# Distribution Solutions Group, Inc.: Form 10-Q for the period ended Mar 31, 2024

- Company: [Distribution Solutions Group, Inc.](/companies/dsgr.md) (CIK 703604)
- Form: 10-Q
- Filed: 2024-05-02
- Accepted by EDGAR: May 2, 2024, 07:52 ET
- Period: 2024-03-31
- Accession: 0000703604-24-000061
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/703604/000070360424000061/dsgr-20240331.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/703604/000070360424000061/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2024-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2024-01-01 to 2024-03-31 | $416.1m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2024-01-01 to 2024-03-31 | $272.7m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2024-01-01 to 2024-03-31 | $143.4m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2024-01-01 to 2024-03-31 | $140.6m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2024-01-01 to 2024-03-31 | $2.8m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2024-01-01 to 2024-03-31 | $11.8m | us-gaap:InterestExpense |
| Income tax | 3 months, 2024-01-01 to 2024-03-31 | −$4.1m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2024-01-01 to 2024-03-31 | −$5.2m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2024-01-01 to 2024-03-31 | −$0.11 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2024-01-01 to 2024-03-31 | −$0.11 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2024-01-01 to 2024-03-31 | 46,777,178 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2024-01-01 to 2024-03-31 | $6.6m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2024-01-01 to 2024-03-31 | $2.5m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2024-03-31 | $73.1m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2024-03-31 | $655.1m | us-gaap:AssetsCurrent |
| Total assets | at 2024-03-31 | $1.54bn | us-gaap:Assets |
| Current liabilities | at 2024-03-31 | $240.5m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2024-03-31 | $888.5m | us-gaap:Liabilities |
| Long-term debt | at 2024-03-31 | $535.7m | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2024-03-31 | $30.3m | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2024-03-31 | $654.7m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 38,102 characters.

The following discussion and analysis of DSG’s financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated financial statements and related notes included in this Quarterly Report on Form 10-Q and the audited consolidated financial statements, accompanying notes and other information included in DSG’s Annual Report on Form 10-K filed for the year ended December 31, 2023.

References to “DSG”, the “Company”, “we”, “our” or “us” refer to Distribution Solutions Group, Inc. and all entities consolidated in the accompanying unaudited condensed consolidated financial statements.

### Overview

DSG, is a multi-platform specialty distribution company providing high touch, value-added distribution solutions to the maintenance, repair and operations (“MRO”), the original equipment manufacturer (“OEM”) and the industrial technologies markets.

We manage and report our operating results through three reportable segments: Lawson, TestEquity and Gexpro Services. A summary of our segments is presented below. For additional details about our segments, see Note 16 – Segment Information within Item 1. Financial Statements.

*Lawson* is a distributor of specialty products and services to the industrial, commercial, institutional and governmental MRO marketplace. Lawson primarily distributes MRO products to its customers through a network of sales representatives and an inside sales channel throughout the United States and Canada.

*TestEquity* is a distributor of test and measurement equipment and solutions, industrial and electronic production supplies, vendor managed inventory programs, and converting, fabrication and adhesive solutions from its leading manufacturer partners supporting the aerospace and defense, wireless and communication, semiconductors, industrial electronics and automotive, and electronics manufacturing industries.

*Gexpro Services* is a global supply chain solutions provider, specializing in the development of mission critical production line management, aftermarket and field installation programs.

In addition to these three reportable segments, we have an “All Other” category which includes unallocated DSG holding company costs that are not directly attributable to the ongoing operating activities of our reportable segments and the results of a non-reportable segment.

### DSG Vision and Strategic Focus

The complementary distribution operations of Lawson, TestEquity and Gexpro Services were combined in 2022 for the purpose of creating a global specialty distribution company enabling each of Lawson, TestEquity and Gexpro Services to maintain their respective high-touch, value-added service delivery models and customer relationships in their specialty distribution businesses under the leadership of their separate business unit management teams. The DSG leadership team provides oversight to these separate leadership teams. This structure helps the combined company to leverage best practices, back-office resources and technologies across the three operating companies to help drive cost synergies and efficiencies. The combined company has the ability to utilize its combined financial resources to accelerate a strategy of expansion through both business acquisitions and organic growth.

### Organic Growth Strategy

We intend to grow our businesses organically by exploring growth opportunities that provide different channels to reach customers, increase revenue and generate positive results. We plan to utilize our Company structure to grow organic revenue through collaborative selling across our customer bases and expanding the digital capabilities across our platform.

### Acquisition Strategy

In addition to organic growth, we plan to actively pursue acquisition opportunities complementary to our businesses and that we believe will be financially accretive to our organization.

### Sales Drivers

DSG believes that the Purchasing Managers Index (“PMI”) published by the Institute for Supply Management is an indicative measure of the relative strength of the economic environment of the industry in which it operates. The PMI is a composite index of economic activity in the U.S. manufacturing sector. A measure of the PMI index above 50 is generally viewed as indicating an expansion of the manufacturing sector while a measure below 50 is generally viewed as representing a contraction. The average monthly PMI was 49.1 in the three months ended March 31, 2024 compared to 47.1 in the three months ended March 31, 2023.

### Lawson Sales Drivers

The North American MRO market is highly fragmented. Lawson competes for business with several national distributors as well as a large number of regional and local distributors. The MRO business is impacted by the overall strength of the manufacturing sector of the U.S. economy.

Lawson’s revenue is also influenced by the number of sales representatives and their productivity. Lawson plans to continue concentrating its efforts on increasing the productivity and size of its sales team. Additionally, Lawson drives revenue through the expansion of products sold to existing customers as well as attracting new customers and additional ship-to locations. Lawson also utilizes an inside sales team to help drive field sales representative productivity and also utilizes an e-commerce site to generate sales.

### TestEquity Sales Drivers

Across the test and measurement, industrial and electronic production supplies businesses, the North American market is highly fragmented with competitors ranging from large global distributors to national and regional distributors.

Through the Hisco Transaction, TestEquity expanded its product offerings, including adhesives, chemicals and tapes as well as specialty materials such as electrostatic discharge, thermal management materials and static shielding bags. Hisco operates in 38 locations across North America, including its Precision Converting facilities that provide value-added fabrication and its Adhesive Materials Group that provides an array of custom repackaging solutions. Hisco also offers vendor-managed inventory and Radio Frequency Identification (“RFID”) programs with specialized warehousing for chemical management, logistics services and cold storage.

### Gexpro Services Sales Drivers

The global supply chain solutions market is highly fragmented across Gexpro Services’ key vertical segments. Gexpro Services’ competitors range from large global distributors and manufacturers to small regional domestic distributors and manufacturers. Gexpro Services’ revenue is influenced by our OEMs’ production schedules, new product introduction launches, and service project needs.

Gexpro Services’ strategy is to increase revenue through increasing wallet share with existing customers, customer-led geographic expansion, new customer development in its six key vertical markets and leveraging its portfolio of recent acquisitions to expand its installation and aftermarket services.

### Supply Chain Disruptions

We continue to be affected by rising supplier costs caused by inflation and increased transportation and labor costs. We have instituted various price increases during 2023 and 2024 in response to rising supplier costs, as well as increased transportation and labor costs in order to manage our gross profit margins.

### Cyber Incident Litigation

On February 10, 2022, DSG disclosed that Lawson Products’ computer network was the subject of a cyber incident potentially involving unauthorized access to certain confidential information (the “Cyber Incident”). DSG engaged a cybersecurity forensics firm to assist in the investigation of the incident and to assist in securing its computer network.

Because of the nature of the information that may have been compromised, DSG was required to notify the parties whose information was potentially compromised of the incident as well as various governmental agencies and has taken other actions, such as offering credit monitoring services. At March 31, 2024, DSG had not incurred material costs as a result of the Cyber Incident. On April 4, 2023, a putative class action lawsuit was filed against DSG related to the Cyber Incident (the “Cyber Incident Suit”). For more information about the Cyber Incident Suit, refer to Note 14 – Commitments and Contingencies within Item 1. Financial Statements.

### Critical Accounting Policies and Use of Estimates

The unaudited condensed consolidated financial statements were prepared in accordance with GAAP. A discussion of our critical accounting policies and estimates is contained within Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in DSG’s Annual Report on Form 10-K for the year ended December 31, 2023. There have been no significant changes to our previously disclosed critical accounting policies and use of estimates. The following provides information on the accounts requiring more significant estimates.

*Income Taxes -* Deferred tax assets or liabilities reflect temporary differences between amounts of assets and liabilities for financial and tax reporting. Such amounts are adjusted, as appropriate, to reflect changes in enacted tax rates expected to be in effect when the temporary differences reverse. Significant judgment is required in determining income tax provisions as well as deferred tax asset and liability balances, including the estimation of valuation allowances and the evaluation of uncertain tax positions.

*Goodwill Impairment -* Goodwill represents the cost of business acquisitions in excess of the fair value of identifiable net tangible and intangible assets acquired. The Company reviews goodwill for potential impairment annually on October 1st, or when an event or other circumstances change that would more likely than not reduce the fair value of the asset below its carrying value.

The first step in the multi-step process to determine if goodwill has been impaired and to what degree is to review the relevant qualitative factors that could cause the fair value of the reporting unit to decrease below the carrying value of the reporting unit. The Company considers factors such as macroeconomic, industry and market conditions, cost factors, overall financial performance and other relevant factors that would affect the individual reporting units. If the Company determines that it is more likely than not that the fair value of the reporting unit is greater than the carrying value of the reporting unit, then no further impairment testing is needed. If the Company determines that it is more likely than not that the carrying value of the reporting unit is greater than the fair value of the reporting unit, the Company will move to the next step in the process. The Company will estimate the fair value of the reporting unit and compare it to the reporting unit’s carrying value. If the carrying value of the reporting unit exceeds its fair value, the Company will record an impairment of goodwill equal to the amount the carrying value of the reporting unit exceeds its fair value, up to the total amount of goodwill previously recognized.

*Business Combinations* - We allocate the purchase price paid for assets acquired and liabilities assumed in connection with our acquisitions based on their estimated fair values at the time of acquisition. This allocation involves a number of assumptions, estimates, and judgments in determining the fair value, as of the acquisition date, of the following:

- intangible assets, including the valuation methodology (the relief of royalty method for trade names and multi-period excess earnings method for customer relationships), estimations of future cash flows, discount rates, royalty rates, recurring revenue attributed to customer relationships, and our assumed market segment share, as well as the estimated useful life of intangible assets;
- deferred tax assets and liabilities, uncertain tax positions, and tax-related valuation allowances;
- inventory;
- property, plant and equipment;
- pre-existing liabilities or legal claims;
- contingent consideration, including estimating the likelihood and timing of achieving the relevant thresholds; and
- goodwill as measured as the excess of consideration transferred over the net of the acquisition date fair values of the assets acquired and the liabilities assumed.

Our assumptions and estimates are based upon comparable market data and information obtained from our management and the management of the acquired companies. We allocate goodwill to the reporting units of the business that are expected to benefit from the business combination.

### Non-GAAP Financial Measures

The Company’s management believes that certain non-GAAP financial measures may provide users of this financial information with additional meaningful comparisons between current results and results in prior operating periods.

Management believes that these non-GAAP financial measures can provide additional meaningful reflection of underlying trends of the business because they provide a comparison of historical information that excludes certain infrequently occurring, seasonal or non-operational items that impact the overall comparability. These non-GAAP financial measures should be viewed in addition to, and not as an alternative for, the Company’s reported results prepared in accordance with GAAP.

### Non-GAAP Adjusted EBITDA

Management believes Adjusted EBITDA is an important measure of the Company’s operating performance and may provide investors with additional meaningful comparisons between current results and results in prior operating periods because Adjusted EBITDA excludes certain non-operational or non-cash items whose fluctuations from period to period do not necessarily correspond to changes in the operating performance of our business and consequently may impact the overall comparability from period to period. We define Adjusted EBITDA as operating income plus depreciation and amortization, stock-based compensation, severance and acquisition related retention costs, costs related to the execution and integration of acquisitions and other non-recurring items. Management uses operating income and Adjusted EBITDA to evaluate the performance of its reportable segments.

The following table provides a reconciliation of Net income (loss) to Adjusted EBITDA on a consolidated basis and Operating income (loss) to Adjusted EBITDA by segment for the three months ended March 31, 2024 and 2023. A reconciliation of Net income (loss) to Adjusted EBITDA by segment is not provided because management does not determine or review net income at the segment level and does not allocate non-operating costs and expenses to its segments, such as income taxes, interest expense, and various other non-operating income and expense. See Note 16 – Segment Information within Item 1. Financial Statements for additional information about our reportable segments.

### Reconciliation of Net Income (Loss) to Non-GAAP Adjusted EBITDA (Unaudited)

*(in thousands)*

|  | Three Months Ended March 31, 2024 Lawson | TestEquity | Gexpro Services | All Other | Consolidated |
| --- | ---: | ---: | ---: | ---: | ---: |
| Net income (loss) |  |  |  |  | $(5,224) |
| Income tax expense (benefit) |  |  |  |  | (4,077) |
| Other income (expense), net |  |  |  |  | 262 |
| Change in fair value of earnout liabilities |  |  |  |  | (5) |
| Interest expense |  |  |  |  | 11,827 |
| Operating income (loss) | $4,107 | $(6,094) | $5,462 | $(692) | $2,783 |
| Depreciation and amortization | 5,208 | 7,496 | 3,840 | 508 | 17,052 |
| Stock-based compensation(1) | 2,012 | — | — | 186 | 2,198 |
| Severance and acquisition related retention expenses(2) | 812 | 9,828 | 72 | 4 | 10,716 |
| Acquisition related costs(3) | 1,287 | 381 | 73 | 213 | 1,954 |
| Other non-recurring(4) | — | — | 1,364 | — | 1,364 |
| Adjusted EBITDA | $13,426 | $11,611 | $10,811 | $219 | $36,067 |

30

*(in thousands)*

|  | Three Months Ended March 31, 2023 Lawson | TestEquity | Gexpro Services | All Other | Consolidated |
| --- | ---: | ---: | ---: | ---: | ---: |
| Net income (loss) |  |  |  |  | $5,907 |
| Income tax expense (benefit) |  |  |  |  | 2,112 |
| Other income (expense), net |  |  |  |  | 975 |
| Change in fair value of earnout liabilities |  |  |  |  | 57 |
| Interest expense |  |  |  |  | 7,670 |
| Operating income (loss) | $8,245 | $26 | $7,374 | $1,076 | $16,721 |
| Depreciation and amortization | 6,558 | 4,805 | 3,865 | 494 | 15,722 |
| Stock-based compensation(1) | 2,204 | — | — | — | 2,204 |
| Severance and acquisition related retention expenses(2) | 238 | 113 | — | — | 351 |
| Acquisition related costs(3) | 1,009 | 2,715 | 375 | — | 4,099 |
| Other non-recurring(4) | 196 | — | 60 | — | 256 |
| Adjusted EBITDA | $18,450 | $7,659 | $11,674 | $1,570 | $39,353 |

(1) Expense (benefit) primarily for stock-based compensation, of which a portion varies with the Company’s stock price.

(2) Includes severance expense from actions taken in 2024 and 2023 not related to a formal restructuring plan and acquisition related retention expenses for the Hisco Transaction.

(3) Transaction and integration costs related to acquisitions.

(4) Other non-recurring costs consist of certain non-recurring strategic projects and other non-recurring items.

### Intersegment Transactions

Segment revenue and Operating income (loss) by reportable segment includes sales to external customers and sales transactions between our segments, referred to as intersegment revenue, and the impact of those intersegment revenue transactions on operating activities. Reconciliations of segment revenue and Operating income (loss) to our consolidated results of operations in the unaudited condensed consolidated financial statements are provided in Note 16 – Segment Information within Item 1. Financial Statements.

### RESULTS OF OPERATIONS

### Three Months Ended March 31, 2024 Compared to Three Months Ended March 31, 2023

### Consolidated Results of Operations

*(Dollars in thousands)*

| Revenue | Three Months Ended March 31, 2024 Amount | % of Revenue | 2023 Amount | % of Revenue |
| --- | ---: | ---: | ---: | ---: |
| Lawson | $118,186 | 28.4% | $125,280 | 36.0% |
| TestEquity | 187,149 | 45.0% | 107,359 | 30.8% |
| Gexpro Services | 98,651 | 23.7% | 101,016 | 29.0% |
| All Other | 12,495 | 3.0% | 14,615 | 4.2% |
| Intersegment revenue elimination | (395) | (0.1)% | — | —% |
| Total Revenue | 416,086 | 100.0% | 348,270 | 100.0% |
| Cost of goods sold |  |  |  |  |
| Lawson | 53,124 | 12.8% | 54,370 | 15.6% |
| TestEquity | 144,948 | 34.8% | 82,002 | 23.5% |
| Gexpro Services | 67,895 | 16.3% | 70,511 | 20.2% |
| All Other | 7,105 | 1.7% | 8,516 | 2.4% |
| Intersegment cost of goods sold elimination | (395) | (0.1)% | — | —% |
| Total Cost of goods sold | 272,677 | 65.5% | 215,399 | 61.8% |
| Gross profit | 143,409 | 34.5% | 132,871 | 38.2% |
| Selling, general and administrative expenses |  |  |  |  |
| Lawson | 60,955 | 14.6% | 62,665 | 18.0% |
| TestEquity | 48,295 | 11.6% | 25,331 | 7.3% |
| Gexpro Services | 25,294 | 6.1% | 23,131 | 6.6% |
| All Other | 6,082 | 1.5% | 5,023 | 1.4% |
| Total Selling, general and administrative expenses | 140,626 | 33.8% | 116,150 | 33.4% |
| Operating income (loss) | 2,783 | 0.7% | 16,721 | 4.8% |
| Interest expense | (11,827) | (2.8)% | (7,670) | (2.2)% |
| Change in fair value of earnout liabilities | 5 | —% | (57) | —% |
| Other income (expense), net | (262) | (0.1)% | (975) | (0.3)% |
| Income (loss) before income taxes | (9,301) | (2.2)% | 8,019 | 2.3% |
| Income tax expense (benefit) | (4,077) | (0.9)% | 2,112 | 0.6% |
| Net income (loss) | $(5,224) | (1.3)% | $5,907 | 1.7% |

### Overview of Consolidated Results of Operations

Our consolidated revenue increased $67.8 million in the first quarter of 2024 compared to the first quarter of 2023 primarily driven by $99.2 million from acquisitions completed in 2023 and 2024 partially offset by a decline in organic revenue. Consolidated gross profit and Selling, general and administrative expenses also increased over the prior year primarily driven by the inclusion of the Hisco and ESS acquisitions completed in 2023 and 2024, respectively.

Refer to Results by Reportable Segment below for a complete discussion of our results of operations.

### Results by Reportable Segment

### Lawson Segment

*(Dollars in thousands)*

|  | Three Months Ended March 31, 2024 | 2023 | Change Amount% |  |
| --- | ---: | ---: | ---: | ---: |
| Revenue from external customers | $118,162 | $125,280 | $(7,118) | (5.7)% |
| Intersegment revenue | 24 | — | 24 | —% |
| Revenue | 118,186 | 125,280 | (7,094) | (5.7)% |
| Cost of goods sold | 53,124 | 54,370 | (1,246) | (2.3)% |
| Gross profit | 65,062 | 70,910 | (5,848) | (8.2)% |
| Selling, general and administrative expenses | 60,955 | 62,665 | (1,710) | (2.7)% |
| Operating income (loss) | $4,107 | $8,245 | $(4,138) | (50.2)% |
| Gross profit margin | 55.1% | 56.6% |  |  |
| Adjusted EBITDA(1) | $13,426 | $18,450 | $(5,024) | (27.2)% |

(1) Refer to the Non-GAAP Adjusted EBITDA section in Overview for a reconciliation of Adjusted EBITDA to operating income.

### Revenue and Gross Profit

Revenue decreased $7.1 million, or 5.7%, to $118.2 million in the first quarter of 2024 compared to $125.3 million in the first quarter of 2023. The decrease was primarily driven by a decline in sales to Lawson’s core and governmental customers of $11.1 million, partially offset by revenue generated from the acquisition completed in 2024 of $2.3 million and strengthening sales to strategic customers and automotive end market of $2.5 million.

Gross profit decreased $5.8 million to $65.1 million in the first quarter of 2024 compared to gross profit of $70.9 million in the prior year quarter primarily as a result of decreased sales and higher expense for write-offs of obsolete and excess inventory of $0.6 million, partially offset by gross profit generated from the acquisition completed in 2024 of $0.7 million. Lawson gross profit as a percent of revenue was 55.1% in the first quarter of 2024 compared to 56.6% in the prior year quarter. The gross profit margin percentage decrease was primarily the result of higher expense for write-offs of obsolete and excess inventory and a shift in sales mix.

### Selling, General and Administrative Expenses

Selling, general and administrative expenses consist of compensation and support for Lawson sales representatives and expenses to operate Lawson’s distribution network and overhead expenses.

Selling, general and administrative expenses decreased $1.7 million to $61.0 million in the first quarter of 2024 compared to $62.7 million in the prior year quarter. The decrease was primarily driven by a decrease in variable compensation on lower sales and a decrease in depreciation and amortization of $1.4 million, partially offset by an increase in severance expense and acquisition related costs of $0.6 million and $0.3 million, respectively.

### Adjusted EBITDA

During the three months ended March 31, 2024, Lawson generated Adjusted EBITDA of $13.4 million, a decrease of $5.0 million from the same period a year ago primarily driven by decreased revenue and margins and deleveraging of its fixed cost structure.

### TestEquity Segment

*(Dollars in thousands)*

|  | Three Months Ended March 31, 2024 | 2023 | Change Amount% |  |
| --- | ---: | ---: | ---: | ---: |
| Revenue from external customers | $187,065 | $107,359 | $79,706 | 74.2% |
| Intersegment revenue | 84 | — | 84 | —% |
| Revenue | 187,149 | 107,359 | 79,790 | 74.3% |
| Cost of goods sold | 144,948 | 82,002 | 62,946 | 76.8% |
| Gross profit | 42,201 | 25,357 | 16,844 | 66.4% |
| Selling, general and administrative expenses | 48,295 | 25,331 | 22,964 | 90.7% |
| Operating income (loss) | $(6,094) | $26 | $(6,120) | N/M |
| Gross profit margin | 22.5% | 23.6% |  |  |
| Adjusted EBITDA(1) | $11,611 | $7,659 | $3,952 | 51.6% |

N/M Not meaningful

(1) Refer to the Non-GAAP Adjusted EBITDA section in Overview for a reconciliation of Adjusted EBITDA to operating income.

### Revenue and Gross Profit

Revenue increased $79.8 million, or 74.3%, to $187.1 million in the first quarter of 2024 compared to $107.4 million in the first quarter of 2023. The increase was driven by $96.9 million of revenue generated from an acquisition completed in 2023 offset by a $17.1 million decline in legacy TestEquity revenue primarily due to a slowdown in the test and measurement market, primarily caused by tightening of capital budgets in TestEquity’s customer base and softening in the electronic production supplies end markets.

Gross profit increased $16.8 million to $42.2 million in the first quarter of 2024 compared to gross profit of $25.4 million in the prior year quarter primarily as a result of the inclusion of the acquisition completed in 2023, which generated $22.4 million of additional gross profit in the first quarter of 2024 offset by a decline in legacy TestEquity revenue. TestEquity gross profit as a percent of revenue decreased to 22.5% in the first quarter of 2024 compared to 23.6% in the prior year quarter primarily due to a shift in sales mix and the lower gross margin rate from the 2023 acquisition.

### Selling, General and Administrative Expenses

Selling, general and administrative expenses consist of compensation and support for TestEquity’s sales representatives and expenses to operate TestEquity’s distribution network and overhead expenses.

Selling, general and administrative expenses increased $23.0 million to $48.3 million in the first quarter of 2024 compared to $25.3 million in the prior year quarter. Approximately $25.0 million of the increased expenses, including depreciation and amortization, was driven by the acquisition completed in 2023 of which $9.6 million was related to the Hisco employee retention bonuses, partially offset by lower merger and acquisition expenses of $2.3 million in the first quarter of 2024 compared to the prior year quarter.

### Adjusted EBITDA

During the three months ended March 31, 2024, TestEquity generated Adjusted EBITDA of $11.6 million, an increase of $4.0 million, or 51.6% from the same period a year ago with approximately $8.6 million driven by the acquisition completed in 2023, offset by a reduction of $4.6 million in legacy TestEquity due to the decline in revenue.

### Gexpro Services Segment

*(Dollars in thousands)*

|  | Three Months Ended March 31, 2024 | 2023 | Change Amount% |  |
| --- | ---: | ---: | ---: | ---: |
| Revenue from external customers | $98,364 | $101,016 | $(2,652) | (2.6)% |
| Intersegment revenue | 287 | — | 287 | —% |
| Revenue | 98,651 | 101,016 | (2,365) | (2.3)% |
| Cost of goods sold | 67,895 | 70,511 | (2,616) | (3.7)% |
| Gross profit | 30,756 | 30,505 | 251 | 0.8% |
| Selling, general and administrative expenses | 25,294 | 23,131 | 2,163 | 9.4% |
| Operating income (loss) | $5,462 | $7,374 | $(1,912) | (25.9)% |
| Gross profit margin | 31.2% | 30.2% |  |  |
| Adjusted EBITDA(1) | $10,811 | $11,674 | $(863) | (7.4)% |

(1) Refer to the Non-GAAP Adjusted EBITDA section in Overview for a reconciliation of Adjusted EBITDA to operating income.

### Revenue and Gross Profit

Revenue decreased $2.4 million, or 2.3%, to $98.7 million in the first quarter of 2024 compared to $101.0 million in the first quarter of 2023. The decrease was primarily driven by the timing of project work in the renewable energy vertical market of $3.1 million, softness in the technology vertical market of $1.6 million, partially offset by strengthening sales within the aerospace and defense vertical market of $1.9 million.

Gross profit increased $0.3 million to $30.8 million in the first quarter of 2024 compared to gross profit of $30.5 million in the prior year quarter. Gexpro Services gross profit as a percent of revenue was 31.2% in the first quarter of 2024 compared to 30.2% in the prior year quarter primarily driven by enhanced strategic sourcing, supply chain improvements and end market sales mix.

### Selling, General and Administrative Expenses

Selling, general and administrative expenses consist of sales and marketing expenses primarily relating to compensation, costs associated with supporting Gexpro Services’ service facilities, overhead expenses within finance, legal, human resources and information technology, and other costs required to operate Gexpro Services’ business and service customers.

Selling, general, and administrative expenses increased $2.2 million to $25.3 million in the first quarter of 2024 compared to $23.1 million in the prior year quarter. The increase was primarily driven by additional consulting costs of $1.3 million to support non-recurring strategic projects and investments to support future growth.

### Adjusted EBITDA

During the three months ended March 31, 2024, Gexpro Services generated Adjusted EBITDA of $10.8 million, a decrease of $0.9 million from the same period a year ago primarily driven by the revenue decline and an increase in Selling, general, and administrative expenses.

### Consolidated Non-operating Income and Expense

*(Dollars in thousands)*

|  | Three Months Ended March 31, 2024 | 2023 | Change Amount% |  |
| --- | ---: | ---: | ---: | ---: |
| Interest expense | $(11,827) | $(7,670) | $(4,157) | 54.2% |
| Change in fair value of earnout liabilities | $5 | $(57) | $62 | N/M |
| Other income (expense), net | $(262) | $(975) | $713 | (73.1)% |
| Income tax expense (benefit) | $(4,077) | $2,112 | $(6,189) | N/M |

N/M Not meaningful

### Interest Expense

Interest expense increased $4.2 million in the first quarter of 2024 compared to the prior year quarter primarily due to an increase in interest rates and higher outstanding borrowings related to the Hisco Transaction.

### Other Income (Expense), Net

Other income (expense), net consists of effects of changes in foreign currency exchange rates, interest income, net and other non-operating income and expenditures. The $0.7 million change in the first quarter of 2024 compared to the same period of 2023 was primarily due to unfavorable changes in foreign currency exchange rates partially offset by favorable increases in interest income.

### Income Tax Expense (Benefit)

Income tax benefit was $4.1 million, a 43.8% effective tax rate for the three months ended March 31, 2024 compared to income tax expense of $2.1 million and a 26.3% effective tax rate for the three months ended March 31, 2023. The change in the year-over-year effective tax rate was primarily due to a change in valuation allowances related to interest expense limitation deferred tax assets, state taxes, foreign income and other permanent items.

### LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents were $73.1 million on March 31, 2024 compared to $83.9 million on December 31, 2023.

The Company believes its current balances of cash and cash equivalents, availability under its 2023 Amended Credit Agreement and cash flows from operations will be sufficient to meet its liquidity needs for the next twelve months. As of March 31, 2024, the Company had $73.1 million of cash and cash equivalents and $198.3 million of borrowing availability remaining, net of outstanding letters of credit, under the 2023 Amended Credit Agreement.

Our primary short-term and long-term liquidity and capital resource needs are to finance operating expenses, working capital, capital expenditures, potential business acquisitions, strategic initiatives and general corporate purposes. Our current debt obligations under the 2023 Amended Credit Agreement mature in April 2027. Required principal payments on the 2023 Amended Credit Agreement for the next twelve months are $30.3 million. Refer to Note 9 – Debt within Item 1. Financial Statements for additional information related to our debt obligations. Access to debt capital markets has historically provided the Company with sources of liquidity, beyond normal operating cash flows. We do not anticipate having difficulty in obtaining financing from those markets in the future, however, we cannot provide assurance that unforeseen events or events beyond our control (such as a potential tightening of debt capital markets) will not have a material adverse impact on our liquidity.

### Sources and Uses of Cash

The following table presents a summary of our cash flows:

*(in thousands)*

|  | Three Months Ended March 31, 2024 | 2023 | Change |
| --- | ---: | ---: | ---: |
| Net cash provided by (used in) operating activities | $6,615 | $13,858 | $(7,243) |
| Net cash provided by (used in) investing activities | $(16,008) | $(5,094) | $(10,914) |
| Net cash provided by (used in) financing activities | $(3,951) | $(2,394) | $(1,557) |

### Cash Provided by (Used in) Operating Activities

Net cash provided by operating activities for the three months ended March 31, 2024 was $6.6 million primarily due to non-cash items, partially offset by a net loss and investments in trade working capital to support higher sales and other net cash flow items.

Net cash provided by operating activities for the three months ended March 31, 2023 was $13.9 million, primarily due to net income including non-cash items, partially offset by investments in trade working capital to support higher sales and other net cash flow items.

### Cash Provided by (Used in) Investing Activities

Net cash used in investing activities for the three months ended March 31, 2024 was $16.0 million, primarily due to the ESS Transaction, as well as purchases of property, plant and equipment and rental equipment which was partially offset by the sale of rental equipment.

Net cash used in investing activities for the three months ended March 31, 2023 was $5.1 million, primarily due to purchases of property, plant and equipment and rental equipment which was partially offset by the sale of rental equipment.

### Cash Provided by (Used in) Financing Activities

Net cash used in financing activities for the three months ended March 31, 2024 was $4.0 million primarily due to principal payments on the term loans and net payments on the revolving credit facility.

Net cash used in financing activities for the three months ended March 31, 2023 was $2.4 million, primarily due to principal payments on the term loans partially offset by net proceeds on the revolving credit facility.

### Financing and Capital Requirements

### Credit Facility

On June 8, 2023, in connection with the Hisco Transaction, DSG amended and replaced its previous credit agreement with the 2023 Amended Credit Agreement, which includes a $200 million senior secured revolving credit facility, a $250 million senior secured initial term loan facility, a $305 million incremental term loan, and a $50 million senior secured delayed draw term loan facility. The 2023 Amended Credit Agreement also provides for the Company to increase the commitments from time to time by up to $200 million in the aggregate, subject to, among other things, receipt of additional commitments from existing and/or new lenders and pro forma compliance with certain financial covenants. Refer to Note 9 – Debt within Item 1. Financial Statements for a description of the 2023 Amended Credit Agreement.

On March 31, 2024, we had $571.8 million in outstanding borrowings under the 2023 Amended Credit Agreement and $198.3 million of borrowing availability remaining, net of outstanding letters of credit, under the senior secured revolving credit facility component.

As of March 31, 2024, we were in compliance with all financial covenants under our 2023 Amended Credit Agreement. While we were in compliance with our financial covenants as of March 31, 2024, failure to meet the covenant requirements of the 2023 Amended Credit Agreement in future quarters could lead to higher financing costs and increased restrictions, reduce or eliminate our ability to borrow funds, or accelerate the payment of our indebtedness and could have a material adverse effect on our business, financial condition and results of operations.

### Purchase Commitments

As of March 31, 2024, we had contractual commitments to purchase approximately $152 million of products from our suppliers and contractors over the next twelve months.

### Capital Expenditures

During the three months ended March 31, 2024, total capital expenditures for property, plant and equipment and rental equipment were $3.7 million excluding proceeds from the sale of rental equipment. The Company expects to spend approximately $12 million to $16 million for capital expenditures during the remainder of 2024 to support ongoing operations.

### Stock Repurchase Program

The Company’s Board of Directors previously authorized a stock repurchase program that permits the Company to repurchase its common stock. The timing and the amount of any repurchases will be determined by management under parameters established by the Board of Directors and depend on various factors including an evaluation of our stock price, corporate and regulatory requirements, capital availability and other market conditions.

No shares were repurchased during the three months ended March 31, 2024 or 2023 under the Company’s stock repurchase program. The remaining availability for stock repurchases under the program was $29.0 million as of March 31, 2024. See Note 11 – Stockholders’ Equity within Item 1. Financial Statements for further information.

### Retention Bonuses

As part of the Purchase Agreement, DSG will also pay $37.5 million in cash or DSG common stock in retention bonuses to certain Hisco employees that remain employed with Hisco or its affiliates for at least twelve months after the closing of the Hisco Transaction. Pursuant to the Purchase Agreement, the Company paid $1.8 million of the retention bonuses in 2023 and $2.3 million of the retention bonuses in the first quarter of 2024 and will pay $32.3 million of the retention bonuses during the next nine months of 2024, with the remaining balance of $1.1 million to be paid in 2025.

## Market risk

As filed, 1,827 characters.

### Interest Rate Risk

Our exposure to market risk for changes in interest rates relate primarily to our floating rate long-term debt obligations. Interest rate risk is the exposure to loss resulting from changes in the level of interest rates and the spread between different interest rates. These risks are highly sensitive to many factors, including U.S. monetary and tax policies, U.S. and international economic factors and other factors beyond our control.

The loans under the 2023 Amended Credit Agreement bear interest, at the Company’s option, at a rate equal to (i) the Alternate Base Rate or the Canadian Prime Rate (each as defined in the 2023 Amended Credit Agreement), plus, in each case, an additional margin ranging from 0.0% to 1.75% per annum, depending on the total net leverage ratio of the Company and its restricted subsidiaries as of the most recent determination date under the 2023 Amended Credit Agreement or (ii) the Adjusted Term SOFR Rate or the CDOR Rate (each as defined in the 2023 Amended Credit Agreement), plus, in each case, an additional margin ranging from 1.0% to 2.75% per annum, depending on the total net leverage ratio of the Company and its restricted subsidiaries as of the most recent determination date under the 2023 Amended Credit Agreement. Refer to Note 9 – Debt within Item 1. Financial Statements for information about the 2023 Amended Credit Agreement.

As of March 31, 2024, approximately 100% of our debt was floating rate debt. A hypothetical increase/decrease in interest rates of 100 basis points would increase/decrease our annual interest expense by approximately $5.7 million. We have not entered into, and currently do not intend to enter into, interest rate swaps or other derivative financial instruments to mitigate the impact of fluctuations in interest rates.

## Controls and procedures

As filed, 1,449 characters.

### Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our senior management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this report (the “Evaluation Date”). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded as of the Evaluation Date that our disclosure controls and procedures were effective as of the Evaluation Date.

### Changes in Internal Control over Financial Reporting

Given the timing of the ESS Transaction and the complexity of systems and business processes, we intend to exclude ESS from our assessment and report on internal control over financial reporting for the year ending December 31, 2024. Other than the ESS Transaction, there were no changes in our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act, during the quarter ended March 31, 2024 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

### PART II

### OTHER INFORMATION

ITEMS 3 and 4 of Part II are not applicable and have been omitted from this report.

## Risk factors

As filed, 169 characters.

There have been no material changes from the risk factors disclosed in the “Risk Factors” section in our Annual Report on Form 10-K for the year ended December 31, 2023.

Filed May 2, 2024.
Source: SEC EDGAR, the filing index for accession 0000703604-24-000061. Last ingested by Listed: Nov 5, 2026, 12:09 ET. No prices; not investment advice.