Distribution Solutions Group, Inc. — 2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022. This is an annual filing, not a standalone fourth-quarter report; the filing text does not provide a clear set of Q4-only financial results.
Business context and comparability
DSG is a specialty distributor serving MRO, OEM and industrial technology markets through Lawson, TestEquity and Gexpro Services. The businesses combined on April 1, 2022, and DSG changed its name from Lawson Products, Inc. in May. Under reverse-acquisition accounting, 2021 results and 2022 results before April 1 include TestEquity and Gexpro Services but exclude legacy Lawson. Consequently, consolidated year-over-year comparisons are not like-for-like.
DSG also completed five acquisitions during 2022, with reported purchase consideration totaling approximately $122.2 million. Management’s strategy includes organic growth, digital and collaborative selling, and further acquisitions.
Key financial results
| Metric | 2022 | 2021 |
|---|---|---|
| Revenue | $1,151.4 million | $520.3 million |
| Gross profit / margin | $390.9 million / 33.9% | $130.3 million / 25.0% |
| Operating income / margin | $41.8 million / 3.6% | $11.4 million / 2.2% |
| Net income (loss) | $7.4 million | $(5.1) million |
| Diluted earnings (loss) per share | $0.42 | $(0.49) |
| Adjusted EBITDA (non-GAAP) | $113.9 million | $39.4 million |
| Operating cash flow | $(11.0) million | $10.3 million |
| Investing cash flow | $(126.7) million | $(41.4) million |
| Financing cash flow | $148.5 million | $34.7 million |
Revenue growth, earnings and margin changes are materially affected by the merger, acquisition activity and differing periods of Lawson consolidation. Adjusted EBITDA is a non-GAAP measure and includes adjustments such as merger and acquisition costs, depreciation and amortization, and inventory-related charges.
On a management-presented, non-GAAP comparable basis, Lawson revenue increased 15.6% to $429.7 million and adjusted EBITDA rose 27.1% to $38.6 million; its adjusted gross margin declined to 52.7% from 53.9%. TestEquity revenue increased 48.5% to $392.4 million, with 12.1% organic growth in its existing base business; gross margin rose to 22.8% from 21.6%. Gexpro Services revenue increased 50.4% to $385.3 million, including 8.9% organic base-business growth; gross margin rose to 29.3% from 28.5%. Acquisition contributions were significant for both TestEquity and Gexpro Services.
Balance sheet, debt and liquidity
At December 31, 2022, cash and cash equivalents were $24.6 million, current assets $478.2 million and current liabilities $169.5 million. Total debt was $417.1 million, including $16.4 million current debt; total liabilities were $652.6 million. The company reported $101.6 million of liquidity: cash plus $77.0 million of revolving-credit availability, net of letters of credit.
The credit facilities mature in April 2027. The average interest rate on outstanding facilities from April 1 through year-end was 5.1%; scheduled principal payments over the next 12 months were $15.0 million. DSG reported compliance with its credit covenants at year-end. It also had approximately $168 million of supplier and contractor purchase commitments due within 12 months.
Changes, outlook, risks and unusual items
- Operating cash flow turned negative, primarily reflecting increased receivables and inventories associated with higher sales, supplier inflation and supply-chain disruption. Investing outflows were driven principally by acquisitions.
- Management said cash, available credit and expected operating cash flows should meet liquidity needs for the next 12 months. No quantitative company-wide revenue or earnings guidance is provided. Management expected semiconductor-chip supply recovery to benefit TestEquity in 2023.
- Inflation, freight and labor costs, supply constraints and product mix pressured margins; price increases were introduced during 2021 and 2022. The U.S. manufacturing PMI averaged 53.5 in 2022 versus 60.7 in 2021.
- Material risks include substantial debt and interest-rate exposure; inventory obsolescence; integration and acquisition execution; reliance on a significant TestEquity supplier (25% of its 2022 inventory purchases); customer concentration at Gexpro Services (largest customer approximately 19% of segment revenue); foreign-exchange exposure; and potential goodwill impairment.
- DSG disclosed a February 2022 cyber incident potentially involving unlawful access to its network; notifications and other response measures followed. The filing does not state a quantified financial loss from the incident.
- Shareholder derivative litigation relating to the mergers is pending. DSG intends to defend it and said the outcome and any reasonably possible loss could not be estimated; no liability was recorded. The Decatur, Alabama environmental matter had less than $0.1 million accrued for monitoring costs.
- Management identified an unremediated material weakness in internal control over financial reporting, centered on insufficient technical accounting resources and controls at TestEquity, including business combinations, rental-equipment disposals, revenue recognition, reconciliations, accounting policies and segregation of duties. Management and the auditor concluded controls were ineffective; the auditor issued an adverse opinion on internal control. The financial-statement audit opinion was unqualified.
- Approximately 1.7 million additional merger-related shares were expected to be issued subject to customary conditions; entities affiliated with LKCM and CEO J. Bryan King held approximately 75% of shares as of February 2023. DSG paid no dividends in 2022 and reported no foreseeable dividend plan.
Important facts for investors to verify
- Use comparable or pro forma segment data to separate organic growth from merger timing and acquired-business contributions.
- Track operating cash conversion, working-capital needs, debt reduction, interest costs and covenant headroom.
- Assess progress remediating the material weakness and whether controls at acquired businesses are brought into the reporting system.
- Monitor supplier and customer concentration, supply-chain conditions, inventory reserves and margin recovery.
- Review final issuance of merger earnout shares, pending litigation developments and any financial consequences from the cyber incident.