DXP ENTERPRISES INC 10-Q

ITEM 1: FINANCIAL STATEMENTS DXP ENTERPRISES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (in thousands, except per share amounts) (unaudited) Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 Sales $ 472,935 $ 419,249 $ 1,331,126 $ 1,271,556 Cost of sales 326,825 293,687 923,341 889,101 Gross profit 146,110 125,562 407,785 382,455 Selling, general and administrative expenses 106,502 89,706 301,694 273,720 Income from operations 39,608 35,856 106,091 108,735 Interest expense 15,716 12,684 46,644 36,068 Other expense (income), net (Note 15) 160 1,234 ( 2,844 ) 522 Income before income taxes 23,732 21,938 62,291 72,145 Provision for income taxes 2,631 5,766 13,165 19,339 Net income 21,101 16,172 49,126 52,806 Preferred stock dividend 23 22 68 67 Net income attributable to common shareholders $ 21,078 $ 16,150 $ 49,058 $ 52,739 Net income $ 21,101 $ 16,172 $ 49,126 $ 52,806 Foreign currency translation adjustments 380 ( 844 ) ( 141 ) ( 87 ) Comprehensive income $ 21,481 $ 15,328 $ 48,985 $ 52,719 Earnings per share (Note 9) : Basic $ 1.34 $ 0.98 $ 3.08 $ 3.08 Diluted $ 1.27 $ 0.93 $ 2.93 $ 2.94 Weighted average common shares outstanding: Basic 15,750 16,516 15,915 17,104 Diluted 16,590 17,356 16,755 17,944 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 3 DXP ENTERPRISES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except share amounts) (unaudited) September 30, 2024 December 31, 2023 ASSETS Current assets: Cash $ 35,000 $ 173,120 Restricted cash 91 91 Accounts receivable, net of allowance of $ 5,316 and $ 5,584 , respectively 337,722 311,171 Inventories 109,787 103,805 Costs and estimated profits in excess of billings 49,707 42,323 Prepaid expenses and other current assets 22,274 18,044 Total current assets 554,581 648,554 Property and equipment, net 73,050 61,618 Goodwill 448,103 343,991 Other intangible assets, net 89,356 63,895 Operating lease right of use assets, net 48,498 48,729 Other long-term assets 17,857 10,649 Total assets $ 1,231,445 $ 1,177,436 LIABILITIES AND EQUITY Current liabilities: Current maturities of debt $ 5,500 $ 5,500 Trade accounts payable 106,802 96,469 Accrued wages and benefits 41,230 36,238 Customer advances 12,656 12,160 Billings in excess of costs and estimated profits 11,911 9,506 Short-term operating lease liabilities 14,928 15,438 Other current liabilities 56,336 48,854 Total current liabilities 249,363 224,165 Long-term debt, net of unamortized debt issuance costs and discounts 519,250 520,697 Long-term operating lease liabilities 34,922 34,336 Other long-term liabilities 25,542 17,359 Total long-term liabilities 579,714 572,392 Total liabilities 829,077 796,557 Commitments and Contingencies ( Note 10 ) Shareholders' equity: Series A preferred stock, $ 1.00 par value; 1,000,000 shares authorized 1 1 Series B preferred stock, $ 1.00 par value; 1,000,000 shares authorized 15 15 Common stock, $ 0.01 par value, 100,000,000 shares authorized; 15,694,883 and 16,177,237 outstanding, respectively 345 345 Additional paid-in capital 218,062 216,482 Retained earnings 368,329 319,271 Accumulated other comprehensive loss ( 31,381 ) ( 31,240 ) Treasury stock, at cost 4,707,773 and 4,141,989 shares, respectively ( 153,003 ) ( 123,995 ) Total DXP Enterprises, Inc. equity 402,368 380,879 Total liabilities and equity $ 1,231,445 $ 1,177,436 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 4 DXP ENTERPRISES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited) Nine Months Ended September 30, 2024 2023 CASH FLOWS FROM OPERATING ACTIVITIES: Net income 49,126 52,806 Reconciliation of net income to net cash provided by operating activities: Depreciation 6,821 6,262 Amortization of intangibles and fixed assets 17,564 15,206 (Recovery of) provision for credit losses ( 783 ) ( 277 ) Payment of contingent consideration liability in excess of acquisition-date fair value ( 108 ) ( 160 ) Fair value adjustment on contingent consideration 380 1,502 Amortization of debt issuance costs 2,678 2,176 Restricted stock compensation expense 3,398 2,211 Deferred income taxes ( 10,376 ) ( 10,178 ) Changes in operating assets and liabilities, net of effects of businesses acquired: Accounts receivable, net ( 12,325 ) 2,295 Costs and estimated profits in excess of billings ( 7,392 ) ( 23,629 ) Accounts payable and accrued expenses 16,622 12,868 Prepaid expenses and other assets 2,848 16,583 Inventories 1,130 ( 3,397 ) Billings in excess of costs and estimated profits 2,410 ( 3,232 ) Other long-term liabilities ( 1,925 ) ( 7,261 ) Net cash provided by operating activities $ 70,068 $ 63,775 CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment ( 15,673 ) ( 7,103 ) Acquisition of businesses, net of cash acquired ( 149,440 ) ( 8,848 ) Net cash used in investing activities $ ( 165,113 ) $ ( 15,951 ) CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings on asset-backed credit facility 6,000 7,870 Repayments on asset-backed credit facility ( 6,000 ) ( 7,870 ) Repayments under term loan facility ( 4,125 ) ( 3,276 ) Payment for acquisition contingent consideration liability ( 4,580 ) ( 5,090 ) Preferred stock dividends paid ( 68 ) ( 67 ) Shares repurchased held in treasury ( 28,783 ) ( 56,215 ) Payment for employee taxes withheld from stock awards ( 1,818 ) ( 464 ) Principal payments on finance leases ( 3,010 ) ( 1,632 ) Net cash used in financing activities $ ( 42,384 ) $ ( 66,744 ) Effect of foreign currency on cash ( 691 ) 70 Net change in cash and restricted cash ( 138,120 ) ( 18,850 ) Cash and restricted cash at beginning of period 173,211 46,117 Cash and restricted cash at end of period $ 35,091 $ 27,267 Supplemental cash flow information ( Note 14 ) The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 5 DXP ENTERPRISES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (in thousands) (unaudited) Series A preferred stock Series B preferred stock Common stock Paid-in capital Retained earnings Treasury stock Accum other comp loss Total equity Balance at December 31, 2023 $ 1 $ 15 $ 345 $ 216,482 $ 319,271 $ ( 123,995 ) $ ( 31,240 ) $ 380,879 Preferred dividends paid — — — — ( 23 ) — — ( 23 ) Compensation expense for restricted stock — — — 864 — — — 864 Tax related items for share based awards — — — ( 54 ) — — — ( 54 ) Currency translation adjustment — — — — — — ( 614 ) ( 614 ) Repurchases of shares — — — — — ( 16,920 ) — ( 16,920 ) Net income — — — — 11,332 — — 11,332 Balance at March 31, 2024 $ 1 $ 15 $ 345 $ 217,292 $ 330,580 $ ( 140,915 ) $ ( 31,854 ) $ 375,464 Preferred dividends paid — — — — ( 22 ) — — ( 22 ) Compensation expense for restricted stock — — — 1,212 — — — 1,212 Tax related items for share based awards — — — ( 1,701 ) — — — ( 1,701 ) Currency translation adjustment — — — — — — 93 93 Repurchases of shares — — — — — ( 7,058 ) — ( 7,058 ) Net income — — — — 16,693 — — 16,693 Balance at June 30, 2024 $ 1 $ 15 $ 345 $ 216,803 $ 347,251 $ ( 147,973 ) $ ( 31,761 ) $ 384,681 Preferred dividends paid — — — — ( 23 ) — — ( 23 ) Compensation expense for restricted stock — — — 1,322 — — — 1,322 Tax related items for share based awards — — — ( 63 ) — — — ( 63 ) Currency translation adjustment — — — — — — 380 380 Repurchases of shares — — — — — ( 5,030 ) — ( 5,030 ) Net income — — — — 21,101 — — 21,101 Balance at September 30, 2024 $ 1 $ 15 $ 345 $ 218,062 $ 368,329 $ ( 153,003 ) $ ( 31,381 ) $ 402,368 6 Series A preferred stock Series B preferred stock Common stock Paid-in capital Retained earnings Treasury stock Accum other comp loss Total equity Balance at December 31, 2022 $ 1 $ 15 $ 345 $ 213,937 $ 250,549 $ ( 67,780 ) $ ( 31,675 ) $ 365,392 Preferred dividends paid — — — — ( 23 ) — — ( 23 ) Compensation expense for restricted stock — — — 476 — — — 476 Tax related items for share based awards — — — ( 104 ) — — — ( 104 ) Currency translation adjustment — — — — — — 98 98 Repurchases of shares — — — — — ( 9,135 ) — ( 9,135 ) Net income — — — — 17,580 — — 17,580 Balance at March 31, 2023 $ 1 $ 15 $ 345 $ 214,309 $ 268,106 $ ( 76,915 ) $ ( 31,577 ) $ 374,284 Preferred dividends paid — — — — ( 22 ) — — ( 22 ) Restricted stock compensation expense — — — 871 — — — 871 Tax related items for share based awards — — — ( 328 ) — — — ( 328 ) Currency translation adjustment — — — — — — 659 659 Repurchases of shares — — — — — ( 25,053 ) — ( 25,053 ) Net income — — — — 19,054 — — 19,054 Balance at June 30, 2023 $ 1 $ 15 $ 345 $ 214,852 $ 287,138 $ ( 101,968 ) $ ( 30,918 ) $ 369,465 Preferred dividends paid — — — — ( 22 ) — — ( 22 ) Restricted stock compensation expense — — — 864 — — — 864 Tax related items for share based awards — — — ( 32 ) — — — ( 32 ) Currency translation adjustment — — — — — — ( 844 ) ( 844 ) Repurchases of shares — — — — — ( 22,027 ) — ( 22,027 ) Net income — — — — 16,172 — — 16,172 Balance at September 30, 2023 $ 1 $ 15 $ 345 $ 215,684 $ 303,288 $ ( 123,995 ) $ ( 31,762 ) $ 363,576 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements 7 DXP ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - THE COMPANY DXP Enterprises, Inc. together with its subsidiaries (collectively "DXP," the "Company," "us," "we," or "our") was incorporated in Texas on July 26, 1996. DXP Enterprises, Inc. and its subsidiaries are engaged in the business of distributing maintenance, repair and operating ("MRO") products and services to a variety of end markets and business-to-business customers. Additionally, DXP provides integrated, custom pump skid packages, pump remanufacturing and manufactures branded private label pumps to energy and broad industrial customers. The Company is currently organized into three business segments: Service Centers ("SC"), Innovative Pumping Solutions ("IPS"), and Supply Chain Services ("SCS"). See Note 11 - Segment Reporting for discussion of the business segments. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING AND BUSINESS POLICIES Basis of Presentation The Company's financial statements are prepared in accordance with generally accepted accounting principles in the United States of America ("U.S. GAAP"). For interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the U.S. Securities and Exchange Commission ("SEC") not all disclosures normally required in annual consolidated financial statements prepared in accordance with U.S. GAAP are required. The unaudited condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements for the year ended December 31, 2023 that are included in our annual report on Form 10-K filed with the SEC on March 11, 2024 (“Annual Report”). Certain reclassifications were made to the prior year’s consolidated financial statements to conform to the current year presentation. Such reclassifications did not have a material effect on our consolidated statements of operations and comprehensive income, balance sheets, cash flows or equity. The results of operations for the nine months ended September 30, 2024 are not necessarily indicative of results expected for the full fiscal year. In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all normal recurring adjustments necessary for the fair statement of the Company's financial position, results of operations and cash flows for the interim periods presented. All intercompany accounts and transactions have been eliminated in consolidation. NOTE 3 - RECENT ACCOUNTING PRONOUNCEMENTS The Company considers the applicability and impact of all Accounting Standard Updates (“ASUs”) issued by the Financial Accounting Standards Board (“FASB”). ASUs not listed within this Quarterly Report on Form 10-Q were assessed and determined as either not applicable or not material to the Company’s consolidated financial position or result of operations. Recent Accounting Standards or Updates Not Yet Effective Segment Reporting In November 2023, the FASB issued an accounting standard update that expands the disclosure requirements for reportable segments, primarily through enhanced disclosures around significant segment expenses. The accounting standard update will be effective for our fiscal 2024 Form 10-K on a retrospective basis, and early adoption is permitted. We are currently evaluating the impact of this accounting standard update on our segment disclosures. Improvements on Income Tax Disclosures In December 2023, the FASB issued an accounting standard update expanding the requirements for disclosure of disaggregated information about the effective tax rate reconciliation and income taxes paid. The accounting standard update will be effective for our fiscal 2025 Form 10-K. We are currently evaluating the impact of this accounting standard update on our income tax disclosures. 8 NOTE 4 - FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES Our acquisitions may include contingent consideration as part of the purchase price. The fair value of the contingent consideration is estimated as of the acquisition date based on the present value of the contingent payments to be made using a weighted probability of possible payments. The unobservable inputs used in the determination of the fair value of the contingent consideration include management's assumptions about the likelihood of payment based on the established benchmarks, discount rates, and an internal rate of return analysis. The fair value measurement includes inputs that are Level 3 inputs as they are not observable in the market. Should actual results increase or decrease as compared to the assumptions used in our analysis, the fair value of the contingent consideration obligations will increase or decrease, up to the contracted limit, as applicable. Changes in the fair value of the contingent consideration are measured each reporting period and reflected in our results of operations. During the nine months ended September 30, 2024, we recorded $ 11.3 million in other current and other long-term liabilities for contingent consideration associated with the recent acquisitions. The following table provides a reconciliation of the beginning and ending balances and gains or losses recognized during the nine months ended September 30, 2024 ( in thousands ): Contingent Consideration *Beginning balance at December 31, 2023 $ 8,753 Acquisitions ( Note 12 ) 11,306 Settlements ( 4,688 ) Total remeasurement adjustments: Changes in fair value recorded in other expense (income), net 380 *Ending Balance at September 30, 2024 $ 15,751 *Amounts included in other current liabilities were $ 7.5 million and $ 5.4 million for the periods ending September 30, 2024 and December 31, 2023, respectively. Amounts included in other long-term liabilities were $ 8.3 million and $ 3.4 million for the periods ending September 30, 2024 and December 31, 2023, respectively. Sensitivity to Changes in Significant Unobservable Inputs The significant Level 3 unobservable inputs used in the fair value measurement of contingent consideration related to the acquisitions are annualized EBITDA forecasts developed by the Company's management and the probability of achievement of those EBITDA results. The discount rate used in the calculations was 9.6 percent. Changes in our unobservable inputs in isolation would result in a change to our fair value measurement. As of September 30, 2024, the maximum amount of contingent consideration payable under these arrangements is $ 18.2 million over three years . Other financial instruments not measured at fair value on the Company's unaudited condensed consolidated balance sheets at September 30, 2024 and December 31, 2023, but which require disclosure of their fair values include: cash, restricted cash, accounts receivable, trade accounts payable and accrued expenses. The Company believes that the estimated fair value of such instruments at September 30, 2024 and December 31, 2023 approximates their carrying value as reported on the unaudited condensed consolidated balance sheets due to the relative short maturity of these instruments. See Note 8 - Long-term Debt for fair value disclosures on our asset-backed line of credit and term loan debt under our syndicated credit agreement facilities. 9 NOTE 5 – INVENTORIES Inventories are made up of equipment purchased for resale, and materials utilized in the fabrication of industrial and wastewater equipment stated at lower of cost and net realizable value, primarily determined using the weighted average cost method. The Company reviews inventory and records provisions for the difference between cost and net realizable value arising from excess and obsolete items on hand based upon the aging of the inventories, market trends, and continued demand. The carrying values of inventories are as follows ( in thousands ): September 30, 2024 December 31, 2023 Finished goods $ 95,432 $ 94,031 Work in process 14,355 9,774 Inventories $ 109,787 $ 103,805 NOTE 6 – CONTRACT ASSETS AND LIABILITIES Under our customized pump production and water and wastewater project contracts, amounts are billed as work progresses in accordance with agreed-upon contractual terms, upon various measures of performance, including achievement of certain milestones, completion of specified units, or completion of a contract. Generally, billing occurs subsequent to revenue recognition, resulting in contract assets presented as "Costs and estimated profits in excess of billings". However, we sometimes receive advances or deposits from our customers before revenue is recognized, resulting in contract liabilities that are presented as "Billings in excess of costs and estimated profits" on our unaudited condensed consolidated balance sheets. Costs and estimated profits on uncompleted contracts and related amounts billed were as follows ( in thousands ): September 30, 2024 December 31, 2023 Costs incurred on uncompleted contracts $ 119,971 $ 92,363 Estimated profits, thereon 52,241 37,379 Total costs and estimated profits on uncompleted contracts 172,212 129,742 Less: billings to date 134,418 96,928 Net $ 37,794 $ 32,814 Such amounts were included in the accompanying unaudited condensed consolidated balance sheets for September 30, 2024 and December 31, 2023 under the following captions ( in thousands ): September 30, 2024 December 31, 2023 Costs and estimated profits in excess of billings $ 49,707 $ 42,323 Billings in excess of costs and estimated profits ( 11,911 ) ( 9,506 ) Translation adjustment ( 2 ) ( 3 ) Net $ 37,794 $ 32,814 During the nine months ended September 30, 2024 and 2023, $ 5.3 million and $ 10.0 million of the balances that were previously classified as contract liabilities at the beginning of the period were recognized in revenues, respectively. Contract asset and liability changes were primarily due to normal activity and timing differences between our performance and customer payments. NOTE 7 – INCOME TAXES Income tax expense during interim periods is based on our estimated annual effective income tax rate plus any discrete items, which are recorded in the period in which they occur. 10 Our effective tax rate from continuing operations was a tax expense of 11.1 percent for the three months ended September 30, 2024 compared to a tax expense of 26.3 percent for the three months ended September 30, 2023. Compared to the U.S. statutory rate for the three months ended September 30, 2024, the effective tax rate was decreased by research and development tax credits and other tax credits and partially offset by state taxes, foreign taxes, nondeductible expenses, contingent consideration payments, and uncertain tax positions recorded for research and development tax credits. Our effective tax rate from continuing operations was a tax expense of 21.1 percent for the nine months ended September 30, 2024, compared to a tax expense of 26.8 percent for the nine months ended September 30, 2023. Compared to the U.S. statutory rate for the nine months ended September 30, 2024, the effective tax rate was decreased by research and development tax credits and other tax credits and partially offset by state taxes, foreign taxes, nondeductible expenses, contingent consideration payments, and uncertain tax positions recorded for research and development tax credits. To the extent penalties and interest would be assessed on any underpayment of income tax, such accrued amounts would be classified as a component of income tax provision (benefit) in the financial statements consistent with the Company’s policy. The Organization of Economic Cooperation and Development (OECD) continues to release additional guidance, including administrative guidance on how Pillar Two rules should be interpreted and applied by jurisdictions as they adopt Pillar Two. A number of countries have utilized the administrative guidance as a starting point for legislation that went into effect January 1, 2024. As of September 30, 2024, DXP anticipates the impact of Pillar Two to be immaterial to the Company based on current legislation that has been enacted to date. NOTE 8 – LONG-TERM DEBT The components of the Company's long-term debt consisted of the following ( in thousands ): September 30, 2024 December 31, 2023 ABL Revolver $ — $ — Senior Secured Term Loan B due October 13, 2030 (1) 544,500 548,625 Total debt 544,500 548,625 Less: current maturities ( 5,500 ) ( 5,500 ) Total long-term debt $ 539,000 $ 543,125 Unamortized discount and debt issuance costs 19,750 22,428 Long-term debt, net of unamortized discount and debt issuance costs $ 519,250 $ 520,697 (1) The fair value of the Term Loan B due October 13, 2030 was $ 547.9 million and $ 554.1 million as of September 30, 2024 and December 31, 2023, respectively. Senior Secured Term Loan B: On October 13, 2023, the Company entered into an amendment on its existing Senior Secured Term Loan B (the "Term Loan Amendment"), which provides for, among other things, an additional $ 125 million in new incremental commitments. The Term Loan Amendment refinanced the existing Senior Term Loan B and replaced it with a new Senior Secured Term Loan B with total borrowings of $ 550.0 million. The new Senior Secured Term Loan B amortizes in equal quarterly installments of 0.25 %, with the remaining balance being payable on October 13, 2030, when the facility matures. Deferred financing costs associated with the Term Loan Amendment were $ 11.7 million, which is being amortized to Interest expense using the interest method over the remaining maturity of the Senior Secured Term Loan B. The interest rate for the Senior Secured Term Loan B was 10.16 % and 10.44 % as of September 30, 2024 and December 31, 2023, respectively. In connection with the Term Loan Amendment the Company expensed third-party fees of $ 0.8 million and recognized a $ 1.2 million loss on debt extinguishment, which were included in Interest expense during 2023. Quarterly interest payments accrue on outstanding borrowings under the new Senior Secured Term Loan B at a rate equal to Term SOFR (with a floor of 1.00 %) plus 4.75 %, or base rate plus 3.75 %. The new Senior Secured Term Loan B is guaranteed by each of the Company’s direct and indirect material wholly owned subsidiaries, other than any of the Company’s Canadian subsidiaries and certain other excluded subsidiaries. 11 As of September 30, 2024 there was $ 544.5 million outstanding under the Senior Secured Term Loan B. The Company was in compliance with all financial covenants as of September 30, 2024. 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"). Subject to the conditions set forth in the ABL Credit Agreement, the ABL Revolver may be increased in increments of $ 10.0 million up to an aggregate of $ 50.0 million. The ABL Revolver matures on July 19, 2027. Interest accrues on outstanding borrowings at a rate equal to SOFR 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 payable on the unused portion of the facility range from 0.25 % to 0.375 % per annum. At September 30, 2024 the unused line fee was 0.375 % and there were no amounts outstanding under the ABL Revolver. As of September 30, 2024, the borrowing availability under our credit facility was $ 131.6 million compared to $ 132.1 million at December 31, 2023, primarily as a result of outstanding letters of credit. The interest rate for the ABL Revolver was 8.25 % and 8.75 % as of September 30, 2024 and December 31, 2023, respectively. As of September 30, 2024, the maturities of long-term debt for the next five years and thereafter were as follows ( in thousands ): Amount 2024 $ 1,375 2025 5,500 2026 5,500 2027 5,500 2028 5,500 Thereafter 521,125 Total $ 544,500 NOTE 9 - EARNINGS PER SHARE Basic earnings per share is computed based on weighted average shares outstanding and excludes dilutive securities. Diluted earnings per share is computed including the impacts of all potentially dilutive securities. 12 The following table sets forth the computation of basic and diluted earnings per share for the periods indicated ( in thousands, except per share data ): Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 Basic earnings per share: Weighted average shares outstanding 15,750 16,516 15,915 17,104 Net income attributable to DXP Enterprises, Inc. $ 21,101 $ 16,172 $ 49,126 $ 52,806 Convertible preferred stock dividend 23 22 68 67 Net income attributable to common shareholders $ 21,078 $ 16,150 $ 49,058 $ 52,739 Per share amount $ 1.34 $ 0.98 $ 3.08 $ 3.08 Diluted earnings per share: Weighted average shares outstanding 15,750 16,516 15,915 17,104 Assumed conversion of convertible preferred stock 840 840 840 840 Total dilutive shares 16,590 17,356 16,755 17,944 Net income attributable to common shareholders $ 21,078 $ 16,150 $ 49,058 $ 52,739 Convertible preferred stock dividend 23 22 68 67 Net income attributable to DXP Enterprises, Inc. $ 21,101 $ 16,172 $ 49,126 $ 52,806 Per share amount $ 1.27 $ 0.93 $ 2.93 $ 2.94 NOTE 10 - COMMITMENTS AND CONTINGENCIES From time to time, the Company is a party to various legal proceedings arising in the ordinary course of business. While DXP is unable to predict the outcome or estimate the financial impact of these disputes, it believes that the ultimate resolution will not have, either individually or in the aggregate, a material adverse effect on DXP's consolidated financial position, cash flows, or results of operations. NOTE 11 - SEGMENT REPORTING The Company's reportable business segments are: Service Centers ("SC"), Innovative Pumping Solutions ("IPS"), and Supply Chain Services ("SCS"). The Service Centers segment is engaged in providing MRO products, equipment and integrated services, including logistics capabilities, to business-to-business customers. The Service Centers segment provides a wide range of MRO products in the rotating equipment, bearing, power transmission, hose, fluid power, metal working, industrial supply, safety products and safety services categories. The Innovative Pumping Solutions segment fabricates and assembles custom-made pump packages, re-manufactures pumps, manufactures branded private label pumps and provides products and process lines for the water and wastewater treatment industries. The Supply Chain Services segment provides a wide range of MRO products and manages all or part of a customer's supply chain, including warehouse and inventory management. Sales are shown net of inter-segment eliminations. Our chief operating decision maker ("CODM") is the Chief Executive Officer. The Company's CODM directs the allocation of resources to operating or business segments based on revenue and operating income of each respective segment. As a part of the Company's annual business planning, the CODM reviews our reportable segment composition and financial performance. As a result of this review, on January 1st, 2024, we moved certain branch locations previously reported under our IPS segment to our SC segment. Prior period segment disclosures have been recast. 13 The following table sets out financial information related to the Company's segments excluding amortization ( in thousands ): Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 Sales Service Centers $ 316,831 $ 294,459 $ 911,783 $ 914,078 Innovative Pumping Solutions 89,825 58,962 225,417 158,440 Supply Chain Services 66,279 65,828 193,926 199,038 Total Sales $ 472,935 $ 419,249 $ 1,331,126 $ 1,271,556 Operating Income Service Centers $ 46,154 $ 41,912 $ 130,329 $ 134,549 Innovative Pumping Solutions 18,207 10,599 38,543 26,555 Supply Chain Services 5,568 5,589 16,653 16,519 Total Segments Operating Income $ 69,929 $ 58,100 $ 185,525 $ 177,623 The following table presents reconciliations of income from operations for reportable segments to the consolidated income before taxes ( in thousands ): Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 Income from operations for reportable segments $ 69,929 $ 58,100 $ 185,525 $ 177,623 Adjustment for: Amortization of intangible assets 5,245 5,866 14,333 15,206 Corporate expenses 25,076 16,378 65,101 53,682 Income from operations $ 39,608 $ 35,856 106,091 108,735 Interest expense 15,716 12,684 46,644 36,068 Other expense (income), net 160 1,234 ( 2,844 ) 522 Income before income taxes $ 23,732 $ 21,938 $ 62,291 $ 72,145 NOTE 12 - BUSINESS ACQUISITIONS The Company enters into strategic acquisitions in an effort to better service existing customers and to attract new customers. The Company makes an initial allocation of the purchase price at the date of acquisition based upon its estimate of the fair value of the acquired assets and assumed liabilities. Subsequent to the acquisition, and not later than one year from the acquisition date, we will record any material adjustments to the initial estimate in the reporting period in which the adjustment amounts are determined based on facts and circumstances that existed as of the acquisition date, as applicable. A summary of the allocation of the total purchase consideration of our five business acquisitions during the nine months ended September 30, 2024 is presented as follows ( in thousands ): Purchase Price Consideration Cash payments $ 153,763 Future consideration 11,306 Total purchase price consideration 165,069 Net Tangible Assets Acquired 20,914 Purchased Intangible Assets 39,801 Goodwill $ 104,354 14 The total purchase consideration related to our acquisitions during the period consisted primarily of cash consideration. The total cash and cash equivalents acquired for these acquisitions was $ 4.5 million. Transaction-related costs included within selling, general, and administrative expenses in the consolidated statements of operations was $ 1.2 million for the nine months ended September 30, 2024. The goodwill total of approximately $ 104.4 million is attributable primarily to expected synergies and the assembled workforce of each entity and is generally not deductible for tax purposes. Goodwill assigned to our SC and IPS segments was $ 63.3 million and $ 41.0 million, respectively. The operating results of these acquisitions are included within the Company's consolidated statements of operations from the date of acquisition, which were not material for the three and nine months ended September 30, 2024. Pro forma results of operations information have not been presented, as the effects of the acquisitions were not material to our financial results. Of the $ 39.8 million of acquired intangible assets, $ 2.2 million was provisionally assigned to non-compete agreements that are subject to amortization over 5 years and $ 3.7 million was assigned to trade name and will be amortized over a period of 10 years. In addition, $ 33.9 million was assigned to customer relationships and will be amortized over a period of 8 years. NOTE 13 - COMMON STOCK AND SHARE REPURCHASES The following is a summary of changes in outstanding common stock for the period indicated (in thousands ): Common stock outstanding at December 31, 2022 17,691 Common stock issued related to stock compensation expense (1) 193 Total number of shares purchased ( 1,707 ) Common stock outstanding at December 31, 2023 16,177 Common stock issued related to stock compensation expense (1) 84 Total number of shares purchased ( 566 ) Common stock outstanding at September 30, 2024 15,695 (1) The number of common stock issued represents issuance net of tax withholding. On December 15, 2022, the Company announced a new Share Repurchase Program pursuant to which it may repurchase up to $ 85.0 million worth, or 2.8 million shares, of the Company's outstanding common stock over the next 24 months from the date of the announcement. The Company completed the program in August 2024. On August 28, 2024, the Company announced a new Share Repurchase Program pursuant to which we may repurchase up to $ 85.0 million worth, or 2.5 million shares of the Company's outstanding common stock over the next 24 months Total consideration paid to repurchase the shares was recorded in shareholders’ equity as treasury stock. Three Months Ended September 30, Nine Months Ended September 30, (in thousands, except per share data) 2024 2023 2024 2023 Total number of shares purchased 100 618 566 1,707 Amount paid $ 4,985 $ 21,508 $ 28,783 $ 54,721 Average price paid per share $ 49.85 $ 34.79 $ 50.87 $ 32.06 15 NOTE 14 - SUPPLEMENTAL CASH FLOW INFORMATION Nine Months Ended September 30, (in thousands) 2024 2023 Supplemental disclosures of cash flow information: Cash paid for interest $ 43,966 $ 33,892 Cash paid for income taxes 17,911 20,298 Cash paid for finance lease liability 3,010 1,632 Non-cash investing and financing activities: Treasury shares repurchase accruals $ 225 $ 519 NOTE 15 - OTHER EXPENSE AND INCOME, NET The components of other expense (income), net were as followed: Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2024 2023 2024 2023 Interest income ( 422 ) ( 202 ) ( 3,487 ) ( 1,053 ) Change in fair value of contingent consideration 685 663 380 1,502 Other, net ( 103 ) 773 263 73 Other expense (income), net 160 1,234 ( 2,844 ) 522 NOTE 16 - SUBSEQUENT EVENT On October 3, 2024, the Company entered into an amendment (the “Third Term Loan Amendment”) on its existing Senior Secured Term Loan B, repricing and borrowing an incremental $ 105 million that was added to the existing Senior Secured Term Loan B. Including the new borrowings, the Company will have $ 649.5 million in Senior Secured Term Loan B borrowings. The new Senior Secured Term Loan B borrowings mature on October 13, 2030, and are priced at Term SOFR plus an applicable margin of 3.75 percent. On November 1, 2024, the Company completed the acquisitions of Burt Gurney & Associates and MaxVac Inc. DXP funded the acquisitions with cash on the balance sheet. 16