DXPE earnings call transcript, November 5, 2026

Manning 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 our 11.5% of sales. Net income increased 24.2% to $26.9 million. Diluted earnings per share increased to 1.64 compared to 1. 3.1 in the third quarter of 2025. Gross profit margins were lower primarily due to sales mix. We had a 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, improve gross margins and continue to leverage our expense base remain important opportunities for DXPE.

From my growth standpoint, we continue to like where DXPE 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 DXPE's 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 DX people. We are focused on profitable growth, strong cash generation. And customer relationships that last. Tariffs, inflation, interest rates, 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, municipal industrial operations moving. This is where our DX 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 relationship and our engineered solutions capability. That is a powerful combination for DXP. Innovative plumbing 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 the complex customer applications, delivering engineered solutions and helping customers move important solutions forward. Like the momentum we are building in this business. DXPE 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, DXPE water sales were up 80% year over year. Water is deliberately a growth platform for DXPE, 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 for our customers value experience, reliability, and know how. Many IPS engineer solutions are long cycle in nature, making discipline execution and a steady pipeline of orders and important. As we move forward, our IPS focus is on discipline 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, solid growth. Sales increased 7.6% year over year, 2.4% sequentially to 370 26.6 million. Organic growth remained a key contributor with increased activity across Southeast California, Texas Gulf Coast, and the South Rocky regions, as well as strengthen our middle working product category. This is the heart of DXP's local customer driven bottle. Our service center teams know their customers, understand the application, respond quickly when the customer needs us. That local present allows DXP to be fast, convenient, while bringing real technical services to the customer. Supply chain services increased 66.4 million, up five. 0.6% 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 SES contribute to growth across DXPE. This business is a great example of being customer-driven experts because we not just sell products, we are helping customers improve procurement, manage inventory, 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 the building 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. Making each acquired business part of DXP's culture of DX people you can trust. MeQuip contributed to our first third quarter results. We are excited to welcome them aboard to DXP. We look forward to supporting their customers. with 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. Project activity required additional working capital in this quarter which tempered cash generation. For the first nine months of 26 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 building with our investment. 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 discipline acquisitions, 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, earnings year over year, generated free cash flow. The real story remains our people, DX people, showing up every day for our customers and for each other. I want to personally thank all our DX 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, I promise 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 flow. And continue to build DXPE into a large. And more valuable company. We importantly. Most importantly. I want to thank our DXPE people. Their technical expertise. Customer focus. And hard work. Are what makes. These results possible. Let's finish 2026 strong. With that I will now turn it over to Kim. To review our financials in more detail.

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 with another record sales quarter. Double digit year over year growth and operating income and adjusted EBITDA and improved operating leverage across the business. Our results also reflect the continued contract. The 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 DXPE's financial results reflect record sales of 587.2 million growing 14.3% year-over-year including 48.8 million of actual acquisition sales. Organic sales growth of 8.7% year-over-year 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 for less than a year.

Retributed $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 $8.18 million per day. $8.41 million per day versus $7.74 million per day in Q3 of 2025. 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. 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 DXPE water, increased production content. Contracts and strategic acquisitions within IPS. Recent acquisitions contributed 40.8.8 million sales during the quarter compared to 6.7 million in Q3 of last year. Excluding acquisitions, IPS organic sales 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 to 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. It 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 26.8%. 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 strengthen 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 in market demand, project opportunities and recurring service potential. Supply chain services sales increased 3.4 million or five and a half percent 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. Sediment 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's total gross margins were 30.7% for the third quarter compared to 31.4% in Q3 of 2025. Gross margin was negatively impacted by a approximately 65 basis points, primarily due to mixed shifts within both service centers and IPS during the corner. That said, on a year-to-date basis, gross margins were 31.6% compared to 31.5% in the first nine months of year 2025, reflecting the continued, reflecting, excuse me, 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, depreciation and amortization, including the addition of acquired businesses. However, SG&A SG&A as a percentage of sales improved approximately 108 basis points to 21.8% from 22.9% in Q3 last year, reflecting operating leverage as sales increased. Total DXP 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, IP S and supply chain services at 14.8%, 16.3% and 9% 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. G&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 was for Q3 was 26.9. up 24.2% from 21.6 million in Q3 of last year. Earnings per diluted share for Q3 2026 was $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 months of 2025. Turning to the balance sheet and cash flow in terms of working capital, working capital as of September 30th, 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 and excessive billings increased $9.5 million, with receivable days increasing within DXP water. We continue to focus on tightening 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 $118.8 million in cash on the balance sheet as of September 30th. $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 with ample dry powder to pursue acquisitions. And broadly invest in DXP. 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. 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 million. $15.4 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 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 30th, 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 $278 million. Total debt outstanding on September 30th was $839.5 million. In terms of acquisitions, we have acquired five businesses through the first nine months of of 2026, including that. The acquisition of McQuipco Limited in the third quarter, which was funded with cash on the balance sheet and DXP stocking 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. DXPE's acquisition pipeline continues to remain active, and we continue to see acquisitions as a discipline and repeatable growth lever for DXPE, 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 strengthen our financial position. On July 2nd, we entered into a new loan agreement increasing our ABL to $225 million.

and extending the maturity to July 2031. Also, on July 20th, S&P Global Ratings upgraded DXP's issuer credit rating to B-plus 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 DXPE remains well positioned to continue creating value through our results. resilient MRO and supply chain solutions, our engineered solutions, and the growing scale of DXPE water and a discipline 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.

Your first question comes from the line of Zach Marriott with Stevens.

Your line is open. Please go ahead.