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 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. 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 March 11, 2024. 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. 15 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 March 31, 2024 2023 (1) Sales by Business Segment Service Centers $ 288,435 $ 305,813 Innovative Pumping Solutions 62,216 51,411 Supply Chain Services 61,984 67,043 Total DXP Sales $ 412,635 $ 424,267 Acquisition Sales 11,775 19,133 Organic Sales $ 400,860 $ 405,134 Business Days 63 64 Sales per Business Day $ 6,550 $ 6,629 Organic Sales per Business Day $ 6,363 $ 6,330 Gross Profit $ 123,882 $ 125,041 Gross Profit Margin 30.0 % 29.5 % EBITDA $ 38,637 $ 42,650 EBITDA Margin 9.4 % 10.1 % Adjusted EBITDA $ 40,343 $ 43,126 Adjusted EBITDA Margin 9.8 % 10.2 % Free Cash Flow $ 24,095 $ 22,645 (1) Prior period segment disclosures have been recast. For additional information, please refer to Note 11. Segment Reporting . 16 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. 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. 17 CURRENT MARKET CONDITIONS AND OUTLOOK 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 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 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. 18 RESULTS OF OPERATIONS (in thousands, except percentages and per share data) DXP is organized into three business segments: 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. 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 March 31, 2024 % 2023 % Sales $ 412,635 100.0% $ 424,267 100.0% Cost of sales 288,753 70.0% 299,226 70.5% Gross profit 123,882 30.0% 125,041 29.5% Selling, general and administrative expenses 94,751 23.0% 89,642 21.1% Income from operations 29,131 7.1% 35,399 8.3% Other income, net (1,968) (0.5)% (469) (0.1)% Interest expense 15,544 3.8% 11,521 2.7% Income before income taxes 15,555 3.8% 24,347 5.7% Provision for income tax expense 4,223 1.0% 6,767 1.6% Net income $ 11,332 2.7% $ 17,580 4.1% Basic earnings per share $ 0.70 $ 1.00 Diluted earnings per share $ 0.67 $ 0.95 Three Months Ended March 31, 2024 compared to Three Months Ended March 31, 2023 SALES. 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 March 31, 2024 2023 (1) Change Change% Sales by Business Segment Service Centers $ 288,435 $ 305,813 $ (17,378) (5.7) % Innovative Pumping Solutions 62,216 51,411 10,805 21.0 % Supply Chain Services 61,984 67,043 (5,059) (7.5) % 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 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 $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. 19 Supply Chain Services segment. 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 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 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 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 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. Federal Reserve Bank. INCOME TAXES. 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 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. 20 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 March 31, 2024 2023 (1) Service Centers $ 288,435 $ 305,813 Innovative Pumping Solutions 62,216 51,411 Supply Chain Services 61,984 67,043 Total DXP Sales $ 412,635 $ 424,267 Acquisition Sales 11,775 19,133 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 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 March 31, 2024 2023 Net income attributable to DXP Enterprises, Inc. $ 11,332 $ 17,580 Plus: Interest expense 15,544 11,521 Plus: Provision for income tax expense 4,223 6,767 Plus: Depreciation and amortization 7,538 6,782 EBITDA $ 38,637 $ 42,650 Plus: other non-recurring items (1) 842 — Plus: stock compensation expense 864 476 Adjusted EBITDA $ 40,343 $ 43,126 Operating Income Margin 7.1 % 8.3 % EBITDA Margin 9.4 % 10.1 % Adjusted EBITDA Margin 9.8 % 10.2 % (1) Other non-recurring items includes unique acquisition integration costs and other non-cash, non-recurring costs not related to continuing business operations. 21 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 March 31, 2024 2023 Net cash provided by operating activities $ 26,989 $ 26,449 Less: purchases of property and equipment (2,894) (3,804) Free Cash Flow $ 24,095 $ 22,645 LIQUIDITY AND CAPITAL RESOURCES General Overview 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 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. 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 provided by and used in operating activities, investing activities and financing activities for the periods presented (in thousands) : Three Months Ended March 31, 2024 2023 Net Cash Provided by (Used in): Operating Activities $ 26,989 $ 26,449 Investing Activities (42,155) (3,804) Financing Activities (18,146) (10,354) Effect of Foreign Currency (111) (35) Net Change in Cash $ (33,423) $ 12,256 Operating Activities 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 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. 22 Financing Activities 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 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, 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 March 11, 2024. 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 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, 2023. Our exposures to market risk have not changed materially since December 31, 2023. 23