Distribution Solutions Group, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2022. Amounts are in U.S. dollars; financial figures are in millions unless stated otherwise.
Business context and comparability
On April 1, 2022, the company completed all-stock mergers combining Lawson, TestEquity and Gexpro Services; on May 5, it changed its name from Lawson Products, Inc. to Distribution Solutions Group, Inc. The combined business distributes MRO, test and measurement, electronics production and OEM supply-chain products and services.
The mergers were accounted for as a reverse acquisition: historical 2022 and 2021 consolidated results include TestEquity and Gexpro Services, while Lawson is included only from April 1, 2022. As a result, reported year-over-year consolidated comparisons are not like-for-like. Management also provided non-GAAP adjusted Lawson comparisons and pro forma combined-company information.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $321.3 | $134.2 | $475.4 | $259.0 |
| Gross profit / margin | $114.6 / 35.6% | $33.7 / 25.2% | $155.4 / 32.7% | $64.0 / 24.7% |
| Operating income / margin | $4.1 / 1.3% | $5.5 / 4.1% | $7.1 / 1.5% | $7.7 / 3.0% |
| Net income (loss) | $(4.7) | $0.5 | $(7.3) | $(1.4) |
| Adjusted EBITDA (non-GAAP) | $31.7 | $11.1 | $45.2 | $18.4 |
Reported revenue rose substantially, largely reflecting the mergers, acquisitions and the differing accounting scope. Q2 net loss included $2.8 million of debt-extinguishment loss and a $5.7 million loss from remeasurement of the merger earnout liability. Q2 merger transaction costs were $5.8 million. Adjusted EBITDA excludes specified items, including merger costs, stock compensation, depreciation and amortization; it is not a GAAP measure.
On management’s adjusted Lawson comparison, Q2 revenue increased 13.1% to $107.3 million and Adjusted EBITDA increased 20.9% to $9.4 million, while operating results shifted to a $2.6 million loss from $2.4 million of income. For the six-month adjusted comparison, Lawson revenue rose 12.8% to $212.2 million and operating income rose 27.4% to $8.5 million; Adjusted EBITDA increased 7.3% to $17.4 million.
Cash flow, debt and liquidity
- Six-month operating cash flow was a use of $39.5 million, versus $8.9 million provided in 2021. Management attributed the use primarily to higher receivables and inventory associated with sales, inflation and supply-chain disruption.
- Investing cash flow used $115.3 million, primarily for acquisitions. Financing activities provided $157.0 million, mainly from borrowing under the new credit agreement.
- Cash and cash equivalents were $17.9 million at June 30, 2022. Current assets were $467.8 million and current liabilities $201.5 million. Inventory was $250.7 million, up from $132.7 million at year-end 2021.
- Total debt was $411.4 million, including $113.1 million outstanding on the revolving facility. Net of letters of credit, revolving borrowing availability was $85.9 million; reported total liquidity was $103.8 million, including cash. The weighted-average borrowing rate from the April 1 refinancing through June 30 was 3.61%.
- The new secured credit agreement includes a $200 million revolver, a $250 million initial term loan and a $50 million delayed-draw term loan, with maturity in 2027. The company reported compliance with its financial covenants at June 30 and said it expected cash, facility availability and operating cash flows to meet liquidity needs for the next 12 months. Principal payments due over the next 12 months were $15.0 million.
Management commentary, outlook and risks
Management cited inflation, freight and labor costs, supplier constraints and product availability as pressures on fulfillment and gross margins; price increases were implemented to offset higher costs. TestEquity’s electronics production business remained affected by the semiconductor shortage, with management anticipating recovery may not occur until 2023. No quantified earnings or revenue guidance is provided in the filing.
Key risks include substantial debt and covenant compliance, the ability to generate cash and fund working capital, further inflation and supply-chain disruption, inventory obsolescence, dependence on a significant TestEquity supplier, acquisition integration and purchase-price accounting, and possible goodwill or intangible-asset impairment. Management noted that the merger purchase-price allocation remained preliminary. LKCM-affiliated entities beneficially owned approximately 75% of the shares after the mergers, giving them significant influence.
A February 2022 cyber incident potentially involved unlawful network access. The company reported no material costs to date but could not estimate total remediation costs. Merger-related shareholder suits were voluntarily dismissed, but plaintiffs sought attorneys’ fees; separate books-and-records litigation resulted in an order requiring limited production of documents concerning debt guarantor identities. Management could not estimate possible losses and recorded no litigation amounts. The Decatur, Alabama environmental matter had less than $0.1 million accrued for monitoring, which the company said was fully accrued for expected costs.
Disclosure controls were assessed as effective. Due to the mergers and integration complexity, the company said it intended to exclude TestEquity and Gexpro Services from its internal-control-over-financial-reporting assessment for 2022.
Important facts for investors to verify
- Use comparable combined-company or segment data when assessing growth; reported consolidated periods do not include Lawson for the pre-merger portion of 2022 or 2021.
- Track working-capital conversion, especially receivables and inventory, and whether operating cash flow improves after the first half’s cash use.
- Monitor debt balances, variable borrowing costs, covenant headroom and remaining revolver availability.
- Assess whether pricing offsets inflation, freight, labor and supply constraints without damaging demand or product mix.
- Follow merger integration, acquisition accounting revisions, earnout share issuance and the realization of expected synergies.
- Review developments in the cyber incident, merger-related legal matters, and the company’s planned 2022 internal-control assessment scope.