Distribution Solutions Group, Inc. (NASDAQ:DSGR) is a global specialty distribution company providing value-added distribution solutions to the maintenance, repair and operations (MRO), original equipment manufacturer (OEM), and industrial technology markets. The company operates through three reportable segments: Lawson, TestEquity, and Gexpro Services.

In the fiscal year ended December 31, 2023, DSGR reported annual revenue of $1,570,402,000 and a net loss of $8,967,000. The company generated annual operating cash flow of $102,286,000 and annual free cash flow of $77,608,000.

For the first quarter of 2024, DSGR reported revenue of $416,086,000, a 19.5% increase compared to the prior year period. The company reported a net loss of $5,224,000 for the quarter. DSGR generated operating cash flow of $6,615,000 and free cash flow of $3,940,000 in the first quarter of 2024.

Business Overview

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.

Segment Performance

In the first quarter of 2024, Lawson reported revenue of $118,186,000, a 5.7% decrease compared to the prior year period. The segment's operating income was $4,107,000, with an adjusted EBITDA margin of 11.4%. Lawson continues to focus on initiatives to improve sales force productivity and optimize its product mix and customer engagement.

TestEquity reported revenue of $187,149,000 in the first quarter of 2024, a 74.3% increase year-over-year. The segment's operating loss was $6,094,000, with an adjusted EBITDA margin of 6.2%. TestEquity faced continued weakness in the test and measurement market, which was partially offset by the contribution from the Hisco acquisition completed in 2023.

Gexpro Services generated revenue of $98,651,000 in the first quarter of 2024, a 2.3% decrease compared to the prior year period. The segment's operating income was $5,462,000, with an adjusted EBITDA margin of 11.0%. Gexpro Services saw strong demand in the aerospace and defense vertical, which helped offset softness in the technology and renewable energy end markets.

Geographic Breakdown

DSGR's revenue is primarily generated in the United States, which accounted for 79.0% of total revenue in the first quarter of 2024. Canada contributed 7.1% of revenue, while Europe, the Pacific Rim, Latin America, and other regions made up the remaining 13.9% of revenue.

Liquidity and Capital Resources

As of March 31, 2024, DSGR had $73,097,000 in cash and cash equivalents and $198,300,000 of available borrowing capacity under its $200 million senior secured revolving credit facility. The company's net debt to adjusted EBITDA ratio was 3.0x at the end of the first quarter.

DSGR's capital allocation strategy remains focused on funding organic growth initiatives, strategic acquisitions, and opportunistic share repurchases. The company expects capital expenditures to be in the range of $16 million to $20 million, or approximately 1% of revenue, in 2024.

Outlook and Strategic Initiatives

For the second quarter of 2024, DSGR expects organic sales to be flat to down low-single digits compared to the prior year period, but up sequentially from the first quarter. The company anticipates margin improvement in each of its segments on a sequential basis.

DSGR is executing on several strategic initiatives to drive long-term value creation, including:

1. Lawson's sales force transformation and productivity improvements: The company is investing in its sales force, including expanding its inside sales team and implementing new tools and technologies to drive increased productivity and customer engagement.

2. Integrating and optimizing recent acquisitions: DSGR has completed the acquisitions of Emergent Safety Supply (ESS) and S&S Automotive, which are expected to enhance the company's product and service offerings, expand its customer base, and drive higher EBITDA margins and returns on invested capital.

3. Leveraging cross-selling opportunities across the DSG platform: The company is dedicating more resources to a cross-business unit commercial initiative to grow cross-selling revenue and leverage the value-added capabilities across its three segments.

4. Continuous improvement in operational efficiency: DSGR is focused on optimizing its cost structure and driving margin expansion through initiatives such as facility consolidations, inventory management, and procurement optimization.

Risks and Challenges

DSGR faces several risks and challenges, including:

- Continued softness in certain end markets, such as test and measurement and technology - Supply chain disruptions and inflationary pressures - Integration and optimization of recent acquisitions - Competitive pressures in the highly fragmented specialty distribution industry

Despite these challenges, DSGR remains focused on executing its strategic initiatives and delivering long-term value for its shareholders.

Conclusion

Distribution Solutions Group, Inc. is a diversified specialty distribution company with a strong market presence and a track record of strategic acquisitions. The company is executing on a comprehensive plan to drive organic growth, improve operational efficiency, and enhance its value proposition to customers. While facing some near-term headwinds, DSGR's long-term growth prospects remain promising as it continues to invest in its sales force, integrate recent acquisitions, and leverage cross-selling opportunities across its platform.