Distribution Solutions Group Inc

Previous wording

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.

Current wording

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 diverse customer base and expanding the digital capabilities across our platform.

Previous wording

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 thethree months ended March 31, 2023.

Current wording

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 48.9 in the six months ended June 30, 2024 compared to 46.9 in thesix months ended June 30, 2023.

Previous wording

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.

Current wording

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 36 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.

Previous wording

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, aputative 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.

Current wording

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. On April 4, 2023, aputative 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. At June 30, 2024, DSG had not incurred material costs as a result of the Cyber Incident.

Previous wording

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.

Current wording

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.

Previous wording

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 thethree 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.

Current wording

The following tables provide a reconciliation of Net income (loss) to Adjusted EBITDA on a consolidated basis and Operating income (loss) to Adjusted EBITDA by segment for thethree and six months ended June 30, 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.

Previous wording

(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.

Current wording

(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 and the S&S Automotive Transaction.

Previous wording

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

Current wording

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

Previous wording

Our consolidated revenue increased$67.8 million in the first quarter of 2024 compared to thefirst 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.

Current wording

Our consolidated revenue increased$61.6 million in the second quarter of 2024 compared to thesecond quarter of 2023 primarily driven by$81.4 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, ESS and S&S Automotive acquisitions completed in 2023 and 2024.

Previous wording

Revenue decreased $7.1 million, or 5.7%, to $118.2 million in thefirst quarter of 2024 compared to $125.3 million in thefirst 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 customersand automotive end market of $2.5 million.

Current wording

Revenue increased $1.9 million, or 1.6%, to $121.1 million in thesecond quarter of 2024 compared to $119.1 million in thesecond quarter of 2023. The increase was primarily driven by $10.1 millionof revenue generated from the acquisitions completed in 2024 and strengthening sales to the automotive end market of $0.8 million partially offset by a decline in sales to Lawson’s core, governmental and strategic customers of$8.2 million with fewer sales representatives.

Previous wording

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.

Current wording

During the three months ended June 30, 2024, Lawson generated Adjusted EBITDA of$16.5 million, an increase of$0.4 million from the same period a year ago with approximately $1.4 million driven by the acquisitions completed in 2024 and deleveraging of its fixed cost structure over lower organic revenue and margins.

Previous wording

Revenue increased$79.8 million, or 74.3%, to$187.1 million in thefirst quarter of 2024 compared to$107.4 million in thefirst 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.

Current wording

Revenue increased$61.4 million, or 45.1%, to$197.5 million in thesecond quarter of 2024 compared to$136.1 million in thesecond quarter of 2023. The increase was driven by$71.3 million of additional revenue generated from an acquisition completed in 2023 offset by a $9.9 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.

Previous wording

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 ofthe inclusion of the acquisition completed in 2023, which generated $22.4 million of additional gross profitin thefirst quarter of 2024 offset by a decline in legacy TestEquity revenue. TestEquity gross profit as a percent of revenue decreased to 22.5% in thefirst quarter of 2024 compared to 23.6% in the prior year quarter primarily due to ashift in sales mix and the lower gross margin rate from the 2023 acquisition.

Current wording

Gross profit increased$14.5 million to $45.8 million in the second quarter of 2024 compared to gross profit of $31.2 million in the prior year quarter primarily as a result ofthe inclusion of the acquisition completed in 2023, which generated $15.8 million of additional gross profitin thesecond quarter of 2024. TestEquity gross profit as a percent of revenue increased to 23.2% in thesecond quarter of 2024 compared to 23.0% in the prior year quarter primarily due to ashift in sales mix and better performance across web channels.

Previous wording

Selling, general and administrative expenses increased$23.0 million to$48.3 million inthe 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 thefirst quarter of 2024 comparedto the prior year quarter.

Current wording

Selling, general and administrative expenses increased$10.7 million to$45.1 million inthe second quarter of 2024 compared to $34.4 million in the prior year quarter. Approximately $12.8 million of the increased expenses was driven by the acquisition completed in 2023 of which$6.4 million was related to the Hisco employee retention bonuses. These costs were partially offset by lower merger and acquisition expenses of $3.8 million and lower medical costs in thesecond quarter of 2024 comparedto the prior year quarter.

Previous wording

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.

Current wording

During the three months ended June 30, 2024, TestEquity generated Adjusted EBITDA of $15.4 million, an increase of $6.0 million, or 62.7% from the same period a year ago with approximately $8.6 million driven by the acquisition completed in 2023, offset by a reduction of $2.6 million in legacy TestEquity due to lower organic revenue.

Previous wording

Gross profit increased$0.3 million to $30.8 millionin thefirst 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 thefirst quarter of 2024 compared to 30.2% in the prior year quarter primarily driven byenhanced strategic sourcing, supply chain improvements and end market sales mix.

Current wording

Gross profit increased$0.8 million to $33.2 millionin thesecond quarter of 2024 compared to gross profit of$32.3 million in the prior year quarter. Gexpro Services gross profit as a percent of revenue was 31.0% in thesecond quarter of 2024 compared to 29.9% in the prior year quarter primarily driven byenhanced strategic sourcing, supply chain improvements and end market sales mix.

Previous wording

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.

Current wording

During the three months ended June 30, 2024, Gexpro Services generated Adjusted EBITDA of $12.7 million, a decrease of$0.4 million from the same period a year ago primarily driven by lower organic revenue and an increase in Selling, general, and administrative expenses partially offset by an increase in gross profit margin.

Previous wording

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

Current wording

Interest expense increased$3.3 million in thesecond quarter of 2024 compared tothe prior year quarter primarily due to an increase in interest rates and higher outstanding borrowings related to the purchase of Hisco, ESS and S&S Automotive.

Previous wording

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.

Current wording

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 $1.1 million change in the second quarter of 2024 compared to the same period of 2023 was primarily due to favorable increases in interest income partially offset by unfavorable changes in foreign currency exchange rates.

Previous wording

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.

Current wording

Income tax benefit was $0.2 million, a (10.5)% effective tax rate for the three months ended June 30, 2024 compared to income tax expense of $0.5 million and a 15.0% effective tax rate for the three months ended June 30, 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.

Previous wording

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 andhigher 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 wasprimarily the result ofhigher expense for write-offs of obsolete and excess inventory and a shift in sales mix.

Current wording

Gross profit decreased $5.8 million to $131.5 million in the first six months of 2024 compared to gross profit of $137.3 million in the same period of 2023 primarily as a result of decreased sales andthe amortization of the fair value step-up of inventory of$0.6 million related to the S&S Automotive Transaction partially offset by price increases, lower net freight expense and spreading operating expenses over a higher sales level. Lawson gross profit as a percent of revenue was 54.9% in the first six months of 2024 compared to 56.2% in the prior year period. The gross profit margin percentage decrease was primarily the result of the amortization of the fair value step-up of inventory of $0.6 million related to the S&SAutomotive Transaction, a sales mix shift and lower gross profit margins on revenue generated by the 2024 acquisitions with lower margins.

Previous wording

Revenue decreased$2.4 million, or 2.3%, to$98.7 millionin thefirst 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.

Current wording

Revenue decreased$3.5 million, or 1.7%, to$205.8 million in the firstsix months of 2024 compared to$209.3 million in the same period of 2023. The decrease was primarily driven by timing of project work in the renewable energy vertical market of $4.8 million and softness in the technology vertical market of $1.3 million, partially offset by strengthening sales within the aerospace and defense vertical market of $2.6 million.

Previous wording

Selling, general, and administrative expenses increased$2.2 million to $25.3 million inthe 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.

Current wording

Selling, general, and administrative expenses increased$3.7 million to$50.4 million in the firstsix months of 2024 compared to$46.7 million in the same period of 2023. The increase was primarily driven by additional consulting costs of $1.6 million to support non-recurring strategic projects, non-recurring legal fees of $0.5 million and investments to support future growth andadditional compensation.

Previous wording

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

Current wording

Cash and cash equivalents were $46.8 million on June 30, 2024 compared to $83.9 million on December 31, 2023.

Previous wording

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.

Current wording

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 June 30, 2024, the Company had $46.8 million of cash and cash equivalents and $153.0 million of borrowing availability remaining, net of outstanding letters of credit, under the 2023 Amended Credit Agreement.

Previous wording

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.

Current wording

Net cash provided by operating activities for the six months ended June 30, 2024 was $28.0 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.

Previous wording

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.

Current wording

Net cash provided by operating activities for the six months ended June 30, 2023 was $27.5 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.

Previous wording

Net cash used in investing activities for thethree 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.

Current wording

Net cash used in investing activities for the six months ended June 30, 2024 was $102.4 million, primarily due to the purchase of ESS and S&SAutomotive, as well as purchases of property, plant and equipment and rental equipment which was partially offset by the sale of rental equipment.

Previous wording

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.

Current wording

Net cash used in investing activities for thesix months ended June 30, 2023 was $262.8 million, primarily due to the Hisco Transaction as well as purchases of property, plant and equipment and rental equipment which was partially offset by the sale of rental equipment.

Previous wording

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.

Current wording

Net cash provided by financing activities for the six months ended June 30, 2024 was $33.2 million primarily due to net proceeds on the revolving credit facility partially offset by principal payments on the term loans.

Previous wording

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.

Current wording

On June 30, 2024, we had $610.3 million in outstanding borrowings under the 2023 Amended Credit Agreement and $153.0 million of borrowing availability remaining, net of outstanding letters of credit, under the senior secured revolving credit facility component.

Previous wording

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.

Current wording

As of June 30, 2024, we had contractual commitments to purchase approximately $133 million of products from our suppliers and contractors over the next twelve months.

Previous wording

During thethree 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 appro ximately $12 million to $16 million for capital expenditures during the remainder of 2024 to support ongoing operations.

Current wording

During thesix months ended June 30, 2024, total capital expenditures for property, plant and equipment and rental equipment were$9.0 million excluding proceeds from the sale of rental equipment. The Company expects to spend appro ximately $8 million to $12 million for capital expenditures during the remainder of 2024 to support ongoing operations.

Previous wording

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.

Current wording

During the second quarter of 2024, the Company repurchased 55,844 shares of DSG common stock under the repurchase program at an average cost of $30.14 per share for a total cost of $1.7 million. No shares were repurchased during the first quarter of 2024 or during the firstsix months of 2023 under the Company’s stock repurchase program. The remaining availability for stock repurchases under the program was$27.3 million as of June 30, 2024. See Note 11 – Stockholders’ Equity within Item 1. Financial Statements for further information.

Previous wording

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.

Current wording

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 thefirstsix months of 2024 and will pay $32.3 million of the retention bonuses during the third quarter of 2024, with the remaining balance of $1.1 million to be paid in 2025.