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Item 2. Management’s Discussion and Analysis

2024-08-08 compared with 2024-05-09 · 133 added, 42 removed, 229 unchanged (43% of the section changed)

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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.

together with its subsidiaries (collectively "DXP," "Company," "us," "we," or "our") for the three and six months ended June 30, 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.

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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,

Three Months Ended June 30, Six Months Ended June 30,

2024 2023 (1)

Sales by Business Segment

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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.

There were 127 business days during the six months ended June 30, 2024 and 128 business days during the six months ended June 30, 2023.

CURRENT MARKET CONDITIONS AND OUTLOOK

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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.

For the six months ended June 30, 2024, we had approximately $730.5 million in sales in our Service Centers and Innovative Pumping Solutions segments, an increase of approximately 1.6% compared to the six months ended June 30, 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.

During the six months ended June 30, 2024, $25.0 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.

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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.

For the six months ended June 30, 2024, we had approximately $127.6 million in sales in our Supply Chain Services segment, a decrease of approximately 4.2 percent compared to the six months ended June 30, 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.

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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,

Three Months Ended June 30,

2024 % 2023 %

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Net income $ 16,693 3.7% $ 19,054 4.5%

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 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.

Earnings per share:

$ 1.05 $ 1.11

$ 1.00 $ 1.06

Three Months Ended June 30, 2024 compared to Three Months Ended June 30, 2023

Sales for the three months ended June 30, 2024 increased $17.5 million, or 4.1 percent, to approximately $445.6 million from $428.0 million for the prior year's corresponding period.

The overall increase in sales was the result of an increase in sales in our IPS segment of $25.3 million, offset by a decrease in sales in our SC and SCS segments of $7.3 million and $0.5 million, respectively.

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

Three Months Ended March 31,

Three Months Ended June 30,

2024 2023 (1)

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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.

Sales for the SC segment decreased $7.3 million, or 2.3 percent, for the three months ended June 30, 2024, compared to the prior year's corresponding period.

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

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.

Sales for the IPS segment increased $25.3 million, or 52.7 percent, for the three months ended June 30, 2024, compared to the prior year's corresponding period.

$14.7 million was associated with recent acquisitions in the water and wastewater markets.

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.

Sales for the SCS segment decreased by $0.5 million, or 0.8 percent, for the three months ended June 30, 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.

Gross profit as a percentage of sales for the three months ended June 30, 2024 was 30.9 percent versus 30.8 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 IPS segment.

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.

SG&A for the three months ended June 30, 2024 increased by $6.1 million, or 6.4 percent, to $100.4 million from $94.4 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.

Operating income for the second quarter of 2024 decreased by $0.1 million to $37.4 million, from $37.5 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.

Interest expense for the second quarter of 2024 increased $3.5 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.

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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.

Our effective tax rate from continuing operations was a tax expense of 27.4 percent for the three months ended June 30, 2024, compared to a tax expense of 26.3 percent for the three months ended June 30, 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.

statutory rate for the three months ended June 30, 2024, the effective tax rate was increased by state taxes, foreign taxes, nondeductible expenses, contingent consideration 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.

Six Months Ended June 30, 2024 compared to Six Months Ended June 30, 2023

Six Months Ended June 30,

2024 % 2023 %

Sales $ 858,191 100.0% $ 852,307 100.0%

Cost of sales 596,516 69.5% 595,414 69.9%

Gross profit 261,675 30.5% 256,893 30.1%

Selling, general and administrative expenses 195,192 22.7% 184,014 21.6%

Income from operations 66,483 7.7% 72,879 8.6%

Other income, net

(3,004) (0.4)% (712) (0.1)%

Interest expense 30,928 3.6% 23,384 2.7%

Income before income taxes 38,559 4.5% 50,207 5.9%

Provision for income taxes 10,534 1.2% 13,573 1.6%

$ 28,025 3.3% $ 36,634 4.3%

Earnings per share:

$ 1.75 $ 2.10

$ 1.66 $ 2.01

Sales for the six months ended June 30, 2024 increased $5.9 million, or 0.7 percent, to approximately $858.2 million from $852.3 million for the prior year's corresponding period.

The overall increase in sales was the result of an increase in sales within our IPS of $36.1 million, offset by decreases in sales in our SC and SCS segments of $24.7 million and $5.6 million respectively.

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

Six Months Ended June 30,

2024 2023 (1)

Change Change%

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

Service Centers $ 594,952 $ 619,619 $ (24,667) (4.0) %

Innovative Pumping Solutions 135,592 99,478 36,114 36.3 %

Supply Chain Services 127,647 133,210 (5,563) (4.2) %

Total DXP Sales $ 858,191 $ 852,307 $ 5,884 0.7 %

(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 by $24.7 million, or 4.0 percent for the six months ended June 30, 2024, compared to the prior year's corresponding period.

Sales from acquisitions for the SC segment decreased $8.9 million compared to the corresponding period.

Total sales for the SC segment excluding acquisitions decreased $15.8 million from the prior year's corresponding period.

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

Innovative Pumping Solutions segment .

Sales for the IPS segment increased by $36.1 million, or 36.3 percent for the six months ended June 30, 2024 compared to the prior year's corresponding period.

Sales from acquisitions for the IPS segment increased $17.7 million compared to the corresponding period.

Total sales for the IPS segment excluding acquisitions increased $18.4 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.

Supply Chain Services segment.

Sales for the SCS segment decreased by $5.6 million, or 4.2 percent, for the six months ended June 30, 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 six months ended June 30, 2024 increased by approximately 35 basis points from the prior year's corresponding period.

The increase in the gross profit percentage is primarily the result of an approximate 62 basis point increase in our SC segment, a 131 basis point increase in our SCS segment, and a 322 basis point decrease in the gross profit percentage in our IPS segments.

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

SG&A for the six months ended June 30, 2024 increased by approximately $11.2 million, or 6.1 percent, to $195.2 million from $184.0 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 six months ended June 30, 2024 decreased by $6.4 million or 8.8% to $66.5 million from $72.9 million in the prior year's corresponding period.

This decrease in operating income is primarily related to the aforementioned increase in SG&A.

INTEREST EXPENSE.

Interest expense for the six months ended June 30, 2024 increased $7.5 million compared with the prior year's corresponding period.

Federal Reserve Bank.

INCOME TAXES.

Our effective tax rate from continuing operations was a tax expense of 27.3 percent for the six months ended June 30, 2024, compared to a tax expense of 27.0 percent for the six months ended June 30, 2023.

Compared to the U.S.

statutory rate for the six months ended June 30, 2024, the effective tax rate was increased by state taxes, foreign taxes, nondeductible expenses, contingent consideration 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

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GAAP financial measure (in thousands) :

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

2024 2023 (1)

Service Centers $ 306,516 $ 313,806 $ 594,952 $ 619,619

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Acquisition Sales

23,403 7,265 35,178 26,398

Organic Sales $ 422,153 $ 420,775 $ 823,013 $ 825,909

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GAAP financial measure (in thousands) :

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

2024 2023 2024 2023

Net income attributable to DXP Enterprises, Inc.

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Provision for income tax expense

6,310 6,805 10,534 13,573

Depreciation and amortization

8,127 6,703 15,665 13,485

EBITDA $ 46,514 $ 44,425 $ 85,152 $ 87,076

other non-recurring items (1)

500 — 1,342 —

stock compensation expense 1,212 871 2,076 1,347

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GAAP financial measure (in thousands) :

Three Months Ended March 31,

Net cash provided by operating activities

Three Months Ended June 30, Six Months Ended June 30,

2024 2023 2024 2023

Net cash provided by (used in) operating activities

$ 14,735 $ (2,430) $ 41,724 $ 24,017

purchases of property and equipment (8,825) (1,813) ( 11,719 ) (5,617)

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General Overview

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

As of June 30, 2024, we had available cash of $49.9 million and credit facility availability of $131.4 million.

We have a $135.0 million asset-backed line of credit (the "ABL Revolver"), partially offset by letters of credit of $3.6 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.

We had no borrowings outstanding on our ABL Revolver as of June 30, 2024.

During the six months ended June 30, 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.

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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,

Six Months Ended June 30,

Net Cash Provided by (Used in):

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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.

The Company generated $41.7 million of cash from operating activities during the six months ended June 30, 2024 compared to $24.0 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.

For the six months ended June 30, 2024, net cash used in investing activities was $130.7 million compared to a $14.1 million use of cash during the prior year’s corresponding period.

This $116.6 million increase was primarily driven by acquisition activity during the six months ended June 30, 2024.

Total cash paid for acquisitions, net of cash acquired, was $119.0 million compared to $8.5 million for the six months ended June 30, 2023.

The increase was partially offset by purchases of property and equipment of $11.7 million for the six months ended June 30, 2024 compared to $5.6 million for the six months ended June 30, 2023.

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.

For the six months ended June 30, 2024, net cash used in financing activities was $35.0 million, compared to net cash used in financing activities of $40.2 million during the prior year’s corresponding period.

The increase was primarily due to share repurchases of $24.0 million for the six months ended June 30, 2024 compared to $33.6 million for the six months ended June 30, 2023.

The Company also paid contingent consideration of $4.5 million for the six months ended June 30, 2024 compared to $4.0 million for the six months ended June 30, 2023.

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 (i) 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 (iii) the portion thereof funded with the net proceeds of casualty insurance or condemnation awards in respect of any equipment and real estate which DXP 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 to 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 June 30, 2024, the Company's Fixed Charge Coverage Ratio was 1.39 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 $200 million) as of such day to EBITDA, beginning with the fiscal quarter ending June 30, 2024, is either equal to or less than as indicated in the table below:

Fiscal Quarter Secured Leverage Ratio

June 30, 2024 5.50:1.00

September 30, 2024 5.50:1.00

December 31, 2024 5.50:1.00

March 31, 2025 5.25:1.00

June 30, 2025 5.25:1.00

September 30, 2025 5.25:1.00

December 31, 2025 5.00:1.00

March 31, 2026 5.00:1.00

June 30, 2026 4.75:1.00

September 30, 2026 and thereafter 4.75:1.00

As of June 30, 2024, the Company’s Secured Leverage Ratio was 2.64 to 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.

The Company was in compliance with all financial covenants as of June 30, 2024.

Funding Commitments

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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.

The results of operations for the six months ended June 30, 2024 are not necessarily indicative of results expected for the full fiscal year.

RECENT ACCOUNTING PRONOUNCEMENTS

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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-Q

Item 2. Management’s Discussion and Analysis