Distribution Solutions Group, Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024. DSG is a specialty distributor serving MRO, OEM and industrial technology markets through Lawson, TestEquity and Gexpro Services. Financial amounts below are in U.S. dollars; millions unless otherwise noted.
Financial performance
| Metric | Q1 2024 | Q1 2023 |
|---|---|---|
| Revenue | $416.1 million | $348.3 million |
| Gross profit / margin | $143.4 million / 34.5% | $132.9 million / 38.2% |
| Operating income / margin | $2.8 million / 0.7% | $16.7 million / 4.8% |
| Net income (loss) | $(5.2) million | $5.9 million |
| Diluted EPS | $(0.11) | $0.14 |
| Operating cash flow | $6.6 million | $13.9 million |
| Adjusted EBITDA (non-GAAP) | $36.1 million | $39.4 million |
Revenue rose 19.5%, primarily from acquisitions, including $96.9 million attributed to the 2023 Hisco acquisition and the 2024 ESS acquisition; management said organic revenue declined. Gross margin fell 3.7 percentage points, while SG&A increased to $140.6 million from $116.2 million. The company cited acquisition-related costs and retention bonuses, among other factors. Interest expense increased 54% to $11.8 million, reflecting higher rates and borrowings associated with Hisco. The reported tax benefit was $4.1 million, or a 43.8% effective rate.
Segments and material changes
- Lawson: Revenue decreased 5.7% to $118.2 million; operating income fell 50% to $4.1 million and Adjusted EBITDA fell 27% to $13.4 million. Management cited lower core and government customer sales, inventory write-offs and mix.
- TestEquity: Revenue increased 74% to $187.1 million, largely from Hisco; legacy revenue declined $17.1 million amid weaker test-and-measurement demand and customer capital-budget constraints. The segment recorded a $6.1 million operating loss, including $9.6 million of Hisco retention-bonus expense; Adjusted EBITDA was $11.6 million.
- Gexpro Services: Revenue decreased 2.3% to $98.7 million. Operating income declined 26% to $5.5 million and Adjusted EBITDA declined 7% to $10.8 million, despite improved gross margin.
Cash, debt and liquidity
- Cash and cash equivalents were $73.1 million at March 31, 2024, down from $83.9 million at year-end; restricted cash was an additional $12.5 million.
- Operating cash flow was $6.6 million. Investing activities used $16.0 million, including the ESS acquisition; financing activities used $4.0 million. Cash, cash equivalents and restricted cash totaled $85.6 million at quarter-end.
- Total debt was $571.8 million, including $30.3 million current; approximately $198.3 million of revolving borrowing capacity remained available. Debt matures in April 2027, with required principal payments of about $30.3 million over the next 12 months. DSG reported compliance with its financial covenants.
- Approximately 100% of debt was floating-rate. Management estimated a 100-basis-point rate increase or decrease would change annual interest expense by approximately $5.7 million.
- Capital expenditures were $3.7 million in Q1; management expects $12–$16 million for the remainder of 2024. Supplier purchase commitments were approximately $152 million for the next 12 months.
Outlook, events and risks
The filing provides no specific revenue, earnings or full-year Adjusted EBITDA guidance. Management said cash, available credit and operating cash flow should be sufficient for liquidity needs over the next 12 months. It reported price increases in 2023 and 2024 in response to supplier, transportation and labor cost inflation.
On May 1, 2024, after quarter-end, DSG completed its approximately $80 million acquisition of S&S Automotive, funded with cash and revolving credit. S&S generates approximately $40 million in annual sales, according to the filing. DSG also expected to pay $32.3 million of Hisco employee retention bonuses during the next nine months of 2024, with $1.1 million remaining for 2025. Q1 included $2.0 million of transaction and integration costs and $9.6 million of Hisco retention-bonus expense.
Key risks include acquisition integration and execution, weaker end-market demand, inflation and supply-chain pressures, inventory obsolescence, significant indebtedness and floating-rate exposure, and the ability to meet credit covenants. The company also disclosed merger-related derivative litigation with an appeal pending and a putative class action related to a 2022 cyber incident; it said it could not estimate potential losses and recorded no amounts for these matters. The environmental monitoring obligation was accrued at approximately $0.1 million. DSG reported effective disclosure controls; it plans to exclude ESS from its 2024 internal-control assessment because of acquisition timing and system complexity.
Important facts for investors to verify
- How much of reported growth and future performance comes from acquisitions versus organic demand, particularly at legacy TestEquity and Lawson.
- Whether gross margins and operating profitability recover after Q1’s decline, and the extent to which retention, integration and other adjusted-out costs persist.
- Debt and interest-rate exposure, covenant headroom, scheduled repayments, and funding needs following the S&S acquisition and Hisco retention payments.
- Final purchase accounting and integration outcomes for ESS and S&S, including the effect of S&S financing on liquidity and leverage.
- Developments in merger and cyber litigation, and whether any future loss estimate or accrual becomes necessary.