconciliation of net cash provided by operating activities to Free Cash Flow (in thousands) :

Twelve Months Ended December 31,

2023 2022 2021

Net cash provided by operating activities $ 106,222 $ 5,894 $ 37,089

Purchase of property and equipment 4,916 5,999 6,672

Proceeds from the disposition of property and equipment — 1,669 123

Purchase of property and equipment, net

12,263 4,916 4,330

Free Cash Flow $ 93,959 $ 978 $ 32,759

ABL Revolver and Senior Secured Term Loan B

ABL Revolver:

On July 19, 2022, the Company entered into an Amended and Restated Loan and Security Agreement (the “ABL Credit Agreement”) that provided for a $135.0 million asset-backed revolving line of credit (the "ABL Revolver").

The ABL Credit Agreement amends and restates the Loan and Security Agreement dated as of August 29, 2017.

The ABL Revolver matures on July 19, 2027.

Total borrowing capacity under the ABL Revolver was $132.4 million, net of the impact of outstanding letters of credit $2.6 million.

As of December 31, 2022, there were no amounts outstanding under the ABL Revolver.

The ABL Credit Agreement may be increased in increments of $10.0 million up to an aggregate of $50.0 million.

The ABL Revolver will mature on July 19, 2027.

Interest shall accrue on outstanding borrowings at a rate equal to SOFR or CDOR plus a margin ranging from 1.25% to 1.75% per annum, or at an alternate base rate, Canadian prime rate or Canadian base rate plus a margin ranging from 0.25% to 0.75% per annum, in each case, based upon the average daily excess availability under the ABL Revolver for the most recently completed calendar quarter.

Fees ranging from 0.25% to 0.375% per annum will be payable on the portion of the ABL Revolver not in use at any given time.

The unused line fee was 0.375% at December 31, 2022.

The interest rate for the ABL Revolver was 7.8% at December 31, 2022.

Senior Secured Term Loan B:

On November 22, 2022, the Company entered into an amendment on its existing $330 million Senior Secured Term Loan (the "Term Loan Amendment"), borrowing an additional $105.0 million that was added to the existing $330 million Senior Secured Term Loan (the “Term Loan Agreement”).

There was $428.1 million outstanding under the Term Loan Agreement, as amended as of December 31, 2022.

The Term Loan Amendment amends and supplements the Term Loan Agreement, dated as of December 23, 2020 and provides for, among other things, $105 million in new incremental commitments.

The Term Loan Agreement and Term Loan Amendment amortizes in equal quarterly installments of 0.25% with the balance payable in December 2027, when the facility matures.

Subject to securing additional lender commitments, the Term Loan Agreement allows for incremental increases in facility size up to an aggregate of $85.0 million, plus an additional amount such that the Company's Secured Leverage Ratio (as defined in the Term Loan Agreement) would not exceed 3.75 to 1.00.

Interest accrues on the Term Loan at a rate equal to SOFR plus a margin of 5.25% for the SOFR Loans (as defined in the Term Loan Amendment).

We are required to repay the Term Loan with certain asset sales and insurance proceeds, certain debt proceeds and 50% of excess cash flow, reducing to 25%, if our total leverage ratio is no more than 3.00 to 1.00 and 0%, if our total leverage ratio is no more than 2.50 to 1.00.

The interest rate for the Term Loan was 10.0% as of December 31, 2022.

Financial Covenants:

The Company's principal financial covenants under the ABL Credit Agreement and Term Loan B Agreement include:

Fixed Charge Coverage Ratio – The Fixed Charge Coverage Ratio under the ABL Credit Agreement is defined as the ratio for the most recently completed four-fiscal quarter period, of (a) EBITDA minus capital expenditures (excluding those financed or funded with debt (other than the ABL Loans), (ii) the portion thereof funded with the net proceeds from asset dispositions of equipment or real property which the Company is permitted to reinvest pursuant to the Term Loan and the portion thereof funded with the net proceeds of casualty insurance or condemnation awards in respect of any equipment and real estate which the Company is not required to use to prepay the ABL Loans pursuant to the Term Loan B Agreement or with the proceeds of casualty insurance or condemnation awards in respect of any other property) minus cash taxes paid (net of cash tax refunds received during such period), to (b) fixed charges.

The Company is restricted from allowing its fixed charge coverage ratio be less than 1.00 to 1.00 during a compliance period, which is triggered when the availability under the ABL Revolver falls below a threshold set forth in the ABL Credit Agreement.

As of December 31, 2022, the Company was in compliance with this covenant with a consolidated Fixed Charge Coverage Ratio of 3.59 to 1.00.

Secured Leverage Ratio – The Term Loan B Agreement requires that the Company’s Secured Leverage Ratio, defined as the ratio, as of the last day of any fiscal quarter of consolidated secured debt (net of unrestricted cash, not to exceed $30 million) as of such day to EBITDA, beginning with the fiscal quarter ending December 31, 2022, is either equal to or less than as indicated in the table below:

Fiscal Quarter

Secured Leverage Ratio

December 31, 2022 5.00:1.00

March 31, 2023 5.00:1.00

June 30, 2023 and each Fiscal Quarter thereafter 4.75:1.00

EBITDA as defined under the Term Loan B Agreement for financial covenant purposes means, without duplication, for any period of determination, the sum of, consolidated net income during such period;

plus to the extent deducted from consolidated net income in such period:

(i) income tax expense, (ii) franchise tax expense, (iii) interest expense, (iv) amortization and depreciation during such period, (v) all non-cash charges and adjustments, and (vi) non-recurring cash expenses related to the Term Loan, provided , that if the Company acquires or disposes of any property during such period (other than under certain exceptions specified in the Term Loan B Agreement, including the sale of inventory in the ordinary course of business, then EBITDA shall be calculated, after giving pro forma effect to such acquisition or disposition, as if such acquisition or disposition had occurred on the first day of such period.

As of December 31, 2022, the Company’s consolidated Secured Leverage Ratio was 2.83 to 1.00.

The ABL Loans and the Term Loan are secured by substantially all of the assets of the Company.

Borrowings (in thousands):

December 31, 2022 December 31, 2021 Increase

ABL Revolver and Senior Secured Term Loan Borrowings (in thousands):

Current portion of long-term debt $ 5,500 $ 4,369

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The following table summarizes the amount of borrowing capacity under our ABL Revolver as follows:

December 31, 2022 December 31, 2021 Increase

Total borrowing capacity $ 135,000 $ 135,000

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Total amount available $ 132,055 $ 132,380

Contractual Obligations

The impact that our contractual obligations as of December 31, 2022 are expected to have on our liquidity and cash flow in future periods is as follows ( in thousands ):

Payments Due by Period

Less than 1 Year 1–3 Years 3-5 Years More than 5 Years Total

Long-term debt, including current portion (1)

$ 4,369 $ 8,737 $ 415,026 $ — $ 428,132

Operating lease obligations 21,400 27,400 12,550 4,740 66,090

Estimated interest payments (2)

18,690 36,812 36,053 — 91,555

Total $ 44,459 $ 72,949 $ 463,629 $ 4,740 $ 585,777

(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, 2022.

Assumes debt is paid on maturity date and not replaced.

Indemnification

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DISCUSSION OF CRITICAL ACCOUNTING ESTIMATES

The Consolidated Financial Statements of the Company are prepared in accordance with US GAAP, which require management to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities.

The Consolidated Financial Statements of the Company are prepared in accordance with U.S.

GAAP, which require management to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities.

Management bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying amount of assets and liabilities that are not readily apparent from other sources.

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However, these payment terms are extended in select cases and customers may 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, and Canada.

The Company has trade receivables from a diversified customer base located primarily in the Rocky Mountain, Northeastern, Midwestern, Southeastern and Southwestern regions of the U.S., and Canada.

The Company believes no significant concentration of credit risk exists.

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Impairment of Goodwill, Other Intangible Assets, and Long-Lived Assets

The Company tests goodwill and other intangible assets for impairment on an annual basis in the fourth quarter and when events or changes in circumstances indicate that the carrying amount may not be recoverable.

The Company tests goodwill and other intangible assets for impairment annually on October 1 st and when events or changes in circumstances indicate that the carrying amount may not be recoverable.

The Company assigns the carrying value of these intangible assets to its "reporting units" and applies the test for goodwill at the reporting unit level.

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If actual results are not consistent with the Company’s current estimates and assumptions, impairment of goodwill could be required.

During the third quarter of 2020, the Company’s market capitalization and overall sales declined significantly driven by then current macroeconomic and geopolitical conditions including the collapse of oil prices caused by both surplus production and supply as well as the decrease in demand caused by the COVID-19 pandemic.

In addition, the uncertainty related to oil demand had a significant impact on the investment and operating plans of many of our customers.

Based on these events, the Company concluded that it was more likely than not that the fair values of certain of its reporting units were less than their carrying values.

Therefore, the Company performed an interim goodwill impairment test.

For the twelve months ended December 31, 2020, goodwill was evaluated for impairment at the reporting unit level.

The Company had four goodwill reporting units:

Service Centers, Innovative Pumping Solutions, Canada and Supply Chain Services.

The Company determined the fair values of two reporting units with goodwill were below their carrying values, resulting in a $36.4 million goodwill impairment, which was included in impairments and other charges in the consolidated statement of operations.

As the world and the economy began to reopen during 2021, the lifting of mandates and the dissemination of vaccines eased the impacts of the pandemic.

In light of these improvements, we performed an assessment of our goodwill and determined that the estimated fair value of each reporting unit substantially exceeded its carrying value and therefore no impairment of goodwill was recorded for 2022 and 2021.

Innovative Pumping Solutions

The oil and gas industry experienced unprecedented disruption during 2020 as a result of a combination of factors, including the substantial decline in global demand for oil caused by the COVID-19 pandemic and subsequent mitigation efforts.

These factors, along with the continued impact of COVID-19, constituted a triggering event and required a goodwill impairment analysis for our manufacturing reporting unit.

With the adverse economic impacts discussed above and the uncertainty surrounding the COVID-19 pandemic, the results of the impairment test indicated that the carrying amount of the manufacturing reporting unit exceeded the estimated fair value of the reporting unit, and a full impairment of its remaining goodwill was required.

Significant assumptions inherent in the valuation methodologies for goodwill impairment calculations included, but were not limited to, prospective financial information, growth rates, discount rates, inflationary factors, and the cost of capital.

To evaluate the sensitivity of the fair value calculations for the reporting unit, the Company applied a hypothetical 100 bps reduction in the weighted average cost of capital, and separately, increased the revenue projections by 10 percent, holding other factors steady.

Even with more favorable assumptions, the results of these sensitivity analyses led the Company to record a non-cash impairment charge of $16.0 million for goodwill during the twelve months ended December 31, 2020.

As described above, no impairment of goodwill was recorded for 2022 and 2021.

In 2020, as a result of the reductions in capital spending for oil and gas producers and processors and the economic repercussions from the COVID-19 pandemic, we determined those events constituted a triggering event that required us to review the recoverability of our long-lived assets and perform an interim goodwill impairment assessment as of July 31, 2020.

Our review resulted in the recording of impairments and other charges during the third quarter of 2020.

As a result of our goodwill impairment assessments, we determined that the fair value of our Canadian reporting unit was lower than its net book value and, therefore, resulted in a partial goodwill impairment.

The enterprise value of the Canadian reporting unit at July 31, 2020 was less than its carrying value by approximately 40 percent.

This resulted in a partial goodwill impairment of approximately $20.5 million for Canada.

Per the impairment test and respective sensitivity analyses, it was noted that a decrease of approximately 480 basis points in the pre-tax discount rate and an approximately 150 basis points increase in our revenue long-term growth rate projections would cause the Canada business enterprise value to increase to the level of its carrying value and thus avoid a full impairment.

The easing of restrictions and the distribution of vaccines contributed to significant improvements in 2021.

As a result, no impairment of goodwill was recorded for 2022 and 2021.

Other Impairments and methodology

The negative market indicators described above were triggering events that indicated that certain of the Company’s long-lived intangible and tangible assets and additional inventory items may also have been impaired.

Recoverability testing indicated that certain long-lived assets and inventory were indeed impaired or otherwise not recoverable.

The estimated fair value of these assets was determined to be below their carrying value.

As a result, the Company recorded the following additional impairment and other charges for the twelve months ended December 31, 2020 as detailed in the table below (in thousands) .

Twelve months ended December 31, 2020

Long-lived asset impairments $ 4,775

Goodwill impairments 36,435

Inventory and work-in-progress costs 18,673

Total impairment and other charges $ 59,883

The Company determined the fair value of both long-lived assets and goodwill, discussed above, primarily using the discounted cash flow method and in the case of goodwill, a multiples-based market approach for comparable companies.

Given the current volatile market environment and inherent complexities it presents, the Company utilized third-party valuation advisors to assist us with these valuations.

These analyses included significant judgment, including management’s short-term and long-term forecast of operating performance, discount rates based on the weighted average cost of capital, as derived from peers, revenue growth rates, profitability margins, capital expenditures, the timing of future cash flows based on an eventual recovery of the oil and gas industry, and in the case of long-lived assets, the remaining useful life and service potential of the asset, all of which were classified as Level 3 inputs under the fair value hierarchy.

These impairment assessments incorporate inherent uncertainties, including supply and demand for the Company’s products and services and future market conditions, which are difficult to predict in volatile economic environments.

The discount rates utilized to value the reporting units were in a range from 14.8 percent to 16.4 percent.

Given the dynamic nature of the COVID-19 pandemic and related market conditions, we cannot reasonably estimate the period that these events will persist or the full extent of the impact they will have on our business.

If market conditions continue to deteriorate, including crude oil prices further declining or remaining at low levels for a sustained period, we may record further asset impairments, which may include an impairment of the carrying value of our goodwill associated with other reporting units.

For inventory and work-in-progress we evaluated the recoverability based upon their net realizable value, factoring in the costs to complete work-in-progress and the salability of inventory items primarily tied to oil and gas.

The net realizable value was derived from quotes for similar items and recent transactions.

Revenue Recognition

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis