What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2024-05-09 compared with 2023-11-09 · 66 added, 133 removed, 205 unchanged (49% of the section changed)

1 unchanged sentence

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.

together with its subsidiaries (collectively "DXP," "Company," "us," "we," or "our") for the three months ended March 31, 2024 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.

21 unchanged sentences

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.

21 unchanged sentences

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,

Three Months Ended March 31,

2024 2023 (1)

17 unchanged sentences

$ 24,095 $ 22,645

(1) Prior period segment disclosures have been recast.

For additional information, please refer to Note 11.

Segment Reporting .

Organic Sales and Acquisition Sales

18 unchanged sentences

We define and calculate free cash flow as net cash (used in) provided by operating activities less net purchases of property and equipment.

Matters Affecting Comparability

There were 63 business days in the three months ended March 31, 2024 and 64 business days in the three months ended March 31, 2023.

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.

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

1 unchanged sentence

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.

For the three months ended March 31, 2024, we had approximately $350.7 million in sales in our Service Centers and Innovative Pumping Solutions segments, a decrease of approximately 1.8% compared to the three months ended March 31, 2023.

Our performance has been strengthened by price increases from our vendors and suppliers.

During the three months ended March 31, 2024, $10.3 million was associated with recent acquisitions in the water and wastewater markets.

We expect to continue to benefit from the increased oil and gas activity throughout the remainder of 2024.

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.

For the three months ended March 31, 2024, we had approximately $62.0 million in sales in our Supply Chain Services segment, a decrease of approximately 7.5 percent compared to the three months ended March 31, 2023 due to some facility closures with some of our customers as well as efficiencies we brought to our new diversified chemical customer that we added last year.

As we move forward and given our increasing demand, we expect our performance to be driven by either the addition of new customers or an increase in spend by our existing customers.

RESULTS OF OPERATIONS

1 unchanged sentence

DXP is organized into three business segments:

Service Centers ("SC"), Innovative Pumping Solutions ("IPS"), and Supply Chain Services ("SCS").

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

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.

2 unchanged sentences

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,

Three Months Ended March 31,

2024 % 2023 %

4 unchanged sentences

Income from operations 29,131 7.1% 35,399 8.3%

Other expense (income), net 1,234 0.3% 1,565 0.4%

Other income, net

(1,968) (0.5)% (469) (0.1)%

Interest expense 15,544 3.8% 11,521 2.7%

2 unchanged sentences

Net income $ 11,332 2.7% $ 17,580 4.1%

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 $ 0.70 $ 1.00

Diluted earnings per share $ 0.67 $ 0.95

Three Months Ended September 30, 2023 compared to Three Months Ended September 30, 2022

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.

Three Months Ended March 31, 2024 compared to Three Months Ended March 31, 2023

Sales for the three months ended March 31, 2024 decreased $11.6 million, or 2.7 percent, to approximately $412.6 million from $424.3 million for the prior year's corresponding period.

Sales from acquisitions for the three months ended March 31, 2024, accounted for $11.8 million .

The overall decrease in sales was the result of a decrease in sales in our SC and SCS segments of $17.4 million and $5.1 million, respectively, partially offset by increases in sales in our IPS segments of $10.8 million.

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 %

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.

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.

Three Months Ended March 31,

2024 2023 (1)

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 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,

Change Change%

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

Sales by Business Segment

Service Centers $ 288,435 $ 305,813 $ (17,378) (5.7) %

2 unchanged sentences

Total DXP Sales $ 412,635 $ 424,267 $ (11,632) (2.7) %

(1) Prior period segment disclosures have been recast.

For additional information, please refer to Note 11.

Segment Reporting .

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.

Sales for the SC segment decreased $17.4 million, or 5.7 percent, for the three months ended March 31, 2024, compared to the prior year's corresponding period.

This sales decrease is primarily the result of the timing of jobs and business mix within the SC segment.

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.

Sales for the IPS segment increased $10.8 million, or 21.0 percent, for the three months ended March 31, 2024, compared to the prior year's corresponding period.

$10.3 million was associated with recent acquisitions in the water and wastewater markets.

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.

Sales for the SCS segment decreased by $5.1 million, or 7.5 percent, for the three months ended three months ended March 31, 2024, 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 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.

Gross profit as a percentage of sales for the three months ended March 31, 2024 was 30.0 percent versus 29.5 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 SCS segments.

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.

SG&A for the three months ended March 31, 2024 increased by $5.1 million, or 5.7 percent, to $94.8 million from $89.6 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.

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.

Operating income for the first quarter of 2024 decreased by $6.3 million to $29.1 million, from $35.4 million in the prior year's corresponding period.

This decrease in operating income was driven by the increase in SG&A during the period.

INTEREST EXPENSE.

Interest expense for the nine months ended September 30, 2023 increased $18.5 million compared with the prior year's corresponding period.

Interest expense for the first quarter of 2024 increased $4.0 million compared to the prior year's corresponding period.

This increase was primarily due to the Company borrowing an additional $125.0 million on its Term Loan during the fourth quarter of 2023 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.

1 unchanged sentence

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.

Our effective tax rate from continuing operations was a tax expense of 27.2 percent for the three months ended March 31, 2024, compared to a tax expense of 27.9 percent for the three months ended March 31, 2023.

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.

statutory rate for the three months ended March 31, 2024, the effective tax rate was increased by state taxes, foreign taxes, nondeductible expenses, earnout payments, 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

4 unchanged sentences

GAAP financial measure (in thousands) :

Three Months Ended September 30, Nine Months Ended September 30,

Three Months Ended March 31,

2024 2023 (1)

5 unchanged sentences

Organic Sales $ 400,860 $ 405,134

(1) Prior period segment disclosures have been recast.

For additional information, please refer to Note 11.

Segment Reporting .

EBITDA, Adjusted EBITDA, EBITDA Margin, and Adjusted EBITDA Margin

6 unchanged sentences

GAAP financial measure (in thousands) :

Three Months Ended September 30, Nine Months Ended September 30,

2023 2022 2023 2022

Three Months Ended March 31,

Net income attributable to DXP Enterprises, Inc.

$ 11,332 $ 17,580

Net loss attributable to non-controlling interest

— ( 885 ) — ( 938 )

Interest expense

15,544 11,521

Provision for income taxes

5,766 5,097 19,339 13,402

Provision for income tax expense

Depreciation and amortization

7,983 7,493 21,468 21,325

EBITDA $ 38,637 $ 42,650

NCI income (loss) before tax (1)

other non-recurring items (1)

551 1,193 551 1,193

stock compensation expense 864 476

3 unchanged sentences

Adjusted EBITDA Margin 9.8 % 10.2 %

(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.

(1) Other non-recurring items includes unique acquisition integration costs and other non-cash, non-recurring costs not related to continuing business operations.

Free Cash Flow

2 unchanged sentences

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

Three Months Ended March 31,

Net cash provided by operating activities

$ 26,989 $ 26,449

4 unchanged sentences

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.

As of March 31, 2024, we had available cash of $139.7 million and credit facility availability of $131.8 million.

We have a $135.0 million asset-backed line of credit (the "ABL Revolver"), partially offset by letters of credit of $3.2 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.

We had no borrowings outstanding on our ABL Revolver as of March 31, 2024.

During the three months ended March 31, 2024, we did not draw down on our ABL Revolver.

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

2 unchanged sentences

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,

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

Three Months Ended March 31,

Net Cash Provided by (Used in):

5 unchanged sentences

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.

The Company generated $27.0 million of cash from operating activities during the three months ended March 31, 2024 compared to $26.4 million of cash generated during the prior year's corresponding 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.

For the three months ended March 31, 2024, net cash used in investing activities was $42.2 million compared to a $3.8 million use of cash during the prior year’s corresponding period.

This $38.4 million increase was primarily driven by acquisition activity during the three months ended March 31, 2024.

Total cash paid for acquisitions, net of cash acquired, was $39.3 million compared to no acquisition activity during the three months ended March 31, 2023.

The increase was partially offset by purchases of property and equipment of $2.9 million for the three months ended March 31, 2024 compared to $3.8 million for the three months ended March 31, 2023.

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.

For the three months ended March 31, 2024, net cash used in financing activities was $18.1 million, compared to net cash used in financing activities of $10.4 million during the prior year’s corresponding period.

The increase was primarily due to share repurchases of $14.8 million for the three months ended March 31, 2024 compared to $9.1 million for the three months ended March 31, 2023.

The Company also paid contingent consideration of $1.0 million for the three months ended March 31, 2024 compared to none for the three months ended March 31, 2023.

Funding Commitments

11 unchanged sentences

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, 2023.

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.

The results of operations for the three months ended March 31, 2024 are not necessarily indicative of results expected for the full fiscal year.

RECENT ACCOUNTING PRONOUNCEMENTS

4 unchanged sentences

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-Q

Item 2. Management’s Discussion and Analysis