DXP ENTERPRISES INC

Previous wording

The following management discussion and analysis ("MD&A") of the financial condition and results of operations of DXP Enterprises, Inc. together with its subsidiaries (collectively "DXP," "Company," "us," "we," or "our") for the three months ended March 31, 2024 should be read in conjunction with our previous Annual Report on Form 10-K and our Quarterly Reports on Form 10-Q, and the consolidated financial statements and notes thereto included in such reports. The Company's consolidated financial statements are prepared in accordance with U.S. GAAP.

Current wording

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 six months ended June 30, 2024 should be read in conjunction with our previous Annual Report on Form 10-K and our Quarterly Reports on Form 10-Q, and the consolidated financial statements and notes thereto included in such reports. The Company's consolidated financial statements are prepared in accordance with U.S. GAAP.

Previous wording

The replacement and mission-critical nature of our products and services within the Company's Service Centers and Innovative Pumping Solutions business segments and industrial and manufacturing environments and processes drives a demand and outlook that are correlated with global, national and regional industrial production, capacity utilization and long-term GDP growth. The Company's recent order activity improved as markets strengthened. For the three months ended March 31, 2024, we had approximately $350.7 million in sales in our Service Centers and Innovative Pumping Solutions segments, a decrease of approximately 1.8% compared to the three months ended March 31, 2023. Our performance has been strengthened by price increases from our vendors and suppliers. During the three months ended March 31, 2024, $10.3 million was associated with recent acquisitions in the water and wastewater markets. We expect to continue to benefit from the increased oil and gas activity throughout the remainder of 2024. Additionally, we expect to benefit from the recent water and wastewater acquisitions as we continue to scale this platform both organically and by positioning DXP Water to bid on projects that historically may have not been available to the separate acquisitions on a standalone basis.

Current wording

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 six months ended June 30, 2024, we had approximately $730.5 million in sales in our Service Centers and Innovative Pumping Solutions segments, an increase of approximately 1.6% compared to the six months ended June 30, 2023. Our performance has been strengthened by price increases from our vendors and suppliers. During the six months ended June 30, 2024, $25.0 million was associated with recent acquisitions in the water and wastewater markets. We expect to continue to benefit from the increased oil and gas activity throughout the remainder of 2024. 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.

Previous wording

For the three months ended March 31, 2024, we had approximately $62.0 million in sales in our Supply Chain Services segment, a decrease of approximately 7.5 percent compared to the three months ended March 31, 2023 due to some facility closures with some of our customers as well as efficiencies we brought to our new diversified chemical customer that we added last year. As we move forward and given our increasing demand, we expect our performance to be driven by either the addition of new customers or an increase in spend by our existing customers.

Current wording

For the six months ended June 30, 2024, we had approximately $127.6 million in sales in our Supply Chain Services segment, a decrease of approximately 4.2 percent compared to the six months ended June 30, 2023 due to some facility closures with some of our customers as well as efficiencies we brought to our new diversified chemical customer that we added last year. As we move forward and given our increasing demand, we expect our performance to be driven by either the addition of new customers or an increase in spend by our existing customers.

Previous wording

SALES. Sales for the three months ended March 31, 2024 decreased $11.6 million, or 2.7 percent, to approximately $412.6 million from $424.3 million for the prior year's corresponding period. Sales from acquisitions for the three months ended March 31, 2024, accounted for $11.8 million. The overall decrease in sales was the result of a decrease in sales in our SC and SCS segments of $17.4 million and $5.1 million, respectively, partially offset by increases in sales in our IPS segments of $10.8 million. The fluctuations in sales are further explained in our business segment discussions below.

Current wording

SALES. Sales for the three months ended June 30, 2024 increased $17.5 million, or 4.1 percent, to approximately $445.6 million from $428.0 million for the prior year's corresponding period. The overall increase in sales was the result of an increase in sales in our IPS segment of $25.3 million, offset by a decrease in sales in our SC and SCS segments of $7.3 million and $0.5 million, respectively. The fluctuations in sales are further explained in our business segment discussions below.

Previous wording

Service Centers segment. Sales for the SC segment decreased $17.4 million, or 5.7 percent, for the three months ended March 31, 2024, compared to the prior year's corresponding period. This sales decrease is primarily the result of the timing of jobs and business mix within the SC segment.

Current wording

Service Centers segment. Sales for the SC segment decreased $7.3 million, or 2.3 percent, for the three months ended June 30, 2024, compared to the prior year's corresponding period. This sales decrease is primarily the result of the timing of jobs and business mix.

Previous wording

Innovative Pumping Solutions segment. Sales for the IPS segment increased $10.8 million, or 21.0 percent, for the three months ended March 31, 2024, compared to the prior year's corresponding period. $10.3 million was associated with recent acquisitions in the water and wastewater markets.

Current wording

Innovative Pumping Solutions segment. Sales for the IPS segment increased $25.3 million, or 52.7 percent, for the three months ended June 30, 2024, compared to the prior year's corresponding period. $14.7 million was associated with recent acquisitions in the water and wastewater markets.

Previous wording

Supply Chain Services segment. Sales for the SCS segment decreased by $5.1 million, or 7.5 percent, for the three months ended three months ended March 31, 2024, compared to the prior year's corresponding period. The decrease in sales was primarily the result of facility closures with existing customers.

Current wording

Supply Chain Services segment. Sales for the SCS segment decreased by $0.5 million, or 0.8 percent, for the three months ended June 30, 2024, compared to the prior year's corresponding period. The decrease in sales was primarily the result of facility closures with existing customers.

Previous wording

GROSS PROFIT. Gross profit as a percentage of sales for the three months ended March 31, 2024 was 30.0 percent versus 29.5 percent in the prior year's corresponding period. The increase in the gross profit percentage is primarily the result of an increase in gross profit within our SC and SCS segments.

Current wording

GROSS PROFIT. Gross profit as a percentage of sales for the three months ended June 30, 2024 was 30.9 percent versus 30.8 percent in the prior year's corresponding period. The increase in the gross profit percentage is primarily the result of an increase in gross profit within our IPS segment.

Previous wording

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A"). SG&A for the three months ended March 31, 2024 increased by $5.1 million, or 5.7 percent, to $94.8 million from $89.6 million for the prior year's corresponding period. The increase in SG&A is primarily the result of increased payroll, incentive compensation and related taxes and 401(k) expenses.

Current wording

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A"). SG&A for the three months ended June 30, 2024 increased by $6.1 million, or 6.4 percent, to $100.4 million from $94.4 million for the prior year's corresponding period. The increase in SG&A is primarily the result of increased payroll, incentive compensation and related taxes and 401(k) expenses.

Previous wording

OPERATING INCOME. Operating income for the first quarter of 2024 decreased by $6.3 million to $29.1 million, from $35.4 million in the prior year's corresponding period. This decrease in operating income was driven by the increase in SG&A during the period.

Current wording

OPERATING INCOME. Operating income for the second quarter of 2024 decreased by $0.1 million to $37.4 million, from $37.5 million in the prior year's corresponding period. This decrease in operating income was driven by the increase in SG&A during the period.

Previous wording

INTEREST EXPENSE. Interest expense for the first quarter of 2024 increased $4.0 million compared to the prior year's corresponding period. This increase was primarily due to the Company borrowing an additional $125.0 million on its Term Loan during the fourth quarter of 2023 and incurring higher than average interest rates on such debt due to changes in the macroeconomic environment and the associated increasing interest rate policy by the U.S. Federal Reserve Bank.

Current wording

INTEREST EXPENSE. Interest expense for the second quarter of 2024 increased $3.5 million compared to the prior year's corresponding period. This increase was primarily due to the Company borrowing an additional $125.0 million on its Term Loan during the fourth quarter of 2023 and incurring higher than average interest rates on such debt due to changes in the macroeconomic environment and the associated increasing interest rate policy by the U.S. Federal Reserve Bank.

Previous wording

INCOME TAXES. Our effective tax rate from continuing operations was a tax expense of 27.2 percent for the three months ended March 31, 2024, compared to a tax expense of 27.9 percent for the three months ended March 31, 2023. Compared to the U.S. statutory rate for the three months ended March 31, 2024, the effective tax rate was increased by state taxes, foreign taxes, nondeductible expenses, earnout payments, and uncertain tax positions recorded for research and development tax credits and was partially offset by research and development tax credits and other tax credits.

Current wording

INCOME TAXES. Our effective tax rate from continuing operations was a tax expense of 27.4 percent for the three months ended June 30, 2024, compared to a tax expense of 26.3 percent for the three months ended June 30, 2023. Compared to the U.S. statutory rate for the three months ended June 30, 2024, the effective tax rate was increased by state taxes, foreign taxes, nondeductible expenses, contingent consideration payments, and uncertain tax positions recorded for research and development tax credits and was partially offset by research and development tax credits and other tax credits.

Previous wording

As of March 31, 2024, we had available cash of $139.7 million and credit facility availability of $131.8 million. We have a $135.0 million asset-backed line of credit (the "ABL Revolver"), partially offset by letters of credit of $3.2 million. We had no borrowings outstanding on our ABL Revolver as of March 31, 2024. During the three months ended March 31, 2024, we did not draw down on our ABL Revolver.

Current wording

As of June 30, 2024, we had available cash of $49.9 million and credit facility availability of $131.4 million. We have a $135.0 million asset-backed line of credit (the "ABL Revolver"), partially offset by letters of credit of $3.6 million. We had no borrowings outstanding on our ABL Revolver as of June 30, 2024. During the six months ended June 30, 2024, we did not draw down on our ABL Revolver.

Previous wording

The Company generated $27.0 million of cash from operating activities during the three months ended March 31, 2024 compared to $26.4 million of cash generated during the prior year's corresponding period.

Current wording

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

Previous wording

For the three months ended March 31, 2024, net cash used in investing activities was $42.2 million compared to a $3.8 million use of cash during the prior year’s corresponding period. This $38.4 million increase was primarily driven by acquisition activity during the three months ended March 31, 2024. Total cash paid for acquisitions, net of cash acquired, was $39.3 million compared to no acquisition activity during the three months ended March 31, 2023. The increase was partially offset by purchases of property and equipment of $2.9 million for the three months ended March 31, 2024 compared to $3.8 million for the three months ended March 31, 2023.

Current wording

For the six months ended June 30, 2024, net cash used in investing activities was $130.7 million compared to a $14.1 million use of cash during the prior year’s corresponding period. This $116.6 million increase was primarily driven by acquisition activity during the six months ended June 30, 2024. Total cash paid for acquisitions, net of cash acquired, was $119.0 million compared to $8.5 million for the six months ended June 30, 2023. The increase was partially offset by purchases of property and equipment of $11.7 million for the six months ended June 30, 2024 compared to $5.6 million for the six months ended June 30, 2023.

Previous wording

For the three months ended March 31, 2024, net cash used in financing activities was $18.1 million, compared to net cash used in financing activities of $10.4 million during the prior year’s corresponding period. The increase was primarily due to share repurchases of $14.8 million for the three months ended March 31, 2024 compared to $9.1 million for the three months ended March 31, 2023. The Company also paid contingent consideration of $1.0 million for the three months ended March 31, 2024 compared to none for the three months ended March 31, 2023.

Current wording

For the six months ended June 30, 2024, net cash used in financing activities was $35.0 million, compared to net cash used in financing activities of $40.2 million during the prior year’s corresponding period. The increase was primarily due to share repurchases of $24.0 million for the six months ended June 30, 2024 compared to $33.6 million for the six months ended June 30, 2023. The Company also paid contingent consideration of $4.5 million for the six months ended June 30, 2024 compared to $4.0 million for the six months ended June 30, 2023.

Previous wording

The Company's unaudited condensed financial statements are prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP"). The accompanying unaudited Condensed Consolidated Financial Statements have been prepared on substantially the same basis as our annual Consolidated Financial Statements and should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2023. For a more complete discussion of our significant accounting policies and business practices, refer to the consolidated Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 11, 2024. The results of operations for the three months ended March 31, 2024 are not necessarily indicative of results expected for the full fiscal year.

Current wording

The Company's unaudited condensed financial statements are prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP"). The accompanying unaudited Condensed Consolidated Financial Statements have been prepared on substantially the same basis as our annual Consolidated Financial Statements and should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2023. For a more complete discussion of our significant accounting policies and business practices, refer to the consolidated Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 11, 2024. The results of operations for the six months ended June 30, 2024 are not necessarily indicative of results expected for the full fiscal year.