DXP Enterprises Q3 2026 Earnings Call Transcript

DXP Enterprises (NASDAQ:DXPE) reported third-quarter financial results on Thursday. The transcript from the company’s third-quarter earnings call has been provided below.

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View the webcast at https://events.q4inc.com/attendee/100630243

Summary

DXP Enterprises reported a strong Q3 2026 with sales of $587.2 million, a 14.3% increase year-over-year, and adjusted EBITDA growth of 19% to $67.3 million.

Organic sales growth was 8.7%, complemented by significant acquisition contributions of $48.8 million, with all business segments showing sales growth.

Net income rose by 24.2% to $26.9 million, with diluted earnings per share increasing to $1.64 from $1.31 in Q3 2025.

The company emphasized its strategic focus on organic growth, acquisitions and expanding technical capabilities, particularly in water and wastewater markets.

Operating income increased by 20.1% to $52.5 million, though gross profit margins slightly decreased due to a sales mix shift.

Free cash flow was $14.4 million for the quarter, impacted by working capital investments to support growth, but year-to-date free cash flow more than tripled compared to 2025.

The company acquired five businesses in 2026, with acquisitions being a key part of its growth strategy, particularly in expanding the DXP Water platform.

Management remains optimistic about Q4 2026, focusing on maintaining sales momentum, expanding margins and leveraging its strong balance sheet for growth.

Full Transcript

OPERATOR

After today’s prepared remarks, we will host a question and answer session. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. I will now hand the conference over to Kent Yee. CFO Kent, please go ahead.

Kent Yee (Chief Financial Officer)

Thank you. This is Kent Yee, and welcome to DXP’s Q3 2026 conference call to discuss our results for the third quarter ending September 30, 2026. Joining me today is our Chairman and CEO, David Little. Before we get started, I want to remind you that today’s call is being webcast and recorded and includes forward-looking statements. Actual results may differ materially from those contemplated by these forward-looking statements. A detailed discussion of the many factors that we believe may have a material effect on our business on an ongoing basis are contained in our SEC filings. DXP assumes no obligation to update that information because of new information or future events.

During this call we may present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in our earnings press release. The press release and an accompanying investor presentation are now available on our website. I will now turn the call over to David Little, our Chairman and CEO, to provide his thoughts and a summary of the third quarter performance and financial results. David,

David Little (Chief Executive Officer)

Good morning and thank you, Kent, and thank you to everyone joining us today on DXP’s fiscal 2026 third quarter conference call. It is my pleasure to share DXP’s third quarter results with you on behalf of 3,494 DXP people. Congratulations to all our stakeholders and a special thank you to our DXP people you can trust. We carried our momentum from the first half of the year into a strong third quarter. I am proud of what our DXP people accomplished in Q3. Sales grew year over year and sequentially, adjusted EBITDA increased 19% from the prior year, and DXP continued to generate positive cash flow. What excites me is all three of our business segments grew sales sequentially and year over year. Our DXP people are executing both locally and collectively as DXP advances our strategy of being customer-driven experts by providing technical, engineered solutions that are reliable, fast, and convenient.

Through the first nine months of 2026, DXP generated 1.7 billion in sales, up 13.2%, and 195.4 million in adjusted EBITDA, up 17.5%. Our year-to-date adjusted EBITDA margin was 11.6%. We are building a strong business and we intend to keep that customer first as we finish the year and as we continue to provide engineered solutions. Total DXP sales for the third quarter were 587.2 million, up 14.3% year over year. Importantly, organic sales increased 8.7% year over year. Our acquisitions are contributing and our existing business is also growing. That combination is important. We are expanding our capabilities while continuing to capture more of our customers’ wallet or spend. Profitability remains strong compared to the prior year. Income from operations increased 20.1% to 52.5 million.

Adjusted EBITDA increased 19% to 67.3 million and at 11.5% of sales. Net income increased 24.2% to 26.9 million. Diluted earnings per share increased to 1.64 compared to 1.31 in the third quarter of 2025. Gross profit margins were lower primarily due to sales mix. We had strong growth, but a portion of that growth came from lower-margin business. There is nothing structurally different about the business. We did achieve operating leverage on our expenses as a percent of sales, which partially offset the lower gross margin percentage. As we move forward, improved gross margins and continuing to leverage our expense base remain important opportunities for DXP.

From a growth standpoint, we continue to like where DXP is positioned. Customers in water and wastewater, energy infrastructure, general industry, air compression, data centers, and other technical markets need reliable responsiveness and expertise. These are DXP strengths. They create opportunity for us to earn more of the customer’s business and drive revenue and market share gains. Our strategy has not changed. We want to grow organically and through acquisitions, diversify the company, expand our technical capabilities, and serve customers with solutions that are fast, convenient, reliable, and supported by DXP people. We are focused on profitable growth, strong cash generation, and customer relationships that last. Tariffs, inflation, interest rates, and geopolitical uncertainty can certainly challenge our customers. Our focus is on what we can control: staying close to those customers, responding quickly, delivering the technical solutions they need.

The work we support is mission critical—keeping plants, facilities, municipalities, industrial operations moving. This is where our DXP people make a difference. During the first nine months of 2026, our Service Centers and Innovative Pumping Solutions business generated approximately 1.5 billion in sales, up 14.7% over the prior year. These businesses bring together the strength of our local customer relationships and our engineered solutions capability. That is a powerful combination for DXP. Innovative Pumping Solutions again led our year-to-year growth. In the third quarter, IPS sales increased 43.3% year over year and 1% sequentially to 144.1 million.

The growth in IPS reflects increased water and wastewater activity, production contracts, and strategic acquisitions. Our IPS team brings technical expertise to complex customer applications, delivering engineered solutions and helping customers move important solutions forward. We like the momentum we are building in this business. DXP Water continues to be an important long-term strategy. Sales were up 71% year over year and 1.8% sequentially. For the first nine months of 2026, DXP Water sales were up 80% year over year. Water is deliberately a growth platform for DXP and we are expanding it with technical capabilities, geographic reach, and customer relationships to compound for many years. We also saw increases in our energy and water and wastewater bookings and backlog.

Our average energy-related backlog increased 8.7% sequentially in Q3. These are markets where our customers value experience, reliability, and know-how. Many IPS engineered solutions are long cycle in nature, making disciplined execution and a steady pipeline of orders important. As we move forward, our IPS focus is on disciplined execution, staying close to our customers, and converting technical capabilities into the profitable growth of both DXP and its clients. We want to keep earning the next project by keeping today’s project right. That means understanding the application, delivering reliable solutions, and following through with the customer.

During Q3, Service Centers also delivered solid growth. Sales increased 7.6% year over year and 2.4% sequentially to 376.6 million. Organic growth remained a key contributor, with increased activity across the Southeast, California, Texas, Gulf Coast, and South Rocky regions, as well as strength in our metalworking product category. This is the heart of DXP’s local, customer-driven model. Our Service Center teams know their customers, understand the application, and respond quickly when the customer needs us.

That local presence allows DXP to be fast and convenient while bringing real technical services to the customer. Supply Chain Services was 66.4 million, up 5.6% year over year and 0.9% sequentially. Growth reflected new customers and facilities, partially offset by lower activity within certain existing customers. We are pleased to see SCS contribute to growth across DXP. This business is a great example of being customer-driven experts because we not just sell products. We are helping customers improve procurement, manage inventories, reduce complexity, and make their supply chain faster, more convenient, and more efficient.

Acquisitions continue to be an important part of DXP’s growth strategy and we remain disciplined. We look for businesses that fit our culture, strength, and technical capabilities and help us serve customers faster and more conveniently. Our focus is on building a broader platform, expanding our reach, making sure growth creates lasting value for customers and shareholders. For the first nine months of 2026, acquisition sales were 139.4 million compared with 74.1 million in the prior-year period.

Acquisition sales contributed 48.8 million in Q3. We are pleased with our acquisition program and our focus remains on operational integration, cross-selling, retaining great people, and making each acquired business part of DXP’s culture of DXP people you can trust. QIP contributed to our third quarter results. We are excited to welcome them aboard to DXP. We look forward to supporting their customers with the broad capabilities of our company and continuing to build DXP Water in Canada.

We continue to generate positive free cash flow. In the third quarter, free cash flow was 14.4 million compared to 29.8 million in Q2. Growth acquisitions and project activity required additional working capital in this quarter, which tempered cash generation. For the first nine months of 2026, free cash flow was 70.5 million compared with 19.5 million in the same period of 2025. A year-to-date improvement matters. We remain focused on working capital discipline, aligning project billing with our investments, and converting earnings into cash.

We ended September with 218.8 million in cash and no borrowings outstanding on our ABL. That is a strong financial position and gives us considerable flexibility, and we continue to invest in organic growth, pursue disciplined acquisitions, and allocate capital where we believe can generate attractive long-term returns for our shareholders. Overall, I am encouraged by our third quarter and the momentum we have built. Through the first nine months of 2026, we grew sales across all three segments, increased adjusted EBITDA and earnings year over year, and generated free cash flow. The real story remains our people—DXP people—showing up every day for our customers and for each other. I want to personally thank all our DXP people for their hard work, customer focus, and execution. We’re building the next chapter of DXP by being technical experts, providing customer-driven engineered solutions, and continuing to be fast and convenient.

This is how we win. This is how we earn trust. This is why customers continue to rely on DXP. As we move into the fourth quarter, our priorities remain unchanged: drive organic growth, expand margins, grow our water and wastewater platform, execute disciplined acquisitions, generate strong free cash flow, and increase long-term shareholder value. We have strong momentum, a strong balance sheet, and significant opportunities ahead for us. We are focused on executing, expanding margins, generating cash, and continuing to build DXP into a larger and more valuable company.

Most importantly, I want to thank our DXP people. Their technical expertise, customer focus, and hard work are what make these results possible. Let’s finish 2026 strong. With that, I will now turn it over to Kent to review our financials in more detail.

Kent Yee (Chief Financial Officer)

Thank you, David, and thank you to everyone for joining us for our review of our third quarter 2026 financial results. Q3 financial performance reflects continued execution across DXP Enterprises with another record sales quarter, double-digit year-over-year growth in operating income and adjusted EBITDA, and improved operating leverage across the business. Our results also reflect the continued contribution of our acquisition strategy alongside strong organic growth in our service centers.

At the same time, gross margins were impacted by mix this quarter, and we made a meaningful investment in working capital to support growth, which tempered free cash flow. As it pertains specifically to our third quarter, DXP Enterprises’ financial results reflect record sales of 587.2 million, growing 14.3% year over year, including 48.8 million of acquisition sales. Organic sales growth of 8.7% year over year was led by 11.3% organic growth in service centers; continued strategic acquisition activity, closing five deals through Q3 and one subsequent to quarter-end; operating income growth of 8.8 million, or 20.1%, to 52.5 million, with operating margins expanding to 8.9%; adjusted EBITDA of 67.3 million, up 19% year over year with adjusted EBITDA margins of 11.5%; and diluted earnings per share of $1.64, up 25.2% from $1.31 in Q3 of last year.

In terms of our detailed financial results, total sales for the third quarter increased 14.3% year over year to 587.2 million. Acquisitions that have been with DXP Enterprises for less than a year contributed 48.8 million in sales during the quarter. Excluding the impact of acquisitions, organic sales were 538.3 million, representing 8.7% organic growth compared to the third quarter of 2025. Average daily sales for the third quarter were 9.18 million per day versus 8.03 million per day in Q3 of last year.

Adjusting for acquisitions, organic average daily sales were 8.41 million per day versus 7.74 million per day in Q3 of 2024. As is typical, sales accelerated throughout the quarter, with average daily sales increasing from 8.45 million per day in July to 9.6 million per day in September, reflecting a normal quarter-end push but highlighting strong acceleration coming into quarter-end. In terms of our business segments, Innovative Pumping Solutions grew 43.3% year over year, followed by service centers growing 7.6% and Supply Chain Services growing 5.5% year over year. Innovative Pumping Solutions sales increased 43.6 million, or 43.3% year over year, to 144.1 million. This growth reflects increased activity in DXP Water, increased production contracts, and strategic acquisitions within IPS. Recent acquisitions contributed 40.8 million in sales during the quarter compared to 6.7 million in Q3 of last year.

Excluding acquisitions, IPS organic sales grew 0.5 million, or 1.6%. Segment operating income for IPS was 23.4 million, up from 18.4 million, or 27.4%, compared to Q3 of last year. In terms of Innovative Pumping Solutions backlog, we experienced increases in the energy and water and wastewater bookings and backlog. Our Q3 energy-related average backlog grew 5.8% sequentially, which is consistent with what we saw in Q2 and further stems the declines we saw in Q3 and Q4 of last year. That said, as we have mentioned, we continue to have some large engineered solutions, and we have continued to recognize revenue again in Q3 and should be completely shipped by the end of Q4.

Excluding this project, our backlog is up 7.8% sequentially and 18.5% from Q1. The conclusion continues to remain that we are trending meaningfully above all notable sales levels, and our backlog has mitigated some decline we saw in the second half of 2025 and positions us to do well going into 2027. Our DXP Water platform experienced our 16th consecutive quarter of sequential sales growth, and we will look for this to continue as we close out fiscal year 2026.

In terms of our service centers, service center sales increased 26.5 million, or 7.6% year over year, to 376.6 million. This growth was driven by increased business activity across multiple regions, including Southeast, California, Texas, Gulf Coast, and South Rockies. Additionally, we saw strength in our metalworking product category. From a segment operating income perspective, service centers generated 55.6 million of operating income in the quarter, reflecting continued strength and consistency in the core MRO business.

We are building a larger, more diversified platform with attractive end-market demand, project opportunities, and recurring service potential. Supply Chain Services sales increased 3.4 million, or 5.5% year over year, to 66.4 million. Performance reflects the onboarding of new customers and related facilities, partially offset by decreased activity with certain existing customers. Segment operating income was 6 million compared to 5.3 million in the prior-year period, reflecting improved profitability along with a pickup in sales growth.

Turning to gross margins, DXP Enterprises’ total gross margins were 30.7% for the third quarter compared to 31.4% in Q3 of 2025. Gross margin was negatively impacted by approximately 65 basis points, primarily due to mix shifts within both service centers and IPS during the quarter. That said, on a year-to-date basis, gross margins were 31.6% compared to 31.5% in the first nine months of 2025, reflecting the continued contribution from recent acquisitions and our continuing margin expansion efforts.

Our SG&A for the quarter increased 10.5 million from Q3 of last year to 128 million and was essentially flat, or 500k, sequentially from Q2. The year-over-year increase reflects increased payroll-related costs and depreciation and amortization, including the addition of acquired businesses. However, SG&A as a percentage of sales improved approximately 108 basis points to 21.8% from 22.9% in Q3 of last year, reflecting operating leverage as sales increased.

Total DXP Enterprises operating income was 52.5 million in the third quarter, or 8.9% of sales, versus 43.7 million, or 8.5% of sales, in the third quarter of 2025. In terms of segment operating margins, service centers, IPS, and Supply Chain Services were at 14.8%, 16.3%, and 9% operating income margins, respectively. Turning to EBITDA, Q3 2026 adjusted EBITDA was 67.3 million compared to 56.5 million in Q3 of 2025. Adjusted EBITDA margins were 11.5%, up from 11% last year. The improvement reflects sales growth and the fixed-cost SG&A leverage we continue to see as we scale the business, partially offset in this quarter by lower gross margins. For the quarter, this translated into 1.3 times operating leverage. Year to date, adjusted EBITDA was 195.4 million, with adjusted EBITDA margins of 11.6% versus 11.2% in the first nine months of 2025.

In terms of our EPS, our net income for Q3 was 26.9 million, up 24.2% from 21.6 million in Q3 of last year. Earnings per diluted share for Q3 2026 were $1.64 per share versus $1.31 per share last year. Our effective tax rate for the quarter was 26.3% compared to 26.6% in Q3 of last year. Year to date, earnings per diluted share were $4.62 versus $3.98 for the first nine months of 2025. Turning to the balance sheet and cash flow, in terms of working capital, working capital as of September 30, 2026 was 420.9 million, an increase of 27.6 million from June and 59.2 million from December of 2025. As a percentage of the last 12 months’ sales, this amounted to 19%. The increase was primarily due to sustained sales growth, acquisitions, and increased project activity during the quarter. Accounts receivable increased 32.5 million, and costs in excess of billings increased 9.5 million, with receivable days increasing.

Within DXP Water, we continue to focus on tightly managing our project work and aligning billings with the investments, and we expect working capital to normalize as we move into the fourth quarter. In terms of cash, we had 218.8 million in cash on the balance sheet as of September 30th. We also had 192.2 million of availability under our ABL. After 32.8 million in letters of credit, we remain undrawn on our ABL, which provides DXP Enterprises with ample dry powder to pursue acquisitions and broadly invest in DXP Enterprises. Capex in the third quarter was 4.2 million compared to 6.7 million in Q3 of last year. For the first nine months of 2026, capital expenditures were 10.2 million compared to 37 million in the first nine months of 2025.

This reflects a more normalized level of capital spending following the elevated investments we made last year. Turning to free cash flow, cash flow from operations was 18.7 million in the third quarter, and free cash flow was 14.4 million versus 28.1 million in Q3 of 2025. The year-over-year decline reflects the investment in working capital previously mentioned. For the first nine months of 2026, free cash flow was 70.5 million compared to 19.5 million in the prior-year period, more than tripling year over year. Over the last four quarters, DXP Enterprises has produced 105 million in free cash flow, or an average of approximately 26 million per quarter, while continuing to grow the business.

As of September 30, our fixed charge coverage ratio was 2.98 to 1 and our secured leverage ratio was 2.3 to 1, with a covenant EBITDA for the last 12 months of 270 million. Total debt outstanding on September 30 was 839.5 million. In terms of acquisitions, we have acquired five businesses through the first nine months of 2026, including the acquisition of McQuipco Limited in the third quarter, which was funded with cash on the balance sheet and DXP Enterprises stock, and gives DXP Water a beachhead to expand in Canada. These acquisitions are directly aligned with our strategy to expand our water and wastewater platform, extend our geographic reach, and maintain our position as the largest distributor of rotating equipment in North America.

Subsequent to quarter-end, on November 1st we entered into an agreement to acquire MDS of Michigan, which was also funded with cash on the balance sheet. DXP Enterprises’ acquisition pipeline continues to remain active, and we continue to see acquisitions as a disciplined and repeatable growth lever for DXP Enterprises, particularly where we can add strong teams, technical expertise, and market access in attractive end markets. As a reminder, during the third quarter we further strengthened our financial position.

On July 2 we entered into a new loan agreement increasing our ABL to 225 million and extending the maturity to July 2031. Also on July 20, S&P Global Ratings upgraded DXP Enterprises’ issuer credit rating to B+ from B. Together, these give us additional financial flexibility as we continue to invest in the business organically and through acquisitions. In summary, we are pleased with our third quarter and year-to-date performance. Through the first nine months of 2026, sales grew 13.2% to 1.69 billion, organic sales grew 9.3%, adjusted EBITDA grew 17.5% to 195.4 million, and free cash flow more than tripled to 70.5 million. In the third quarter we delivered record sales, strong organic growth in our service centers, expanding operating and adjusted EBITDA margins, and continued progress on our acquisition strategy.

We believe DXP Enterprises remains well positioned to continue creating value through our resilient MRO and supply chain solutions, our engineered solutions, and the growing scale of DXP Water, and a disciplined acquisition strategy. We are excited about the future, and we look forward with confidence to closing out 2026 strong. I will now turn the call over to questions.

OPERATOR

We will now begin the question-and-answer session. If you would like to ask a question, please press star-one to raise your hand. To withdraw your question, press star-one again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from the line of Zach Marriott with Stephens.

Your line is open. Please go ahead.

Zach Marriott (Analyst)

Good morning and thank you for taking my questions.

David Little (Chief Executive Officer)

Good morning, Zach.

Kent Yee (Chief Financial Officer)

Good morning, Zach.

Zach Marriott (Analyst)

Is there any color you can share on demand overall, then more precisely on the daily sales trends by month for both Q3 and Q4 thus far, please.

Kent Yee (Chief Financial Officer)

Absolutely. I can walk through the daily sales trend, and I’ll just go from July and pull it through October. So our July daily average sales was $8.45 million. August was $9.51 million. September was $9.60 million. And then October was $9.03 million per day. Year to date, you know. You know, Zach, if you look at, on a year-to-date variance, you know, we’re up on a year-to-date basis, 13.9% year over year.

Zach Marriott (Analyst)

Perfect. Thank you for that. And then is there anything that should drive a meaningful margin difference, whether up or down, when comparing 3Q to 4Q? Anything to call out?

David Little (Chief Executive Officer)

Sorry, if you haven’t noticed, I’ve got a really bad cold. But no, no, no, no, no. The margins were just a mix problem. There wasn’t anything very specific. Nothing jumped out. There was—some people were up, other people were obviously down. And I think there’s no—we feel good about demand, and so we’re not trying to structurally cut prices to capture more sales. We’re still trying to capture profitable sales. So it was, you know, it just kind of is what it is.

It was still north of 30%, which we spent a long time getting there. So.

Zach Marriott (Analyst)

Thank you. And then sticking on margins, in the Innovative Pumping Solutions segment specifically, they dipped quarter over quarter. Just what was the driver there, and what is a reasonable expectation for Q4 in that segment?

Kent Yee (Chief Financial Officer)

Yeah, Zach, once again, you know, similar to David’s comments, I’d echo that. The mix shift—in my comments I mentioned what was in service centers and IPS. So some of that’s just once again mix shift in IPS, the sequential kind of decline in operating income margins, you know, and so that kind of is what it is. You know, specifically, we also have a fairly large project we talked about, without getting into too many of the specifics. And so that shipped and should be complete by the end of Q4.

And so we would expect margins once again to be historically what they’ve been. So.

Zach Marriott (Analyst)

Got it. And then. Sorry,

David Little (Chief Executive Officer)

No, I was just going to add that—not to give the wrong impression—the bigger order we have at a little lower margins, but we’ve been on a percentage of completion basis dealing with that for several quarters now. So I don’t really think that had much effect, in my opinion. You know, I think commission work, which is at 100%, was maybe—maybe we can point to that a little bit. But I don’t—you know, bottom line is we were fine with where the margins landed.

We were a little surprised, I guess, that they trended down. But there wasn’t any clear answer to it besides just normal everyday business and just how the mix worked out.

Zach Marriott (Analyst)

Got it. And then last one, if I may, on interest expense holding pretty steady, around $17 million a quarter. Is this a fair assumption for Q4 as well?

Kent Yee (Chief Financial Officer)

Yeah, yeah, no, Zach, that’s fair. We obviously redid the Term Loan B now almost a year and some change ago, and so we for a period went up to, you know, call it that $17 million. And as the year goes, you know, it should taper slightly. You have some quarterly principal payments, but outside of that, it should stay in the rough same range.

Zach Marriott (Analyst)

Thanks for all the color. And I’ll turn it back.

OPERATOR

There are no further questions at this time. I will now turn the call back to David Little for closing remarks.

David Little (Chief Executive Officer)

Well, thanks for everybody for participating on the call. I would just like to leave you with, I guess, my thoughts on about the business and, you know, the core DXP business is growing. Acquisitions are adding to that growth. Water is becoming a major strategic platform. We have additional margin opportunity. Balance sheet gives us the capacity to continue to compound the business and creating long shareholder value. You know, just in conclusion, thanks to our DXP people. We feel like things are solid, and onward and upward. So thank you very much.

OPERATOR

This concludes today’s call. Thank you for attending. You may now disconnect.

Disclaimer: This transcript is provided for informational purposes only. While we strive for accuracy, there may be errors or omissions in this automated transcription. For official company statements and financial information, please refer to the company’s SEC filings and official press releases. Corporate participants’ and analysts’ statements reflect their views as of the date of this call and are subject to change without notice.