What changed in this filing

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Item 7. Management’s Discussion and Analysis

2025-03-10 compared with 2024-03-11 · 97 added, 51 removed, 349 unchanged (30% of the section changed)

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

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

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

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

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(1) From Baker Hughes’ Worldwide Rig Counts - Current Data

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

The continued disruption in economic markets due to inflation, changing interest rates, tariffs, trade disputes, business interruptions due to natural disasters and changes in weather patterns, employee shortages, and supply chain issues, all pose challenges which may adversely affect our future performance.

The Company continues to execute various strategies previously implemented to help mitigate the impact of these economic disruptors.

Sales for the year ended December 31, 2024 increased $123.4 million, or 7.4%, to approximately $1.8 billion from $1.7 billion for the prior corresponding period.

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

Customer demand was generally healthy throughout fiscal 2024, resulting in industry expected volume growth, complemented by additional pricing actions taken by the Company's vendors after strong pricing action in 2022 and 2023, which ultimately, gets passed on to customers.

As such, some of the 2024 sales increase is the result of increases in price with increases in volume as well as the contribution from acquisitions and the related sales of rotating equipment and air compressors.

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

However, the Company cannot reasonably estimate whether these strategies will help mitigate the impact of these economic disruptors in the future.

The Company’s consolidated financial statements reflect estimates and assumptions made by management that affect the reported amounts of assets and liabilities and related disclosures as of the date of the condensed consolidated financial statements.

The Company considered the impact of economic trends on the assumptions and estimates used in preparing the consolidated financial statements.

In the opinion of management, all material adjustments necessary for a fair presentation of the Company’s financial results for the year have been made.

These adjustments are of a normal recurring nature but are complicated by the continued uncertainty surrounding these macro economic trends.

The severity, magnitude and duration of certain economic trends continue to be uncertain and are difficult to predict.

Therefore, our accounting estimates and assumptions may change over time in response to economic trends and may change materially in future periods.

The extent to which changing interest rates, inflation and other economic trends will continue to impact the Company’s business, financial condition and results of operations is uncertain.

Therefore, we cannot reasonably estimate the full future impacts of these matters at this time.

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

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

With our strong backlog and improved market environment, we expect to continue to see growth in 2025.

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

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

Assuming a positive general macroeconomic environment and continued supportive environments in our end markets, we expect fiscal 2025 growth to be comparable to 2024 growth metrics with the continued execution of acquisition activity.

We expect our interest expense in 2025 will be relatively higher than the amounts incurred in 2024 due to our refinancing in the fourth quarter of 2024.

We expect to generate sufficient cash from operations and have sufficient capacity under our ABL credit facility to fund any working capital, capital expenditures, share repurchases, and debt payments in 2025.

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145.3 8.1 138.7 8.3 97.7 6.6

Interest expense 63.9 3.5 53.1 3.2 29.1 2.0

Other (income) expense, net

(3.5) (0.2) (1.4) (0.1) 2.7 0.2

Interest expense 53.1 3.2 29.1 2.0 21.1 1.9

Income before income taxes

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Sales for the year ended December 31, 2024 increased $123.4 million, or 7.4%, to approximately $1.8 billion from $1.7 billion for the year ended December 31, 2023.

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

The sales increase was primarily due to new acquisitions within our SC and IPS segments during the year ended December 31, 2024.

Sales in our SC and IPS segments increased $23.1 million and $104.3 million, respectively, offset by a decrease in sales in our SCS segment of $4.0 million.

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

Years Ended December 31

(in thousands, except percentages) 2024 % Total

Change Change %

Sales by Business Segment (in thousands, except percentages)

Sales by Business Segment

Service Centers $ 1,222,599 67.9 $ 1,199,501 71.5 $ 23,098 1.9 %

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Total Sales $ 1,802,040 100.0 $ 1,678,600 100.0 $ 123,440 7.4 %

(1) Prior period segment disclosures have been recast.

For additional information, please refer to Note 20.

Segment Reporting .

Service Centers Segment.

Sales for the Service Centers segment increased by $23.1 million, or 1.9% for the year ended December 31, 2024, compared to the year ended December 31, 2023.

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

This sales increase is primarily the result of increased sales of rotating equipment and bearings product lines to customers engaged in operating and maintenance services in the general industrial, diversified chemical, and oil and gas markets in connection with increased capital spending by oil and gas producers.

Sales from acquisitions for the SC segment increased by $17.7 million during the twelve months ended December 31, 2024.

Total sales for the SC segment excluding acquisitions increased $5.4 million from the prior year's corresponding period.

This sales increase was primarily due to increase in sales within our Ohio River Valley, Southwest, South Rockies, and Canada regions;

partially offset by decreases in our North Rockies and Texas Gulf Coast regions.

Innovative Pumping Solutions Segment.

Sales for the IPS segment increased by $104.3 million, or 47.7% for the year ended December 31, 2024, compared to the year ended December 31, 2023.

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

Sales from acquisitions for the IPS segment increased $47.8 million during the twelve months ended December 31, 2024.

Total sales for the IPS segment excluding acquisitions increased $56.5 million from the prior year's corresponding period.

This sales increase was primarily due to increase in sales within our water and wastewater division, our international division, and overall increases in project related jobs due to increased capital spending by oil and gas producers and the renewables sector.

Supply Chain Services Segment.

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

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

Sales for the SCS segment decreased by $4.0 million, or 1.5%, for the year ended December 31, 2024, compared to the year ended December 31, 2023.

The decrease in sales was primarily the result of decreases in sales in our oil & gas, resin, and power end-markets.

GROSS PROFIT.

Gross profit as a percentage of sales for the twelve months ended December 31, 2024 increased by approximately 77 basis points from the prior year's corresponding period.

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

The primary driver was an increase in contribution from IPS sales, going from 13.0% of consolidated sales in 2023 to 17.9% of sales in 2024.

While IPS overall gross profit percentage decreased 148 basis points from 2023 to 2024, the decrease did not impact consolidated gross profit percentage due to IPS’ overall relative higher gross margins.

Additionally, the increase in the gross profit percentage is primarily the result of an approximate 83 basis points and 114 basis points increase in the gross profit percentage in our SC and SCS segments, respectively, partially offset by an approximate 148 basis points decrease in our IPS segment.

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

SG&A for the year ended December 31, 2024 increased by approximately $44.3 million, or 12.1%, to $410.9 million from $366.6 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 as a result of increased business activity.

SG&A attributable to acquisitions during the period increased by $6.4 million.

Excluding acquisitions, the increase in SG&A is primarily the result of increased professional fees, payroll expenses, incentive compensation and 401(k) expenses as a result of an increase in headcount during the period.

INCOME FROM OPERATIONS.

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INTEREST EXPENSE.

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

Interest expense for the year ended December 31, 2024 increased $10.8 million compared to the prior year's corresponding period, primarily due to an increase outstanding borrowings on the Term Loan B.

Both of the Company's facilities are subject to a variable interest rate for the twelve months ended December 31, 2024.

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Organic Sales $ 1,703,540 $ 1,645,522 $ 1,439,305

(1) Prior period segment disclosures have been recast.

For additional information, please refer to Note 20 .

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 define and calculate EBITDA as Net income attributable to DXP Enterprises, Inc., plus interest, taxes, depreciation, amortization, less non-controlling interest.

We define and calculate Adjusted EBITDA as Net income attributable to DXP Enterprises, Inc., plus interest, taxes, depreciation, amortization plus 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.

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Adjusted EBITDA Margin 10.6 % 10.4 % 8.6 %

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

(1) Other non-recurring items includes unique acquisition integration costs and other non-cash, non-recurring costs.

Free Cash Flow

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General Overview

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

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

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

As a distributor of MRO products and services, we require significant amounts of working capital to fund inventories and accounts receivables.

Additional cash is required for capital items for information technology, warehouse equipment, leasehold improvements, pump manufacturing equipment and safety services equipment.

We assess our liquidity in terms of our ability to generate cash to fund our operating, investing and financing activities.

We continue to generate adequate cash from operating activities.

We believe that our operating cash flow, cash on hand, and other sources of liquidity will be sufficient to allow us to continue investing in the business including capital expenditures, strategic acquisitions and investments, paying interest and servicing debt, repurchasing common stock when deemed appropriate, and manage our capital structure on a short-term and long-term basis.

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

As a distributor of MRO products and services, we require certain amounts of working capital to primarily fund inventories and accounts receivables.

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, fund project work-in-process and to service our debt.

As of December 31, 2024 and 2023, we had cash of $148.3 million and $173.1 million, respectively.

The decrease in cash was primarily due to less cash flow from operating activities and an increase in acquisitions and capital expenditures from 2023 to 2024, partially offset by increased borrowings under the Company’s Amended Senior Secured Term Loan B and lower volume of share repurchases compared to 2023.

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

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The Company generated $102.2 million of cash in operating activities during the year ended December 31, 2024 compared to generating $106.2 million of cash during the prior year's corresponding period.

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

The $4.0 million decrease in the amount of cash generated between the two periods was primarily driven by an increase in operating assets including trade accounts receivable partially offset by decreased inventory purchases and accrued expenses as compared to the prior period.

Investing Activities

For the year ended December 31, 2024, net cash used in investing activities was $181.7 million compared to $22.6 million used in the corresponding period in 2023.

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

The increase of $159.0 million was primarily driven by an increase in acquisition activities during 2024 compared to 2023.

Financing Activities

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For the year ended December 31, 2024, the Company repurchased approximately $29.0 million worth of outstanding shares compared to $56.2 million worth of outstanding shares for the year ended December 31, 2023.

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

The net inflow of cash from financing activities in 2024 was a benefit driven by the refinancing of our existing Senior Secured Term Loan B.

Debt issuance costs associated with the amendment of our new Term Loan B was $1.8 million for the year ended December 31, 2024.

During the twelve months ended December 31, 2024 we repurchased 0.6 million shares of the Company's common stock for approximately $28.8 million compared to 1.7 million shares of the Company's stock for approximately $54.7 million for the twelve months ended December 31, 2023.

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

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

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

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

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

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

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

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

At December 31, 2024, our total outstanding debt was $648.9 million, or 60.5% of total capitalization (total debt plus shareholders’ equity) of $1.1 billion.

$647.9 million of this outstanding debt bears interest at various floating rates.

Quantitative and Qualitative Disclosure about Market Risk

We believe our cash generated from operations will meet our normal working capital needs during the next twelve months.

However, we 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, we may issue securities that substantially dilute the interests of our shareholders.

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

Total borrowing capacity $ 135,000 $ 135,000

Outstanding letters of credit

Total amount available $ 125,646 $ 132,055

At December 31, 2024, the Company had $274.0 million of liquidity including $148.3 million in cash and $125.6 million in availability under the ABL Revolver.

Credit Ratings

We receive credit ratings from two independent credit rating agencies:

Moody’s Investor Service (“Moody’s”) and Standard & Poor’s (“S&P”).

Both credit rating agencies currently rate the Company’s corporate credit as non-investment grade.

The following table summarizes the Company’s credit ratings as of December 31, 2024:

Senior Secured

Free Cash Flow

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

Our Free Cash Flow, which is calculated as cash provided by operations less net purchase of property and equipment, was $77.1 million, $94.0 million and $1.0 million for years 2024, 2023 and 2022, respectively.

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Purchase of property and equipment, net 25,068 12,263 4,916

12,263 4,916 4,330

Free Cash Flow $ 77,143 $ 93,959 $ 978

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

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

Long-term debt 543,125 423,764

Total debt $ 548,625 $ 428,133

We believe our cash generated from operations will meet our normal working capital needs during the next twelve months.

However, we 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, we may issue securities that substantially dilute the interests of our shareholders.

Borrowing Capacity (in thousands):

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

Total borrowing capacity $ 135,000 $ 135,000

Outstanding letters of credit

Total amount available $ 132,055 $ 132,380

Indemnification

Uses of Liquidity

Internally generated cash flows are the primary source of working capital and growth initiatives, including acquisitions and growth capital expenditures.

The Company expects to continue to return excess capital to shareholders through share repurchases, when appropriate.

Working Capital

Working capital as of December 31, 2024 was $296.3 million, an increase of $20.9 million compared to $275.4 million as of December 31, 2023.

The increase was primarily due to sustained sales growth and acquisitions.

For a discussion of the Company’s acquisitions refer to Note 16 to the Consolidated Financial Statements.

In 2024 and 2023, the Company invested $156.6 million and $10.4 million, respectively, in acquisitions.

Capital Expenditures

In fiscal 2024, the Company's capital expenditures were $25.1 million and $12.3 million for the years ended December 31, 2024 and 2023, respectively.

Capital expenditures for 2025 is expected to be in the range of $15.0 and $25.0 million.

This includes continued facility enhancements, tools and equipment, software and technology enhancements across the Company.

Share Repurchases

For the years ended December 31, 2024 and 2023, we repurchased shares of our common stock for $28.8 million and $54.7 million, respectively.

Share repurchases are executed at prices the Company determines appropriate subject to various factors, including market conditions and the Company's financial performance and may be affected through accelerated share repurchase programs, open market purchases, or privately negotiated transactions.

Contractual and Other Obligations

The Company under our Amended Senior Secured Term Loan B is required to make equal quarterly principal payments of 0.25%, with the remaining balance being payable on October 13, 2030.

For Fiscal Year 2024 and 2023, the Company made cash principal payments of $5.7 million and $4.7 million, respectively.

Additionally, the Company makes quarterly interest payments that accrue on outstanding borrowings under the Amended Senior Secured Term Loan B at a rate equal to Term SOFR (with a floor of 1.00%) plus 3.75%, or base rate plus 2.75%.

The interest rate for the Amended Senior Secured Term Loan B was 8.32% as of December 31, 2024.

The interest rate for the Senior Secured Term Loan B was 10.44% as of December 31, 2023.

For Fiscal Year 2024 and 2023, the Company made cash interest payments of $59.8 million and $49.0 million, respectively.

See Note 9 to the Consolidated Financial Statements.

In the ordinary course of business, the Company enters into contractual arrangements under which the Company may agree to indemnify customers from any losses incurred relating to the services we perform.

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

What changed 10-K

Item 7. Management’s Discussion and Analysis