Record margins prove the water shift is working
- Q2 2026 sales rose 15.6% to $576.5 million, with daily sales reaching $9.4 million by June.
- Innovative Pumping Solutions grew 52.6%, and DXP Water is approaching 70% of that segment's sales.
- Service Centers remain the largest unit, contributing $367.9 million of Q2 sales.
- Adjusted EBITDA margin hit a record 12.2% as the higher-margin water business drove profitability.
- The primary cash risk remains an ongoing IRS review tied to $37.0 million of past R&D tax credits.
Water is carrying the story
DXP is an industrial distributor, but the main driver of its current success is pumps and water. In Q2 2026, total sales rose 15.6% to $576.5 million. The standout was once again Innovative Pumping Solutions, where sales grew 52.6%. The DXP Water division reached $97 million in the quarter and is now approaching 70% of the segment's sales.
This shift is structurally transforming the company because water and wastewater end markets are generally steadier than the cyclical oil and gas sector. It also directly boosts profitability. The strong execution in water helped push total adjusted EBITDA margins to a record 12.2% in Q2. Steady sequential sales growth through the first half of the year dispelled earlier concerns about a slow January.
The bear case centers on costs and integration. Management is making acquisitions to expand the water platform, such as the recent Mequipco deal in Canada. These additions bring execution risk, and they structurally increase SG&A expenses due to higher payroll and self-insurance healthcare costs.
The other lingering headwind is a significant tax dispute. The IRS is auditing the company's past R&D tax credits, putting $37.0 million at risk. If disallowed, this would result in a meaningful cash drain. However, as long as the water business continues its rapid expansion, the underlying operating story remains strong.
Industrial supplies plus pump work
DXP sells maintenance, repair, and operating products to other businesses. These are the essential parts and supplies that factories, energy sites, utilities, and other industrial customers need to keep their operations running.
The company generates revenue in two main ways. First, it distributes a wide range of products through local service centers and managed customer supply programs. Second, it builds, assembles, and repairs custom pump systems, which is handled by the IPS segment.
Growth is fueled by increasing customer activity, new contract wins, and strategic acquisitions. Recent deals, including a push into Canada, have moved DXP deeper into the water and wastewater markets. This pivot is now the primary growth engine for the entire business.
The model faces pressure if broad industrial demand slows down, if newly acquired companies fail to integrate well, or if rising payroll and healthcare costs consume the extra gross profit generated by higher-margin sales.
What DXP sells
Service Centers
This is the largest segment. It sells industrial parts and services, including rotating equipment, bearings, power transmission, and safety products.
Innovative Pumping Solutions
IPS builds, assembles, and remanufactures custom pump packages. It grew an impressive 52.6% in Q2 2026.
DXP Water
DXP Water serves water and wastewater customers within IPS. It has nearly doubled in size year-over-year and approaches 70% of IPS sales.
Supply Chain Services
This unit manages MRO inventory and purchasing functions for customers. It grew modestly in Q2 as new customer wins offset softer existing activity.
Q2 sales mix
Segment shares use sales for the three months ended June 30, 2026. Service Centers is the largest segment, while IPS drives the highest growth.
What could go wrong
IRS tax credit hit
High impact · Medium oddsDXP has recognized $37.0 million of federal R&D tax credits from 2015 through Q3 2025. The IRS is examining the 2018 tax year, and the company intends to defend its position. If a large share is disallowed, cash and reported results could take a real hit.
Acquisition integration strain
Medium impact · Medium oddsDXP is actively acquiring companies, like Mequipco in Canada, to expand its water footprint. Acquisitions add growth but also bring payroll, systems complexity, and integration risk. If DXP pays too much or struggles to combine operations, the growth may not convert to actual cash flow.
Costs limit future margin gains
Medium impact · High oddsWhile adjusted EBITDA margins hit a record 12.2% in Q2, structural costs remain high. Management has noted that corporate expenses and self-insurance healthcare claims will remain high as acquired headcount grows. This could cap further margin expansion.
Water growth slows
High impact · Medium oddsThe bull case is completely dependent on IPS and the water division. In Q2 2026, the water division nearly doubled year-over-year. If that pace abruptly fades, the market may question whether DXP has truly transformed into a steadier business.
In one breath
What does DXP Enterprises do?
DXP sells industrial maintenance, repair, and operating products to business customers. It also builds and repairs custom pump systems, with a rapidly growing focus on water and wastewater markets.
Why is DXP Water important?
DXP Water is now the primary growth engine for the company. It approaches 70% of IPS sales and is helping shift the company away from cyclical oil and gas work toward steadier infrastructure projects.
What is the biggest risk for DXPE stock?
The clearest single risk is an ongoing IRS review of R&D tax credits tied to $37.0 million recognized from 2015 through Q3 2025. The broader operational risk involves integrating recent acquisitions smoothly.
Is DXP still exposed to oil and gas?
Yes. While DXP has significantly reduced its reliance on legacy energy markets through its water expansion, it still serves oil and gas customers, making parts of the business vulnerable to energy cycles.
