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(Exact
name of registrant as specified in its charter)
iTexas
i76-0509661
(State
or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification Number)
i5301 Hollister, iHouston, iTexasi77040
(Address of principal executive offices, including zip code)
(i713)
i996-4700
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title
of Each Class
Trading Symbol
Name of Exchange on which Registered
iCommon Stock par value $0.01
iDXPE
iNASDAQ
Global Select Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. iYes ☒ No ☐
Indicate
by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). iYes ☒ No ☐
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of "large accelerated filer,""accelerated filer,""smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐iAccelerated filer ☒ Non-accelerated filer ☐ Smaller reporting company i☐
Emerging growth company i☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.☐
Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes i☐ No ☒
Number of shares of registrant's Common Stock, par value $0.01 per share outstanding as of November 3, 2023: i16,176,412.
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 ithree
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 - iSUMMARY OF SIGNIFICANT ACCOUNTING AND BUSINESS POLICIES
iBasis
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 reporting 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, 2022 that are included in our annual report on Form 10-K filed with the SEC on April 17, 2023 (“Annual Report”). The results of operations for the nine months ended September
30, 2023 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. The ownership interest of noncontrolling investors of the Company's subsidiaries are recorded as noncontrolling interest. iAll
inter-company accounts and transactions have been eliminated in consolidation.
During the fourth quarter of 2022, the Company became aware of a financing cash flow error related to borrowings and repayments on our asset-backed credit facility as a result of the Company inadvertently duplicating journal entries, resulting in the overstatement of financing cash flow activities from borrowings and repayments related to our revolving credit facility. Management's assessment concluded that the errors were not material, individually or in the aggregate, to any prior period unaudited condensed consolidated financial statements. The
Company concluded to revise prior period unaudited condensed consolidated financial statements the next time they were reported. The unaudited condensed consolidated financial statements included herein, have been revised to correct for the impact of these errors. iThe revision for the unaudited condensed consolidated statement of cash flows for the nine months ended September 30, 2022, is provided in the following table (in thousands):
As
Previously Reported
Adjustments
Revised
Proceeds from asset-backed credit facility
$
i605,257
$
(i27,258)
$
i577,999
Payments
on asset-backed credit facility
(i564,651)
i27,258
(i537,393)
The
change did not result in a change in net income or earnings per share for the three and nine months ended September 30, 2022. Additionally, the change did not result in a change in the unaudited condensed consolidated balance sheets and statements of equity.
The
Company has implemented all new accounting pronouncements that are in effect and is evaluating any new accounting pronouncements that may impact its financial statements, including the new Business Combinations (Topic 805) - Accounting for Contract Assets and Contract Liabilities from Contracts with Customers standard. The Company does not believe the new accounting pronouncement will have a material impact on its financial position or results of operations for recent acquisitions.
Accounting
Pronouncements Not Yet Adopted
All other new accounting pronouncements that have been issued, but not yet effective, are currently being evaluated and at this time are not expected to have a material impact on our financial position or results of operations.
8
NOTE 4 - iiFAIR
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.
As of September 30, 2023, we recorded liabilities in other current and long-term liabilities for contingent consideration associated with the acquisitions of Drydon Equipment, Inc. ("Drydon"), Cisco Air Systems, Inc. ("Cisco"), Sullivan Environmental Technologies, Inc. ("Sullivan"), Florida Valve & Equipment, LLC and Environmental MD, Inc. (collectively,“Florida Valve EMD”) and Riordan Materials Corporation (“Riordan”) of $i1.8
million, $i2.4 million, $i1.6 million, $i0.3
million, and $i2.8 million, respectively.
i
The following table provides a reconciliation
of the beginning and ending balances and gains or losses recognized during the nine months ended September 30, 2023 (in thousands):
*Amounts
included in other current liabilities were $i5.2 million and $i5.5
million for the periods ending September 30, 2023 and December 31, 2022, respectively. Amounts included in long-term liabilities were $i3.7 million and $i4.7
million for the periods ending September 30, 2023 and December 31, 2022, 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 of Drydon, Cisco, Sullivan, Florida Valve EMD, and Riordan 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 i11.1 percent. Changes in our unobservable inputs in isolation would result in a change to our fair value measurement. The maximum amount of contingent consideration payable under these arrangements is $i10.4 million.
Other
financial instruments not measured at fair value on the Company's unaudited condensed consolidated balance sheets at September 30, 2023 and December 31, 2022, 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, 2023 and December 31, 2022 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.
NOTE 5 – iINVENTORIES
i
The
carrying values of inventories are as follows (in thousands):
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.
i
Costs
and estimated profits on uncompleted contracts and related amounts billed were as follows (in thousands):
Total
costs and estimated profits on uncompleted contracts
i131,755
i93,603
Less:
billings to date
i91,717
i80,421
Net
$
i40,038
$
i13,182
Such
amounts were included in the accompanying unaudited condensed consolidated balance sheets for September 30, 2023 and December 31, 2022 under the following captions (in thousands):
During
the nine months ended September 30, 2023, $i10.0 million of the balances that were previously classified as contract liabilities at the beginning of the period were recognized in revenues. Contract asset and liability changes were primarily due to normal activity and timing differences between our performance and customer payments.
NOTE
7 – iINCOME 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. Our effective tax rate from continuing operations was a tax expense of i26.3
percent for the three months ended September 30, 2023 compared to a tax expense of i28.1 percent for the three months ended September 30, 2022. Compared to the U.S. statutory rate for the three months ended September 30, 2023, the effective tax rate was increased by state taxes, foreign taxes, nondeductible expenses, and uncertain tax positions recorded for research and development tax credits and was partially offset by research
and development tax credits and other tax credits.
Our effective tax rate from continuing operations was a tax expense of i26.8 percent for the nine months ended September 30, 2023 compared to a tax expense of i25.1
percent for the nine months ended September 30, 2022. Compared to the U.S. statutory rate for the nine months ended September 30, 2023, the effective tax rate was increased by state taxes, foreign taxes, nondeductible expenses, and uncertain tax positions recorded for research and development tax credits and was partially offset by research and development tax credits and other tax credits. Compared to the U.S. statutory rate for the nine months ended September 30, 2022, the effective tax rate was increased by state taxes, foreign taxes, nondeductible expenses and uncertain tax positions for research and development tax credits and was partially offset by research and development tax credits and other 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.
10
NOTE 8 – iLONG-TERM
DEBT
i
The components of the Company's long-term debt consisted of the following (in thousands):
(1)
Carrying value amounts do not include unamortized debt issuance costs of $i12.4 million and $i14.6 million for September 30, 2023 and
December 31, 2022, respectively.
/
Credit Agreements
On July 19, 2022, the Company entered into an Amended and Restated Loan and Security Agreement (the “ABL Credit Agreement”) that provided for a $i135.0 million
asset-backed revolving line of credit (the "ABL Revolver"). The ABL Credit Agreement amends and restates the Loan and Security Agreement dated as of August 29, 2017. Subject to the conditions set forth in the ABL Credit Agreement, the ABL Revolver may be increased by up to an aggregate of $i50.0 million, in minimum increments of $i10.0 million.
The ABL Revolver matures on July 19, 2027. As of September 30, 2023, the Company had ino borrowings outstanding under the ABL Revolver, and total borrowing capacity under the ABL Revolver was $i131.9
million, net of the letters of credit outstanding of $i3.1 million.
On November 22, 2022, the Company entered into an amendment to its existing $i330 million
Senior Secured Term Loan (the "Term Loan Amendment"), borrowing an additional $i105 million that was added to the existing $i330 million Senior Secured Term Loan (the “Term Loan Agreement”). As of September
30, 2023 there was $i424.9 million outstanding under the Term Loan Agreement.
The Term Loan Amendment amends and supplements the Term Loan Agreement, dated as of December 23, 2020, and provides for among other things, $i105.0 million
in new incremental commitments. The Term Loan Agreement and Term Loan Amendment amortize in equal quarterly installments of i0.25 percent with the balance payable in December 2027 when the facility matures. Subject to securing additional lender commitments, the Term Loan Agreement allows for incremental increases in facility size up to an aggregate of $i85.0 million,
plus an additional amount such that the Company's Secured Leverage Ratio (as defined in the Term Loan Agreement) would not exceed i3.75 to 1.00. Interest accrues on the Term Loan at a rate equal to SOFR plus a margin of i5.25
percent for the SOFR Loans (as defined in the Term Loan Amendment). We are required to repay the Term Loan with certain asset sales and insurance proceeds, certain debt proceeds and i50 percent of excess cash flow--reducing to (i.) i25
percent if our total leverage ratio is no more than i3.00 to 1.00 and (ii.) izero percent if our total leverage ratio is no more than i2.50
to 1.00.
The Company was in compliance with all financial covenants under the ABL Credit Agreement and Term Loan Agreements as of September 30, 2023.
NOTE 9 - iEARNINGS 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.
11
i
The following table sets forth the computation of basic and diluted earnings per share for the periods indicated (in thousands, except per share data):
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 - iSEGMENT REPORTING
The Company's reportable business segments are: Service Centers, Innovative Pumping Solutions and Supply Chain Services. 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.
12
i
The
following table sets out financial information related to the Company's segments excluding amortization (in thousands):
On May 1, 2023, the Company completed the acquisition of Florida Valve EMD, a leading provider of valve and related products and services for the municipal water markets in the State of Florida. Florida Valve EMD is included within our IPS business segment. Total consideration for the transaction was approximately $i3.3
million, funded with a mixture of cash on hand of $i3.0 million and future consideration of $i0.3 million. Goodwill for the transaction totaled approximately
$i2.4 million.
On May 1, 2023, the Company completed the acquisition of Riordan, a leading provider of products for water treatment, wastewater treatment, odor control, solids handling, pumping and bio solid processes in the States of Maryland, New Jersey, Pennsylvania, Delaware and Virginia. Riordan is included within our IPS business segment. Total consideration for the transaction was approximately $i8.4
million, funded with a mixture of cash on hand of $i6.2 million and future consideration of $i2.2 million. Goodwill for the transaction totaled approximately
$i5.9 million.
i
In aggregate, the acquisition-date fair value of the consideration transferred for the itwo
businesses totaled $i11.7 million, which consisted of the following (in thousands):
Purchase Price Consideration
Cash
payments
$
i9,200
Future consideration
i2,498
Total
purchase price consideration
$
i11,698
/
13
Pro
forma results of operations information have not been presented, as the effect of the recent acquisitions is not material. The operating results of Riordan and Florida Valve EMD are included within the Company's consolidated statements of operations since the acquisition date of May 1, 2023 and were not material for the nine months ended September 30, 2023. Pursuant to U.S. GAAP, costs incurred to complete the acquisitions as well as costs incurred to integrate into the Company’s operations are expensed as incurred. Transaction-related costs incurred, which are included within selling, general, and administrative expenses in the consolidated statements of operations, were not material for the nine
months ended September 30, 2023.
i
The following table summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed at the acquisition date (in thousands):
Amount
Cash
$
i352
Accounts
receivable
i2,236
Inventory
i355
Other
current assets
i134
Non-compete agreements
i595
Customer
relationships
i1,708
Property and equipment
i41
Other
assets
i5
Assets acquired
i5,426
Current
liabilities assumed
(i1,395)
Other long term liabilities
(i23)
Deferred
tax liability
(i538)
Net assets acquired
i3,470
Total
Consideration
i11,698
Goodwill
$
i8,228
/
Of
the $i2.3 million of acquired intangible assets, $i0.6 million was provisionally assigned to non-compete agreements that are subject to amortization over i5
years, coinciding with the terms of the agreements. In addition, $i1.7 million was assigned to customer relationships and will be amortized over a period of i8 years. The goodwill total of approximately $i8.2
million is attributable primarily to expected synergies and the assembled workforce of each entity and is generally not deductible for tax purposes.
The Company recognized approximately $i400 thousand of acquisition related costs that were expensed during the year. These costs are included in the Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income in Selling, General and Administrative
costs.
NOTE 13 - iSHARE REPURCHASES
On December 15, 2022, the Company announced a new Share Repurchase Program pursuant to which it may repurchase up to $i85.0 million
worth, or i2.8 million shares, of the Company's outstanding common stock over the next i24 months.
i
Total
consideration paid to repurchase the shares was recorded in shareholders’ equity as treasury shares.
Supplemental disclosures of cash flow information:
Cash paid for interest
$
i33,892
$
i16,253
Cash
paid for income taxes
$
i20,298
$
i12,220
Cash
paid for finance lease liability
$
i1,632
$
i—
Shares
issued for acquisition
$
i—
$
i5,757
Non-cash
investing and financing activities:
Assets obtained in exchange for finance lease obligations
$
i10,819
$
i—
/
NOTE
15 - iSUBSEQUENT EVENT
Senior Secured Term Loan B
On October 13, 2023, the Company entered into an amendment (the “Second Term Loan Amendment”) on its existing Senior Secured Term Loan B, borrowing an incremental $i125 million
that was added to the existing Senior Secured Term Loan B. Including the new borrowings, the Company will have $i550.0 million in Senior Secured Term Loan B borrowings. The Term Loan B borrowings mature on October 30, 2030, and are priced at Term SOFR plus an applicable margin of i4.75
percent.
15
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 and nine months ended September
30, 2023 should be read in conjunction with our previous Annual Report on Form 10-K and our Quarterly Reports on Form 10-Q, and the consolidated financial statements and notes thereto included in such reports. 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 April 17, 2023. 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.
16
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.
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.
CURRENT MARKET CONDITIONS AND OUTLOOK
Inflation Reduction Act
In August 2022, the Inflation Reduction Act of 2022 (IRA) was signed into United States (U.S.) law. The IRA establishes a new 15% corporate minimum tax and a new 1% excise tax on stock repurchases, effective after December 31, 2022. In addition, the IRA contains provisions relating to climate change, energy and health care. Based on the
Company's current analysis of the provisions, the Company does not anticipate a material impact to the consolidated financial statements as a result of the IRA.
18
Inflation
The global commodity and labor markets experienced significant inflationary pressures attributable to economic recovery and supply chain issues tightening caused by the COVID-19 pandemic and the Ukrainian-Russia conflict, among other factors. These inflationary trends increased the cost of many of the products we buy. As a distributor, we often remain neutral to inflation as those costs are
generally passed on to customers. The Company was able to pass price increases on to customers and implement other strategies designed to mitigate some of the adverse effects of higher costs during the nine months ended September 30, 2023.
Service Centers and Innovative Pumping Solutions Segments
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 September 30, 2023 and nine months ended September 30, 2023, we had approximately $353.4 million and $1,072.5 million in sales in our Service Centers and Innovative Pumping Solutions segments, an increase of approximately 10.7 percent and 19.2 percent compared to the three months ended September 30, 2022 and the nine months ended September 30, 2022, respectively. Our performance has been strengthened by price increases from our vendors and suppliers During the nine months ended September
30, 2023, $11.2 million was associated with recent acquisitions in the water and wastewater markets. We expect to benefit from the increased oil and gas activity throughout the remainder of 2023. Additionally, we expect to benefit from the recent water and wastewater acquisitions as we continue to scale this platform both organically and by positioning DXP Water to bid on projects that historically may have not been available to the separate acquisitions on a standalone basis.
Supply Chain Services Segment
For the three and nine months ended September 30, 2023, we had approximately $65.8 million and $199.0 million in sales in our Supply Chain Services segment, respectively, a decrease of approximately 3.5 percent and an increase of 14.0 percent compared
to the three and nine months ended September 30, 2022, respectively. Our performance compared to the previous nine month period has benefited from the addition of a new diversified chemical customer that recently reached its one-year anniversary during the second quarter of 2023. As we move forward, we expect our performance to be driven by either the addition of new customers or an increase in spend by our existing customers.
19
RESULTS OF OPERATIONS
(in thousands, except percentages and per share data)
DXP
is organized into three business segments: Service Centers ("SC"), Innovative Pumping Solutions ("IPS"), and Supply Chain Services ("SCS"). 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.
SALES. Sales for the three months ended September 30, 2023 increased $31.9 million, or 8.2 percent, to approximately $419.2 million from $387.3 million for the prior year's corresponding period. Sales from acquisitions for the three months ended September 30, 2023, accounted for $3.9 million. The overall increase in sales was the result of an increase in sales in our SC segment of $34.4 million partially offset by decreases in sales in our SCS and IPS segments of $2.4 million and $0.1 million, respectively.
The fluctuations in sales are further explained in our business segment discussions below.
Service
Centers segment. Sales for the SC segment increased by approximately $34.4 million, or 13.2 percent, for the three months ended September 30, 2023, compared to the prior year's corresponding period. This sales increase is primarily the result of increased sales of rotating equipment and bearings and power transmission products to customers engaged in variety of markets.
Supply Chain Services segment. Sales for the SCS segment decreased by $2.4 million, or 3.5 percent, for the three months ended September 30, 2023, compared to the prior year's corresponding period. The decrease in sales was primarily the result of facility closures with existing customers.
GROSS
PROFIT. Gross profit as a percentage of sales for the three months ended September 30, 2023 was 29.9 percent versus 28.8 percent in the prior year's corresponding period. The increase in the gross profit percentage is primarily the result of an increase in gross profit within our SC and IPS segments.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A"). SG&A for the three months ended September 30, 2023 increased by approximately $4.6 million, or 5.4 percent, to $89.7 million from $85.1 million for the prior year's corresponding period. The increase in SG&A is primarily the result of increased payroll, incentive compensation and related taxes and 401(k) expenses as a result of increased business activity.
OPERATING
INCOME. Operating income for the third quarter of 2023 increased by $9.3 million to $35.9 million, from $26.5 million in the prior year's corresponding period. This increase in operating income is the result of the aforementioned increase in business activity across all segments.
INTEREST EXPENSE. Interest expense for the third quarter of 2023 increased $5.9 million compared to the prior year's corresponding period. This increase was primarily due to the Company borrowing an additional $105.0 million on its Term Loan during the fourth quarter of 2022 and incurring higher than average interest rates on such debt due to changes in the macroeconomic environment and the associated increasing interest rate policy by the U.S. Federal Reserve Bank.
INCOME
TAXES. Our effective tax rate from continuing operations was a tax expense of 26.3 percent for the three months ended September 30, 2023, compared to a tax expense of 28.1 percent for the three months ended September 30, 2022. Compared to the U.S. statutory rate for the three months ended September 30, 2023, the effective tax rate was increased by state taxes, foreign taxes, nondeductible expenses, and uncertain tax positions recorded for research and development tax credits and was partially offset by research and development tax credits and other tax credits.
Per
share amounts attributable to DXP Enterprises, Inc.
Basic earnings per share
$
3.08
$
2.19
Diluted earnings per share
$
2.94
$
2.10
SALES.
Sales for the nine months ended September 30, 2023 increased $197.0 million, or 18.3 percent, to approximately $1,271.6 million from $1,074.5 million for the prior year's corresponding period. Sales from businesses acquired accounted for $30.3 million of sales for the nine months ended September 30, 2023. The overall increase in sales was the result of an increase in sales within our SC, IPS and SCS segments of $158.1 million, $14.5 million and $24.4 million, respectively. The fluctuations in sales are further explained in our business segment discussions below.
Service Centers segment. Sales for the SC segment increased by $158.1 million, or 21.7 percent for the nine months ended September 30, 2023, compared to the prior year's corresponding period. Sales from acquisitions for the SC
segment was $19.1 million during the nine months ended September 30, 2023. Total sales for the SC segment excluding acquisitions increased $139.0 million from the prior year's corresponding period. This sales increase is primarily the result of increased sales of rotating equipment and bearings product lines to customers engaged in operating and maintenance services in the general industrial, diversified chemical, and oil & gas markets in connection with increased capital spending by oil and gas producers.
Innovative Pumping Solutions segment. Sales for the IPS segment increased by $14.5 million, or 8.5% for the nine months ended September 30, 2023 compared to the prior year's corresponding period. Sales from acquisitions for the IPS
segment was $11.2 million during the nine months ended September 30, 2023. Total sales for the IPS segment excluding acquisitions increased $3.4 million from the prior year's corresponding period. This increase was primarily the result of an increase in the capital spending by oil and gas producers and renewables sector.
22
Supply Chain Services segment. Sales for the SCS segment increased by $24.4 million, or 14.0 percent, for the nine months ended September 30, 2023, compared to the prior year's corresponding period. The improved sales are primarily related to the addition of a new customer in the diversified
chemicals market, as well as sales increases in the medical technology, food and beverage and oil and gas markets.
GROSS PROFIT. Gross profit as a percentage of sales for the nine months ended September 30, 2023 increased by approximately 116 basis points from the prior year's corresponding period. The increase in the gross profit percentage is primarily the result of an approximate 91 basis points and 363 basis points increase in the gross profit percentage in our SC and IPS segments, respectively, partially offset by an approximate 48 basis points decrease in our SCS segment.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A"). SG&A for the nine months ended September
30, 2023 increased by approximately $37.0 million, or 15.6 percent, to $273.7 million from $236.8 million for the prior year's corresponding period. The increase in SG&A is primarily the result of increased payroll, incentive compensation and related taxes and 401(k) expenses as a result of increased business activity.
OPERATING INCOME. Operating income for the nine months ended September 30, 2023 increased by $34.7 million or 46.9% to $108.7 million from $74.0 million in the prior year's corresponding period. This increase in operating income is primarily related to the aforementioned increased business activity across all segments.
INTEREST EXPENSE. Interest expense for the nine months ended September
30, 2023 increased $18.5 million compared with the prior year's corresponding period. This increase was primarily due to the Company borrowing an additional $105.0 million on its Term Loan during the fourth quarter of 2022 and incurring higher than average interest rates on such debt due to changes in the macroeconomic environment and the associated increasing interest rate policy by the U.S. Federal Reserve Bank.
INCOME TAXES. Our effective tax rate from continuing operations was a tax expense of 26.8 percent for the nine months ended September 30, 2023, compared to a tax expense of 25.1 percent for the nine months ended September 30, 2022. Compared to the U.S. statutory
rate for the nine months ended September 30, 2023, the effective tax rate was increased by state taxes, foreign taxes, nondeductible expenses, and uncertain tax positions recorded for research and development tax credits and was partially offset by research and development tax credits and other tax credits.
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):
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):
Less:
Net loss attributable to non-controlling interest
i—
(i885)
i—
(i938)
Plus:
Interest expense
i12,684
i6,833
i36,068
i17,610
Plus:
Provision for income taxes
i5,766
i5,097
i19,339
i13,402
Plus:
Depreciation and amortization
7,983
7,493
21,468
21,325
EBITDA
$
42,605
$
32,467
$
129,681
$
92,402
Plus:
NCI income (loss) before tax(1)
—
159
—
433
Plus: other non-recurring items(2)
551
1,193
551
1,193
Plus:
stock compensation expense
864
505
2,211
1,368
Adjusted EBITDA
$
44,020
$
34,324
$
132,443
$
95,396
Operating
Income Margin
8.6
%
6.9
%
8.6
%
6.9
%
EBITDA Margin
10.2
%
8.4
%
10.2
%
8.6
%
Adjusted
EBITDA Margin
10.5
%
8.9
%
10.4
%
8.9
%
(1) NCI represents non-controlling interest.
(2) Other non-recurring items includes the loss associated with closing an
international location for the three and nine months ended September 30, 2023 and the loss associated with the sale of a VIE for the three and nine months ended September 30, 2022.
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):
Net cash provided by (used in) operating activities
$
39,758
$
(3,432)
$
63,775
$
2,256
Less:
purchases of property and equipment
(1,486)
(1,578)
(i7,103)
(3,426)
Free
Cash Flow
$
38,272
$
(5,010)
$
56,672
$
(1,170)
24
LIQUIDITY
AND CAPITAL RESOURCES
General Overview
As ofSeptember 30, 2023, we had cash and restricted cash of $27.3 million and credit facility availability of $131.9 million. We have a $135.0 million asset-backed line of credit (the "ABL Revolver"), partially offset by letters of credit of $3.1 million. We had no borrowings outstanding on our ABL Revolver as of September 30, 2023. We had $424.9 million in borrowings on our Term Loan as of September 30, 2023.
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 generated by operating activities, net cash used in investing activities and net cash used in financing activities for the periods presented (in thousands):
The
Company generated $63.8 million of cash from operating activities during the nine months ended September 30, 2023 compared to $2.3 million of cash generated during the prior year's corresponding period. The $61.5 million increase in the amount of cash provided by operating activities between the two periods was primarily due to increased business activity and higher sales at a higher margin partially offset by a decrease of progress billings as compared to the prior period.
Investing Activities
For the nine months ended September 30, 2023, net cash used in investing activities was $16.0 million compared to a $51.9 million use of cash during the prior year’s corresponding period. This $36.0 million
decrease was primarily driven by a reduction in the total purchase price paid for acquisitions during the nine months ended September 30, 2023 of $8.8 million compared to $48.5 million during the nine months ended September 30, 2022. The decrease was partially offset by purchases of property and equipment of $7.1 million for the nine months ended September 30, 2023 compared to $3.4 million for the nine months ended September 30, 2022.
Financing Activities
For the nine months ended September 30, 2023, net cash used in financing activities was $66.7 million, compared to net cash provided by
financing activities of $18.3 million during the prior year’s corresponding period. The increase was primarily due to share repurchases of $56.2 million for the nine months ended September 30, 2023 compared to $18.5 million for the nine months ended September 30, 2022. During the nine months ended September 30, 2022, the Company had $40.6 million outstanding under the ABL Revolver compared to no borrowings outstanding during the nine months ended September 30, 2023. The Company paid contingent consideration of $5.1 million for the nine months ended September
30, 2023 compared to $0.5 million for the nine months ended September 30, 2022.
25
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, 2022. For a more complete discussion of our significant accounting policies and business practices, refer to the consolidated Annual Report on Form 10-K filed with the Securities and Exchange Commission on April 17, 2023. The results of operations for the nine months ended September 30, 2023 are not necessarily indicative of results expected for the full fiscal year.
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, 2022. Our exposures to market risk have not changed materially since December 31, 2022.
26
ITEM
4: CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
With the participation of management, our principal executive officer and principal financial officer carried out an evaluation, pursuant to Rule 13a-15(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were not effective as of September 30, 2023 because of the existing material weaknesses in internal control over financial reporting as previously
disclosed in our Annual Report on Form 10-K for the year end December 31, 2022.
Notwithstanding these material weaknesses, our management, including our principal executive officer and principal financial officer, has concluded that the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q are fairly stated in all material respects in accordance with GAAP for each of the periods presented.
Management's Plan to Remediate the Material Weaknesses
In relation to the Material Weakness identified around lack of sufficient complement of resources as previously disclosed in our second quarter Form 10Q, the
Company has hired a new Chief Accounting Officer and a Director of Technical Accounting with public company and SOX experience that are already working on the implementation of processes and controls required to remediate these material weaknesses. During the quarter ended September 30, 2023, management has continued to work on enhancing our finance department by hiring an assistant controller as well as an additional member to our Financial Reporting team as well as continuing to expand our technical accounting department. These are key individuals with the appropriate level of accounting knowledge, experience, and training to appropriately analyze, record, and disclose accounting matters timely and accurately as well as establish effective processes and controls. At this point we believe we have added the necessary talent and resources with the proper accounting knowledge to support our growth and to continue to
strengthen our Internal Control Over Financial Reporting.
In relation to the Material Weakness identified around timely clearing of discrepancies arising from the three-way-match process, during the quarter ended September 30, 2023, management effectively designed and implemented the necessary controls to ensure a timely clearing of discrepancies arising from the three-way match process of matching purchase orders, invoices, and item receipts. Although the remediated controls have been effective to date, the material weakness will not be considered remediated until the applicable controls operate for a sufficient period of time for management to conclude, through testing, that such controls are operating effectively. We expect that the material weakness will be remediated by December
31, 2023.
Related to the lack of segregation of duties Material Weakness, during the quarter ended September 30, 2023, management effectively designed and implemented the necessary controls to ensure appropriate segregation of duties and adequately review user access to transactions within business processes relevant to significant accounts and disclosures within the general ledger system across the Company. Although the remediated controls have been effective to date, the material weakness will not be considered remediated until the applicable controls operate for a sufficient period of time for management to conclude, through testing, that such controls are operating effectively. We expect that the material weakness will
be remediated by December 31, 2023.
Finally, related to the material weakness on revenue recognized over the percentage of completion input method, the necessary controls have been designed and implemented during the quarter ended September 30, 2023 to ensure accuracy of the cost-to-date, estimates of the cost-to-complete and the determination of revenue recognized for certain project-based contracts. Although these controls have been designed and implemented, we will continue to evaluate whether further enhancement or modification to these controls in future periods is needed. The material weakness will not be considered remediated
until the applicable controls operate for a sufficient period of time for management to conclude, through testing, that such controls are operating effectively.
Changes in Internal Control Over Financial Reporting
Except as described above, there were no other changes in internal control over financial reporting identified in the evaluation for the quarter ended September 30, 2023, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
27
PART
II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
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 of these lawsuits, 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.
ITEM
1A. RISK FACTORS.
There have been no material changes to the risk factors as previously disclosed in “Part I. Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year end December 31, 2022.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
A summary of our repurchases of DXP Enterprises, Inc. common stock under our current share repurchase program and employee stock awards withheld for certain tax obligations during the third quarter of fiscal year 2023 is as
follows:
Total
Number of Shares Purchased (1)
Average Price Paid per Share
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2)
Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (in thousands) (2)
(1)
There were 1,863 shares transferred from employees in satisfaction of minimum statutory tax withholding obligations upon the vesting of restricted stock during the three months ended September 30, 2023.
(2) 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. As of September 30, 2023, approximately $26.4 million worth of, or approximately 1.0 million, shares remained
available under the $85.0 million Share Repurchase Program.
Exhibits designated by the symbol * are filed or furnished with this Quarterly Report on Form 10-Q. All exhibits not so designated are incorporated by reference to a prior filing with the Commission as indicated.
29
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
