Distribution Solutions Group, Inc. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated financial statements and related notes included in this Quarterly Report on Form 10-Q, the audited consolidated financial statements, accompanying notes and other information included in our Annual Report on Form 10-K filed for the year ended December 31, 2022 and the Lawson Products, Inc. unaudited condensed consolidated financial statements and accompanying notes included in our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2022. References to “DSG”, the “Company”, "we", "our" or "us" refer to Distribution Solutions Group, Inc. and all entities consolidated in the accompanying unaudited condensed consolidated financial statements. Overview Organization and Structure Distribution Solutions Group, Inc. ("DSG"), is a multi-platform specialty distribution company providing high touch, value-added distribution solutions to the maintenance, repair and operations ("MRO"), the original equipment manufacturer ("OEM") and the industrial technologies markets. The Mergers that were consummated on April 1, 2022 resulted in the combination of Lawson, TestEquity and Gexpro Services. For a description of the Mergers, see Note 1 – Nature of Operations and Basis of Presentation within Item 1. Financial Statements. We manage and report our operating results through three reportable segments: Lawson, TestEquity and Gexpro Services. A summary of our segments is presented below. For additional details about our segments, see Note 16 – Segment Information within Item 1. Financial Statements. Lawson is a distributor of specialty products and services to the industrial, commercial, institutional and government MRO market. TestEquity is a distributor of test and measurement equipment and solutions, industrial and electronic production supplies, vendor managed inventory programs, converting, fabrication and adhesive solutions from its leading manufacturer partners supporting the technology, aerospace, defense, automotive, electronics, education, automotive and medical industries. Gexpro Services is a global supply chain solutions provider, specializing in developing and implementing vendor managed inventory ("VMI") and kitting programs to high-specification manufacturing customers. In addition to these three reportable segments, we have an “All Other” category which includes unallocated DSG holding company costs that are not directly attributable to the ongoing operating activities of our reportable segments and the results of a non-reportable segment. Recent Events HIS Company, Inc. Acquisition On June 8, 2023, DSG acquired all of the issued and outstanding capital stock of Hisco, a distributor of specialty products serving industrial technology applications, pursuant to the Purchase Agreement dated March 30, 2023. The total purchase consideration exchanged for the Hisco Transaction was $268.5 million, net of cash acquired of $12.2 million, with a potential additional earn-out payment subject to Hisco achieving certain performance targets. 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. In connection with the Hisco Transaction, DSG combined the operations of TestEquity and Hisco, creating one of the largest suppliers serving the electronics design, production, and repair industries. Accordingly, Hisco results are included in the TestEquity reportable segment after the date of acquisition. DSG funded the Hisco Transaction with borrowings under its 2023 Credit Agreement and proceeds raised from the Rights Offering, both discussed below. Refer to Note 3 – Business Acquisitions for further details about the Hisco Transaction. 35 Table of Contents Debt Amendment On June 8, 2023, the Company entered into the First Amendment to Amended and Restated Credit Agreement (the “First Amendment”), which amended the Amended and Restated Credit Agreement, dated as of April 1, 2022 (as amended by the First Amendment, the “2023 Credit Agreement”), by and among the Company, certain subsidiaries of the Company as borrowers or guarantors, the lenders party thereto and JPMorgan Chase Bank, N.A., as administrative agent. The First Amendment provides for a $305 million incremental term loan. Refer to Note 9 – Debt for additional information about the 2023 Credit Agreement. Rights Offering On May 30, 2023, the Company raised approximately $100 million pursuant to a Rights Offering of transferable subscription rights to holders of DSG common stock as of the close of business on May 1, 2023. Refer to Note 11 – Stockholders' Equity for additional information about the Rights Offering. DSG Vision and Strategic Focus The complementary distribution operations of Lawson, TestEquity and Gexpro Services were combined in 2022 for the purpose of creating a global specialty distribution company enabling each of Lawson, TestEquity and Gexpro Services to maintain their respective high-touch, value-added service delivery models and customer relationships in their specialty distribution businesses under the leadership of their separate business unit management teams. The DSG leadership team provides oversight to these separate leadership teams. This structure helps the combined company to leverage best practices, back-office resources and technologies across the three operating companies to help drive cost synergies and efficiencies. The combined company has the ability to utilize its combined financial resources to accelerate a strategy of expansion through both business acquisitions and organic growth. Organic Growth Strategy 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. Acquisition Strategy In addition to organic growth, we plan to actively pursue acquisition opportunities complementary to our businesses and that we believe will be financially accretive to our organization. Sales Drivers 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 wa s 47.2 in the nine months ended September 30, 2023 compared to 54.9 in the nine months ended September 30, 2022 . Lawson Sales Drivers The North American MRO market is highly fragmented. Lawson competes for business with several national distributors as well as a large number of regional and local distributors. The MRO business is impacted by the overall strength of the manufacturing sector of the U.S. economy. Lawson's revenue is also influenced by the number of sales representatives and their productivity. Lawson plans to continue concentrating its efforts on increasing the productivity and size of its sales team. Additionally, Lawson drives revenue through the expansion of products sold to existing customers as well as attracting new customers and additional ship-to locations. Lawson also is expanding its inside sales team to help drive field sales representative productivity and also utilizes an e-commerce site to generate sales. 36 Table of Contents TestEquity Sales Drivers Across the test and measurement, industrial and electronic production supplies businesses, the North American market is highly fragmented with competitors ranging from large global distributors to national and regional distributors. Specifically in respect of its electronic production supplies business, the current semi-conductor chip shortage is negatively impacting TestEquity’s business as such chips are key elements to the electronic production process. TestEquity anticipates that recovery of this important part of its customers’ supply chain will occur in the first half of 2024. 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 RFID programs with specialized warehousing for chemical management, logistics services and cold storage. Gexpro Services Sales Drivers The global supply chain solutions market is highly fragmented across Gexpro Services' key vertical segments. Gexpro Services’ competitors range from large global distributors and manufacturers to small regional domestic distributors and manufacturers. Gexpro Services' revenue is influenced by our OEMs’ production schedules, new product introduction launches, and service project needs. Gexpro Services drives revenue through increasing wallet share with existing customers, customer-led geographic expansion, and new customer development in its six key vertical markets. Additionally, Gexpro Services drives revenue through expansion of its installation and aftermarket services by leveraging its portfolio of recent acquisitions. Supply Chain Disruptions We continue to be affected by rising supplier costs caused by inflation and increased transportation and labor costs . We have instituted various price increases during 2022 and 2023 in response to rising supplier costs, as well as increased transportation and labor costs in order to manage our gross profit margins. Cyber Incident Litigation On February 10, 2022, DSG disclosed that Lawson Products' computer network was the subject of a cyber incident potentially involving unauthorized access to certain confidential information (the “Cyber Incident”). DSG engaged a cybersecurity forensics firm to assist in the investigation of the incident and to assist in securing its computer network. 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 September 30, 2023, DSG had not incurred material costs as a result of the Cyber Incident and, at this time, is unable to estimate the total cost of any remediation that may be required. On April 4, 2023, a putative class action lawsuit (the “Cyber Incident Suit”) was filed against DSG. For more information about the Cyber Incident Suit, refer to Note 14 – Commitments and Contingencies within Item 1. Financial Statements. Critical Accounting Policies and Use of Estimates The unaudited condensed consolidated financial statements were prepared in accordance with GAAP. A discussion of our critical accounting policies and estimates is contained within Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in DSG's Annual Report on Form 10-K for the year ended December 31, 2022. There have been no significant changes to our previously disclosed critical accounting policies and use of estimates. The following provides information on the accounts requiring more significant estimates. Inventory Reserves - Inventories principally consist of finished products stated at the lower of cost or net realizable value using the first-in-first-out method for the Lawson segment and primarily the weighted average method for the TestEquity and Gexpro Services segments. Most of our products are not exposed to the risk of obsolescence due to technology changes. However, some of our products do have a limited shelf life, and from time to time we add and remove items from our catalogs, brochures or website for marketing and other purposes. 37 Table of Contents To reduce the cost basis of inventory to a lower of cost or net realizable value, a reserve is recorded for slow-moving and obsolete inventory based on historical experience and monitoring of current inventory activity. Estimates are used to determine the necessity of recording these reserves based on periodic detailed analysis using both qualitative and quantitative factors. As part of this analysis, the Company considers several factors including the inventories length of time on hand, historical sales, product shelf life, product life cycle, product category and product obsolescence. In general, depending on the product category, we reserve inventory with low turnover at higher rates than inventory with higher turnover. At September 30, 2023, our inventory reserve was $15.9 million, equal to approximately 4.8% of our gross inventory. A hypothetical change of one hundred basis points to our reserve as a percentage of total inventory would have affected our cost of goods sold by $3.2 million. Income Taxes - Deferred tax assets or liabilities reflect temporary differences between amounts of assets and liabilities for financial and tax reporting. Such amounts are adjusted, as appropriate, to reflect changes in enacted tax rates expected to be in effect when the temporary differences reverse. Significant judgment is required in determining income tax provisions as well as deferred tax asset and liability balances, including the estimation of valuation allowances and the evaluation of uncertain tax positions. Goodwill Impairment - Goodwill represents the cost of business acquisitions in excess of the fair value of identifiable net tangible and intangible assets acquired. The Company reviews goodwill for potential impairment annually on October 1st, or when an event or other circumstances change that would more likely than not reduce the fair value of the asset below its carrying value. The first step in the multi-step process to determine if goodwill has been impaired and to what degree is to review the relevant qualitative factors that could cause the fair value of the reporting unit to decrease below the carrying value of the reporting unit. The Company considers factors such as macroeconomic, industry and market conditions, cost factors, overall financial performance and other relevant factors that would affect the individual reporting units. If the Company determines that it is more likely than not that the fair value of the reporting unit is greater than the carrying value of the reporting unit, then no further impairment testing is needed. If the Company determines that it is more likely than not that the carrying value of the reporting unit is greater than the fair value of the reporting unit, the Company will move to the next step in the process. The Company will estimate the fair value of the reporting unit and compare it to the reporting unit's carrying value. If the carrying value of the reporting unit exceeds its fair value, the Company will record an impairment of goodwill equal to the amount the carrying value of the reporting unit exceeds its fair value, up to the total amount of goodwill previously recognized. Business Combinations - We allocate the purchase price paid for assets acquired and liabilities assumed in connection with our acquisitions based on their estimated fair values at the time of acquisition. This allocation involves a number of assumptions, estimates, and judgments in determining the fair value, as of the acquisition date, of the following: • intangible assets, including the valuation methodology (the relief of royalty method for trade names and multi-period excess earnings method for customer relationships), estimations of future cash flows, discount rates, royalty rates, recurring revenue attributed to customer relationships, and our assumed market segment share, as well as the estimated useful life of intangible assets; • deferred tax assets and liabilities, uncertain tax positions, and tax-related valuation allowances; • inventory; • property, plant and equipment; • pre-existing liabilities or legal claims; • contingent consideration, including estimating the likelihood and timing of achieving the relevant thresholds; and • goodwill as measured as the excess of consideration transferred over the net of the acquisition date fair values of the assets acquired and the liabilities assumed. Our assumptions and estimates are based upon comparable market data and information obtained from our management and the management of the acquired companies. We allocate goodwill to the reporting units of the business that are expected to benefit from the business combination. Factors Affecting Comparability to Prior Periods Our results of operations for the nine months ended September 30, 2023 are not directly comparable to prior results for the nine months ended September 30, 2022 due to the Mergers that were completed on April 1, 2022. The Mergers were accounted for as a reverse merger under the acquisition method of accounting in accordance with the accounting guidance for reverse acquisitions as provided in Accounting Standards Codification 805, Business Combinations ("ASC 805"). Under this guidance, TestEquity and Gexpro Services were treated as a combined entity as the accounting acquirer for financial reporting purposes, 38 Table of Contents and DSG was identified as the accounting acquiree. This determination was primarily made as TestEquity and Gexpro Services were under the common control of an entity that owned a majority of the voting rights of the combined entity, and therefore, only DSG experienced a change in control. Accordingly, the unaudited condensed consolidated financial statements for the nine months ended September 30, 2022 reflect the results of operations of TestEquity and Gexpro Services on a consolidated basis, and the results of operations of DSG's legacy Lawson business are only included subsequent to the April 1, 2022 Merger Date. The combined operations of all three entities are included in the unaudited condensed consolidated financial statements for the three and nine months ended September 30, 2023 and the three months ended September 30, 2022. Non-GAAP Financial Measures 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. Non-GAAP Adjusted EBITDA Management believes Adjusted EBITDA is an important measure of the Company's operating performance. We define Adjusted EBITDA as operating income plus depreciation and amortization, stock-based compensation, severance and acquisition related retention costs, costs related to the execution and integration of the Mergers and other acquisitions, inventory net realizable value adjustments, amortization of fair value step-up resulting from the Mergers and other acquisitions, and other non-recurring items. The following table provides our calculation of Adjusted EBITDA for the three and nine months ended September 30, 2023 and 2022: Reconciliation of Operating Income to Non-GAAP Adjusted EBITDA (Unaudited) Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2023 2022 (7) 2023 2022 (7) Operating income (loss) $ 12,783 $ 22,027 $ 43,280 $ 29,128 Depreciation and amortization 17,010 8,979 47,316 31,314 Stock-based compensation (1) 1,049 (3,568) 5,441 445 Severance and acquisition related retention expenses (2) 10,478 944 13,266 2,353 Merger and acquisition related costs (3) (94) 2,402 9,063 10,809 Inventory net realizable value adjustment (4) — 1,737 — 1,737 Inventory step-up (5) 2,150 1,082 2,866 2,867 Other non-recurring (6) 327 1,097 1,924 1,202 Adjusted EBITDA $ 43,703 $ 34,700 $ 123,156 $ 79,855 (1) Expense (benefit) primarily for stock-based compensation, of which a portion varies with the Company’s stock price. (2) Includes severance expense from actions taken in 2023 and 2022 not related to a formal restructuring plan and acquisition related retention expenses for the Hisco Transaction. (3) Transaction and integration costs related to the Mergers and other acquisitions. (4) Inventory net realizable value adjustment recorded to reduce inventory related to discontinued products where the anticipated net realizable value was lower than the cost reflected in our records. (5) Inventory fair value step-up adjustment for Lawson resulting from the reverse merger acquisition accounting and acquisition accounting for additional acquisitions completed by Gexpro Services or TestEquity. (6) Other non-recurring costs consist of non-capitalized deferred financing costs incurred in conjunction with the 2023 Credit Agreement, certain non-recurring strategic projects and other non-recurring items. (7) Includes the operating results of Lawson subsequent, but not prior, to the April 1, 2022 Merger Date in accordance with GAAP accounting guidance for reverse acquisitions. 39 Table of Contents Management uses operating income and Adjusted EBITDA to evaluate the performance of its reportable segments. See Note 16 – Segment Information with in Item 1. Financial Statements for additional information about our reportable segments. The following table provides Adjusted EBITDA by reportable segment: Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2023 2022 2023 2022 Adjusted EBITDA Lawson (1) $ 16,721 $ 9,670 $ 51,241 $ 19,077 TestEquity 14,298 10,122 31,450 24,260 Gexpro Services 11,552 12,485 36,368 32,409 All Other (2) 1,132 2,423 4,097 4,109 Consolidated Adjusted EBITDA $ 43,703 $ 34,700 $ 123,156 $ 79,855 (1) Includes the operating results of Lawson subsequent, but not prior, to the April 1, 2022 Merger Date in accordance with GAAP accounting guidance for reverse acquisitions . (2) Includes the operating results of All Other subsequent, but not prior, to the April 1, 2022 Merger Date in accordance with GAAP accounting guidance for reverse acquisitions . Supplemental Information - Lawson Non-GAAP Adjusted Operating Income and Non-GAAP Adjusted EBITDA For management to discuss Lawson's operating results on a comparable basis, Lawson's historical, pre-merger components of operating income have been provided separately in the table below. In addition, Lawson's GAAP results of operations were adjusted to include the results prior to the April 1, 2022 Merger Date in order to reflect the total operating activities attributable to Lawson for each period presented. Management believes this historical information provides the most meaningful basis of comparison for Lawson's operations, is more useful in identifying current business trends, and is important for the user of our financial statements in understanding Lawson's business. Refer to Note 1 – Nature of Operations and Basis of Presentation and Note 3 – Business Acquisitions within Item 1. Financial Statements for information about the Mergers. These non-GAAP amounts are not considered to be prepared in accordance with GAAP, have not been prepared as pro forma results under applicable regulations, may not reflect the actual results we would have achieved had the Mergers occurred at the beginning of 2022, and should not be viewed as a substitute for the results of operations presented in accordance with GAAP. Lawson's historical operating results prior to the Mergers were obtained from the unaudited condensed consolidated financial statements included in DSG's Quarterly Report on Form 10-Q filed for the quarterly period ended March 31, 2022. Lawson Non-GAAP Adjusted Results - Calculation of Supplemental Information (Unaudited) (in thousands) Nine Months Ended September 30, 2023 Nine Months Ended September 30, 2022 Lawson Operating Income GAAP Results (1) Pre-Merger Results Adjusted Results (2) GAAP Results (1) Pre-Merger Results (3) Adjusted Results (2) Revenue $ 358,903 $ — $ 358,903 $ 216,752 $ 104,902 $ 321,654 Cost of goods sold 155,533 — 155,533 103,733 49,371 153,104 Gross profit 203,370 — 203,370 113,019 55,531 168,550 Selling, general and administrative expenses 176,012 — 176,012 110,227 44,435 154,662 Operating income (loss) $ 27,358 $ — $ 27,358 $ 2,792 $ 11,096 $ 13,888 Lawson Adjusted EBITDA (4) $ 51,241 $ — $ 51,241 $ 19,077 $ 8,042 $ 27,119 (1) Operating income prepared in accordance with GAAP, which includes Lawson’s results of operations subsequent, but not prior, to the April 1, 2022 Merger Date. See Note 1 – Nature of Operations and Basis of Presentation and Note 3 – Business Acquisitions within Item 1. Financial Statements. (2) Lawson's results of operations adjusted for comparability on a period-over-period basis. These non-GAAP results represent Lawson’s total operating activities for the nine months ended September 30, 2023 and 2022 , regardless of the Merger date (that is, they reflect both pre- and post-Merger results of Lawson). (3) Lawson's results of operations for the three months ended March 31, 2022, which occurred prior to the April 1, 2022 Merger Date, were not included in the Company's GAAP operating results under reverse merger acquisition accounting. 40 Table of Contents (4) Refer to the Non-GAAP Adjusted EBITDA section above for a reconciliation of Adjusted EBITDA to operating income. Composition of Results of Operations The following results of operations for the three and nine months ended September 30, 2023 and the three months ended September 30, 2022 include the combined operations of DSG. The following results of operations for the nine months ended September 30, 2022 include the accounts of the TestEquity and Gexpro Services combined entity, as the accounting acquirer, and the results of DSG's legacy Lawson business have only been included for activity subsequent, and not prior, to the April 1, 2022 Merger Date. 41 Table of Contents RESULTS OF OPERATIONS Three Months Ended September 30, 2023 Compared to Three Months Ended September 30, 2022 Consolidated Results of Operations Three Months Ended September 30, 2023 2022 (Dollars in thousands) Amount % of Revenue Amount % of Revenue Revenue Lawson $ 114,477 26.1% $ 109,418 31.5% TestEquity 207,657 47.3% 116,709 33.6% Gexpro Services 103,232 23.5% 103,749 29.9% All Other 13,543 3.1% 17,275 5.0% Total Revenue 438,909 100.0% 347,151 100.0% Cost of goods sold Lawson 48,395 11.0% 53,183 15.3% TestEquity 164,589 37.5% 89,704 25.8% Gexpro Services 72,990 16.6% 73,794 21.3% All Other 7,638 1.7% 11,303 3.3% Total Cost of goods sold 293,612 66.9% 227,984 65.7% Gross profit 145,297 33.1% 119,167 34.3% Selling, general and administrative expenses Lawson 55,439 12.6% 50,883 14.7% TestEquity 48,095 11.0% 19,429 5.6% Gexpro Services 22,910 5.2% 21,963 6.3% All Other 6,070 1.4% 4,865 1.4% Total Selling, general and administrative expenses 132,514 30.2% 97,140 28.0% Operating income (loss) 12,783 2.9% 22,027 6.3% Interest expense (12,895) (2.9)% (6,097) (1.8)% Loss on extinguishment of debt — —% — —% Change in fair value of earnout liabilities 667 0.2% 9,641 2.8% Other income (expense), net (1,133) (0.3)% (550) (0.2)% Income (loss) before income taxes (578) (0.1)% 25,021 7.2% Income tax expense (benefit) 990 0.3% 8,480 2.4% Net income (loss) $ (1,568) (0.4)% $ 16,541 4.8% Overview of Consolidated Results of Operations Our consolidated revenue increased $91.8 million in the third quarter of 2023 compared to the third quarter of 2022 primarily driven by $106.3 million from acquisitions completed in 2023 and 2022 and organic sales growth. Consolidated gross profit and Selling, general and administrative expenses also increased over the prior year primarily driven by the inclusion of the acquisitions completed in 2023 and 2022. Refer to Results by Reportable Segment below for a complete discussion of our results of operations. 42 Table of Contents Results by Reportable Segment Lawson Segment Three Months Ended September 30, Change (Dollars in thousands) 2023 2022 Amount % Revenue $ 114,477 $ 109,418 $ 5,059 4.6 % Cost of goods sold 48,395 53,183 (4,788) (9.0) % Gross profit 66,082 56,235 9,847 17.5 % Selling, general and administrative expenses 55,439 50,883 4,556 9.0 % Operating income (loss) $ 10,643 $ 5,352 $ 5,291 98.9 % Gross profit margin 57.7 % 51.4 % Adjusted EBITDA (1) $ 16,721 $ 9,670 $ 7,051 72.9 % (1) Refer to the Non-GAAP Adjusted EBITDA section in Overview for a reconciliation of Adjusted EBITDA to operating income. Revenue and Gross Profit Revenue increased $5.1 million, or 4.6%, to $114.5 million in the third quarter of 2023 compared to $109.4 million in the third quarter of 2022 . The increase was primarily driven by the realization of price increases enacted throughout 2022 and 2023 to offset rising supplier costs and strengthening sales to Lawson's strategic and governmental customers and automotive end market. Gross profit increased $9.8 million to $66.1 million in the third quarter of 2023 compared to gross profit of $56.2 million in the prior year quarter primarily as a result of increased sales, price increases, lower net freight expense and spreading fixed expenses for certain warehouse activities over a higher sales level. Lawson gross profit as a percent of revenue was 57.7% in the third quarter of 2023 compared to 51.4% in the prior year quarter. The gross profit margin percentage increase for the third quarter of 2023 was primarily the result of price increases and leveraging operating costs over a higher sales base. The prior year quarter was negatively impacted by increased supplier costs from inflation and supply chain disruptions, and a sales shift toward lower margin customers. Selling, General and Administrative Expenses Selling, general and administrative expenses consist of compensation and support for Lawson sales representatives and expenses to operate Lawson's distribution network and overhead expenses. Selling, general and administrative expenses increased $4.6 million to $55.4 million in the third quarter of 2023 compared to $50.9 million in the prior year quarter. The increase was primarily driven by higher stock-based compensation as a benefit was realized in 2022, higher compensation expense incurred to support increased sales and health insurance costs in 2023 partially offset by lower acquisition related and non-recurring consulting costs costs. Adjusted EBITDA During the three months ended September 30, 2023, Lawson generated Adjusted EBITDA of $16.7 million , an increase of $7.1 million , or 72.9% from the same period a year ago primarily driven by increased revenue and margins and leveraging of costs. 43 Table of Contents TestEquity Segment Three Months Ended September 30, Change (Dollars in thousands) 2023 2022 Amount % Revenue $ 207,657 $ 116,709 $ 90,948 77.9 % Cost of goods sold 164,589 89,704 74,885 83.5 % Gross profit 43,068 27,005 16,063 59.5 % Selling, general and administrative expenses 48,095 19,429 28,666 147.5 % Operating income (loss) $ (5,027) $ 7,576 $ (12,603) N/M Gross profit margin 20.7 % 23.1 % Adjusted EBITDA (1) $ 14,298 $ 10,122 $ 4,176 41.3 % N/M Not meaningful (1) Refer to the Non-GAAP Adjusted EBITDA section in Overview for a reconciliation of Adjusted EBITDA to operating income. Revenue and Gross Profit Revenue increased $90.9 million, or 77.9%, to $207.7 million in the third quarter of 2023 compared to $116.7 million in the third quarter of 2022 . The increase was primarily driven by $106.3 million of revenue generated from acquisitions completed in 2023 and 2022 offset by a $15.4 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. Gross profit increased $16.1 million to $43.1 million in the third quarter of 2023 compared to gross profit of $27.0 million in the prior year quarter primarily as a result of the inclusion of the acquisitions completed in 2023 and 2022, which generated $20.5 million of additional gross profit in the third quarter of 2023. TestEquity gross profit as a percent of revenue was 20.7% in the third quarter of 2023 compared to 23.1% in the prior year quarter. The gross profit margin percentage decline for t he third quarter of 2023 was primarily due to the amortization of the fair value step-up of inventory of $2.2 million related to the Hisco Transaction and a shift of customer sales mix . Selling, General and Administrative Expenses Selling, general and administrative expenses consist of compensation and support for TestEquity's sales representatives and expenses to operate TestEquity's distribution network and overhead expenses. Selling, general and administrative expenses increased $28.7 million to $48.1 million in the third quarter of 2023 compared to $19.4 million in the prior year quarter. This increase was due to a pproximately $27.2 million of additional expenses, including depreciation and amortization, primarily driven by the acquisitions completed in 2023 and 2022, partially offset by lower merger and acquisition expenses in the third quarter of 2023 compared to the prior year quarter. Adjusted EBITDA During the three months ended September 30, 2023, TestEquity generated Adjusted EBITDA of $14.3 million, an increase of $4.2 million, or 41.3% from the same period a year ago with approximately $8.3 million driven by the acquisitions completed in 2023 and 2022, offset by a reduction of $4.1 million in legacy TestEquity due to the decline in revenue. 44 Table of Contents Gexpro Services Segment Three Months Ended September 30, Change (Dollars in thousands) 2023 2022 Amount % Revenue $ 103,232 $ 103,749 $ (517) (0.5) % Cost of goods sold 72,990 73,794 (804) (1.1) % Gross profit 30,242 29,955 287 1.0 % Selling, general and administrative expenses 22,910 21,963 947 4.3 % Operating income (loss) $ 7,332 $ 7,992 $ (660) (8.3) % Gross profit margin 29.3 % 28.9 % Adjusted EBITDA (1) $ 11,552 $ 12,485 $ (933) (7.5) % (1) Refer to the Non-GAAP Adjusted EBITDA section in Overview for a reconciliation of Adjusted EBITDA to operating income. Revenue and Gross Profit Revenue decreased $0.5 million, or 0.5%, to $103.2 million in the third quarter of 2023 compared to $103.7 million in the third quarter of 2022 . The decrease was primarily driven by the timing of project work in Gexpro Services' customer base as well as market softness in the technology vertical market . Gross profit increased $0.3 million to $30.2 million in the third quarter of 2023 compared to gross profit of $30.0 million in the prior year quarter. Gexpro Services gross profit as a percent of revenue was 29.3% in the third quarter of 2023 compared to 28.9% in the prior year quarter primarily driven by an improvement in the global supply chain and enhanced margin management on Gexpro Services' product offerings. Selling, General and Administrative Expenses Selling, general and administrative expenses consist of sales and marketing expenses primarily relating to compensation, costs associated with supporting Gexpro Services’ service facilities, overhead expenses within finance, legal, human resources and information technology, and other costs required to operate Gexpro Services’ business and service customers. Selling, general, and administrative expenses increased $0.9 million to $22.9 million in the third quarter of 2023 compared to $22.0 million in the prior year quarter. The increase was primarily driven by higher compensation and product fulfillment costs. Adjusted EBITDA During the three months ended September 30, 2023, Gexpro Services generated Adjusted EBITDA of $11.6 million , a decrease of $0.9 million, or 7.5%, from the same period a year ago primarily driven by flat revenue and an increase in Selling, general, and administrative expenses. Consolidated Non-operating Income and Expense Three Months Ended September 30, Change (Dollars in thousands) 2023 2022 Amount % Interest expense $ (12,895) $ (6,097) $ (6,798) 111.5 % Change in fair value of earnout liabilities $ 667 $ 9,641 $ (8,974) N/M Other income (expense), net $ (1,133) $ (550) $ (583) 106.0 % Income tax expense (benefit) $ 990 $ 8,480 $ (7,490) (88.3) % N/M Not meaningful 45 Table of Contents Interest Expense Interest expense increased $6.8 million in the third quarter of 2023 compared to the prior year quarter . The increase was primarily driven by higher interest rates and outstanding borrowings partially driven by the Hisco Transaction . Change in Fair Value of Earnout Liabilities The benefit in the third quarter of 2023 related to the change in fair value of the earnout liabilities associated with the Frontier acquisition and the Hisco Transaction. The $9.6 million benefit in the third quarter of 2022 primarily related to the change in fair value of the earnout derivative liability associated with the earnout provisions of the Merger Agreements. Income Tax Expense (Benefit) Income tax expense was $1.0 million, a (171.3)% effective tax rate for the three months ended September 30, 2023 compared to income tax expense of $8.5 million and a 33.9% effective tax rate for the three months ended September 30, 2022. The change in the year-over-year effective tax rate was primarily due to adjustments to uncertain tax positions, a book loss for the current quarter, and other permanent items. 46 Table of Contents Nine Months Ended September 30, 2023 Compared to Nine Months Ended September 30, 2022 Consolidated Results of Operations Nine Months Ended September 30, 2023 2022 (Dollars in thousands) Amount % of Net Sales Amount % of Net Sales Revenue Lawson (1) $ 358,903 30.8 % $ 216,752 26.4 % TestEquity 451,082 38.7 % 286,984 34.9 % Gexpro Services 312,523 26.8 % 285,224 34.7 % All Other 42,655 3.7 % 33,612 4.1 % Total Revenue 1,165,163 100.0 % 822,572 100.0 % Cost of goods sold Lawson (1) 155,533 13.3 % 103,733 12.6 % TestEquity 351,417 30.2 % 220,247 26.8 % Gexpro Services 219,430 18.8 % 202,133 24.6 % All Other 24,592 2.1 % 21,853 2.7 % Total Cost of goods sold 750,972 64.5 % 547,966 66.6 % Gross profit 414,191 35.5 % 274,606 33.4 % Selling, general and administrative expenses Lawson (1) 176,012 15.1 % 110,227 13.4 % TestEquity 107,848 9.3 % 59,294 7.2 % Gexpro Services 69,609 6.0 % 66,119 8.0 % All Other 17,442 1.5 % 9,838 1.2 % Total Selling, general and administrative expenses 370,911 31.8 % 245,478 29.8 % Operating income (loss) 43,280 3.7 % 29,128 3.5 % Interest expense (30,057) (2.6) % (16,704) (2.0) % Loss on extinguishment of debt — — % (3,395) (0.4) % Change in fair value of earnout liabilities 646 0.1 % 3,948 0.5 % Other income (expense), net (2,869) (0.2) % 224 — % Income (loss) before income taxes 11,000 0.9 % 13,201 1.6 % Income tax expense (benefit) 3,637 0.3 % 3,912 0.5 % Net income (loss) $ 7,363 0.6 % $ 9,289 1.1 % (1) Includes the operating results of Lawson subsequent, but not prior, to the Merger Date of April 1, 2022. Overview of Consolidated Results of Operations Our consolidated results of operations include the financial impact of the Mergers that were completed on April 1, 2022 and the other acquisitions completed in 2023 and 2022. The increase in gross profit for the first nine months of 2023 compared to the first nine months of 2022 was primarily due to the inclusion of Lawson operations only subsequent, and not prior, to the Merger Date and the other acquisitions completed in 2023 and 2 022. Expenses for the first nine months of 2023 compared to the first nine months of 2022 were impacted by the inclusion of Lawson and the other acquisitions completed in 2023 and 2022. Refer to Results by Reportable Segment below for a complete discussion of our results of operations. 47 Table of Contents Results by Reportable Segment Lawson Segment Nine Months Ended September 30, Change (Dollars in thousands) 2023 2022 Amount % Revenue $ 358,903 $ 216,752 $ 142,151 — % Cost of goods sold 155,533 103,733 51,800 — % Gross profit 203,370 113,019 90,351 — % Selling, general and administrative expenses 176,012 110,227 65,785 — % Operating income (loss) $ 27,358 $ 2,792 $ 24,566 — % Gross profit margin 56.7 % 52.1 % Adjusted EBITDA (1) $ 51,241 $ 19,077 $ 32,164 168.6 % (1) Refer to the Non-GAAP Adjusted EBITDA section in Overview for a reconciliation of Adjusted EBITDA to operating income. The increase in revenue, gross profit and operating income for the first nine months of 2023 compared to the first nine months of 2022 was primarily due to the inclusion of Lawson operations beginning on the Merger Date and not including any Lawson operations prior to the Merger Date. Supplemental Information For management to discuss Lawson's operating results on a comparable basis, Lawson's GAAP results of operations for the nine months ended September 30, 2022 were adjusted to include its results prior to the April 1, 2022 Merger Date in order to reflect the total operating activities attributable to Lawson for each period presented. These non-GAAP Adjusted Results for the nine months ended September 30, 2022 presented in the table below are referred to within this supplemental results of operations discussion as "Adjusted". Nine Months Ended September 30, Adjusted Change (Dollars in thousands) 2023 Adjusted 2022 (1) Amount % Revenue $ 358,903 $ 321,654 $ 37,249 11.6% Cost of goods sold 155,533 153,104 2,429 1.6% Gross profit 203,370 168,550 34,820 20.7% Selling, general and administrative expenses 176,012 154,662 21,350 13.8% Operating income (loss) $ 27,358 $ 13,888 $ 13,470 97.0% Gross profit margin 56.7 % 52.4 % Adjusted EBITDA (2) $ 51,241 $ 27,119 $ 24,122 88.9% (1) For comparability purposes, Lawson's GAAP results of operations were adjusted to include the historical unaudited results of Lawson prior to the Merger Date. Refer to the section Factors Affecting Comparability to Prior Periods and the non-GAAP measures section Supplemental Information - Lawson Non-GAAP Adjusted Operating Income and Non-GAAP EBITDA for more information related to the calculation of adjusted amounts. (2) Refer to the Non-GAAP Adjusted EBITDA section in Overview for a reconciliation of Adjusted EBITDA to operating income. Revenue and Gross Profit Revenue increased $37.2 million , or 11.6%, to $358.9 million in the first nine months of 2023 compared to adjusted revenue of $321.7 million in the same period of 2022 . The increase was primarily driven by the realization of price increases enacted throughout 2022 and 2023 to offset rising supplier costs and strengthening sales to Lawson's strategic and governmental customers and automotive end market. Gross profit increased $34.8 million to $203.4 million in the first nine months ended September 30, 2023 compared to adjusted gross profit of $168.6 million i n the same period of 2022 primarily as a result of increased sales, price increases, lower net freight expense and spreading operating expenses over a higher sales level. Lawson gross profit as a percent of revenue was 48 Table of Contents 56.7% in the first nine months of 2023 c ompared to adjusted gross profit as a percent of adjusted revenue of 52.4% in the prior year period. The gross profit margin percentage improvement for the first nine months of 2023 was primarily the result of price increases, lower net freight costs and leveraging costs over a higher sales base. The adjusted gross profit margin percentage for the same period of 2022 was impacted by increased supplier costs from inflation and supply chain disruptions and a sales shift toward lower margin customers. Adjusted gross profit margin for 2022 was also impacted by the amortization of the fair value step-up of inventory of $1.9 million related to the Mergers. Selling, General and Administrative Expenses Selling, general and administrative expenses consist of compensation and support for Lawson sales representatives as well as expenses to operate Lawson's distribution network and overhead expenses. Selling, general and administrative expenses increased $21.4 million to $176.0 million in the first nine months of 2023 compared to adjusted Selling, general and administrative expenses of $154.7 million in the same period of 2022. The increase was primarily driven by higher compensation expense incurred to support increased sales, additional depreciation and amortization as a result of the fair value step-up adjustments related to the reverse merger acquisition accounting and higher stock-based compensation in 2023 due to a benefit realized in 2022, partially offset by lower acquisition related costs in 2023. Adjusted EBITDA During the nine months ended September 30, 2023 , Lawson generated Adjusted EBITDA of $51.2 million, an increase of $24.1 million, or 88.9% from the same period a year ago primarily driven by increased revenue and gross profit margin. TestEquity Segment Nine Months Ended September 30, Change (Dollars in thousands) 2023 2022 Amount % Revenue $ 451,082 $ 286,984 $ 164,098 57.2 % Cost of goods sold 351,417 220,247 131,170 59.6 % Gross profit 99,665 66,737 32,928 49.3 % Selling, general and administrative expenses 107,848 59,294 48,554 81.9 % Operating income (loss) $ (8,183) $ 7,443 $ (15,626) N/M Gross profit margin 22.1 % 23.3 % Adjusted EBITDA (1) $ 31,450 $ 24,260 $ 7,190 29.6 % N/M Not meaningful (1) Refer to the Non-GAAP Adjusted EBITDA section in Overview for a reconciliation of Adjusted EBITDA to operating income. Revenue and Gross Profit Revenue increased $164.1 million , or 57.2%, to $451.1 million in the first nine months of 2023 compared to $287.0 million in the same period in 2022 . The increase was primarily driven by $180.9 million of revenue generated from acquisitions completed in 2023 and 2022 offset by a $16.8 million decline in legacy TestEquity due to a slowdown in the test and measurement market, primarily caused by tightening of capital budgets in TestEquity's customer base. Gross profit increased $32.9 million to $99.7 million in the first nine months of 2023 compared to $66.7 million in the same period of 2022 primarily as a result of the inclusion of the acquisitions completed in 2023 and 2022, which generated $38.3 million of additional gross profit during the first nine months of 2023 . TestEquity gross profit as a percent of revenue decreased to 22.1% in the first nine months of 2023 compared to 23.3% in the prior year primarily due to the amortization of the fair value step-up of inventory of $2.9 million related to the Hisco Transaction and a shift in sales mix from the lower gross margin rates from the 2022 and 2023 acquisitions. Selling, General and Administrative Expenses Selling, general and administrative expenses consist of compensation and support for TestEquity's sales representatives and expenses to operate TestEquity's distribution network and overhead expenses. 49 Table of Contents Selling, general and administrative expenses increased $48.6 million to $107.8 million in the first nine months of 2023 compared to $59.3 million in the same period of 2022 . Approximately $42.3 million of the increased expenses, including depreciation and amortization, was primarily driven by the acquisitions completed in 2023 and 2022 and higher merger and acquisition expenses in the f irst nine months of 2023 compared to the same period a year ago. Adjusted EBITDA During the nine months ended September 30, 2023 , TestEquity generated Adjusted EBITDA of $31.5 million , an increase of $7.2 million, or 29.6% from the same period a year ago with approximately $13.4 million driven by the acquisitions completed in 2023 and 2022, offset by a reduction of $6.2 million in legacy TestEquity due to the decline in revenue. Gexpro Services Segment Nine Months Ended September 30, Change (Dollars in thousands) 2023 2022 Amount % Revenue $ 312,523 $ 285,224 $ 27,299 9.6 % Cost of goods sold 219,430 202,133 17,297 8.6 % Gross profit 93,093 83,091 10,002 12.0 % Selling, general and administrative expenses 69,609 66,119 3,490 5.3 % Operating income (loss) $ 23,484 $ 16,972 $ 6,512 38.4 % Gross profit margin 29.8 % 29.1 % Adjusted EBITDA (1) $ 36,368 $ 32,409 $ 3,959 12.2 % (1) Refer to the Non-GAAP Adjusted EBITDA section in Overview for a reconciliation of Adjusted EBITDA to operating income. Revenue and Gross Profit Revenue increased $27.3 million , or 9.6%, to $312.5 million in the first nine months of 2023 compared to $285.2 million in the same period of 2022 . The increase was primarily driven by growth in the base business through an expansion of products and services to existing customers as well as the addition of new customers. Gross profit increased $10.0 million to $93.1 million in the first nine months of 2023 compared to $83.1 million in the same period of 2022 . Gexpro Services gross profit as a percent of revenue was 29.8% in the first nine months of 2023 compared to 29.1% in the prior year period d riven by an improvement in the global supply chain and margin management on its product offering. Selling, General and Administrative Expenses Selling, general and administrative expenses consist of sales and marketing expenses primarily relating to compensation, costs associated with supporting Gexpro Services’ service facilities, overhead expenses within finance, legal, human resources and information technology, and other costs required to operate Gexpro Services' business and service customers. Selling, general, and administrative expenses increased $3.5 million to $69.6 million in the first nine months ended September 30, 2023 compared to $66.1 million in the same period of 2022. The increase was primarily driven by $1.7 million of additional expenses from the Frontier acquisition completed at the end of the first quarter of 2022 and additional compensation and product fulfillment costs to support the organic growth. Adjusted EBITDA During the nine months ended September 30, 2023 , Gexpro Services generated Adjusted EBITDA of $36.4 million , an increase of $4.0 million, or 12.2% from the same period a year ago primarily driven by increased revenue and gross profit margin . 50 Table of Contents Consolidated Non-operating Income and Expense Nine Months Ended September 30, Change (Dollars in thousands) 2023 2022 Amount % Interest expense $ (30,057) $ (16,704) $ (13,353) 79.9 % Loss on extinguishment of debt $ — $ (3,395) $ 3,395 N/M Change in fair value of earnout liabilities $ 646 $ 3,948 $ (3,302) N/M Other income (expense), net $ (2,869) $ 224 $ (3,093) N/M Income tax expense (benefit) $ 3,637 $ 3,912 $ (275) (7.0) % N/M Not meaningful Interest Expense Interest expense increased $13.4 million in the first nine months of 2023 compared to the same period of 2022 primarily due to an increase in interest rates and higher borrowings related to the Mergers and the other 2022 and 2023 acquisitions. Loss on Extinguishment of Debt The $3.4 million loss on extinguishment of debt in the nine months ended September 30, 2022 was primarily due to the write-off of previously capitalized financing costs as a result of the debt refinancing related to the Mergers. Change in Fair Value of Earnout Liabilitie s The benefit in the first nine months of 2023 related to the change in fair value of the earnout liabilities associated with the Frontier acquisition and the Hisco Transaction. The $3.9 million benefit in the first nine months of 2022 primarily related to the change in fair value of the earnout derivative liability associated with the earnout provisions of the Merger Agreements. Other Income (Expense), Net 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 $3.1 million change in the first nine months of 2023 compared to the same period of 2022 was partly due to unfavorable changes in foreign currency exchange rates and other insignificant changes in other non-operating income and expenditures. Income Tax Expense (Benefit) Income tax expense was $3.6 million, a 33.1% effective tax rate for the first nine months of 2023 compared to an income tax expense of $3.9 million and a 29.6% effective tax rate for the first nine months of 2022. The change in the year-over-year effective tax rate was primarily due to state taxes, foreign income and other permanent items. The 2022 income tax was also impacted by the creation of a consolidated group for federal income tax purposes as a result of the completion of the Mergers. LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents were $80.5 million on September 30, 2023 compared to $24.6 million on December 31, 2022. The Company believes its current balances of cash and cash equivalents, availability under its 2023 Credit Agreement and cash flows from operations will be sufficient to meet its liquidity needs for the next twelve months. As of September 30, 2023, the Company had $80.5 million of cash and cash equivalents and $198.3 million of bo rrowing availability remaining, net of outstanding letters of credit, under the 2023 Credit Agreement. On June 2, 2023, the Company raised approximately $100 million from the Rights Offering, in which 4,444,444 shares of DSG common stock were sold at a purchase price of $22.50 per share. On June 8, 2023, the Company borrowed $305.0 million under the incremental term loan of the 2023 Credit Agreement. The Company used these combined proceeds primarily to fund the Hisco Transaction and to pay down its revolving credit facility. Our primary short-term and long-term liquidity and capital resource needs are to finance operating expenses, working capital, capital expenditures, potential business acquisitions, strategic initiatives and general corporate purposes. Our current 51 Table of Contents debt obligations under the 2023 Credit Agreement mature in April 2027. Required principal payments on the 2023 Credit Agreement for the next twelve months are $30.3 million . Refer to Note 9 – Debt within Item 1. Financial Statements for additional information related to our debt obligations. Access to debt capital markets has historically provided the Company with sources of liquidity, beyond normal operating cash flows. We do not anticipate having difficulty in obtaining financing from those markets in the future, however, we cannot provide assurance that events beyond our control will not have a material adverse impact on our liquidity. Sources and Uses of Cash The following table presents a summary of our cash flows: Nine Months Ended September 30, (in thousands) 2023 2022 Change Net cash provided by (used in) operating activities $ 74,053 $ (19,280) $ 93,333 Net cash provided by (used in) investing activities $ (266,720) $ (120,550) $ (146,170) Net cash provided by (used in) financing activities $ 269,295 $ 151,820 $ 117,475 Cash Provided by (Used in) Operating Activities Net cash provided by operations for the nine months ended September 30, 2023 was $74.1 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. Net cash used in operations for the nine months ended September 30, 2022 was $19.3 million, excluding non-cash items, primarily due to increased accounts receivables driven by higher sales and increased inventories due to increased supplier costs driven by inflation and global supply chain disruptions. Cash Provided by (Used in) Investing Activities Net cash used in investing activities for the nine months ended September 30, 2023 was $266.7 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. Net cash used in investing activities for the nine months ended September 30, 2022 was $120.6 million, primarily due to acquisitions completed by TestEquity and Gexpro Services, as well as purchases of property, plant and equipment and rental equipment which was partially offset by the sale of rental equipment. Cash Provided by (Used in) Financing Activities Net cash provided by financing activities for the nine months ended September 30, 2023 was $269.3 million due to proceeds from the 2023 Credit Agreement and the Rights Offering partially offset by repayment of previous indebtedness and principal payments on the term loans. In conjunction with the Hisco Transaction, the Company borrowed $305.0 million under the incremental term loan facility on June 8, 2023 and raised approximately $100 million through the Rights Offering closed during the second quarter of 2023. During the first nine months of 2023, deferred financing costs of $3.4 million were incurred related to the 2023 Credit Agreement and offering costs of $1.5 million were incurred related to the Rights Offering. Net cash provided by financing activities for the nine months ended September 30, 2022 was $151.8 million, primarily due to proceeds from term loans and revolving credit facilities to finance the Mergers and other acquisitions, partly offset by repayment of previous indebtedness. Deferred financing costs of $12.0 million were incurred during the first nine months of 2022 related to these financing activities. Financing and Capital Requirements Credit Facility On June 8, 2023, in connection with the Hisco Transaction, DSG entered into the First Amendment, which amended and replaced the Amended and Restated Credit Agreement dated April 1, 2022 with the 2023 Credit Agreement, and provided for a $305.0 million incremental term loan facility. The 2023 Credit Agreement also provides for the Company to increase the 52 Table of Contents commitments from time to time by up to $200 million in the aggregate, subject to, among other things, receipt of additional commitments from existing and/or new lenders and pro forma compliance with certain financial covenants. The 2023 Credit Agreement includes a $200 million senior secured revolving credit facility, a $250 million senior secured initial term loan facility, a $305 million incremental term loan and a $50 million senior secured delayed draw term loan facility. Refer to Note 9 – Debt within Item 1. Financial Statements for a description of the 2023 Credit Agreement. On September 30, 2023, we had $589.6 million in outstanding borrowings under the 2023 Credit Agreement and $198.3 million of bo rrowing availability remaining, net of outstanding letters of credit, under the senior secured revolving credit facility component. As of September 30, 2023, we were in compliance with all financial covenants under our 2023 Credit Agreement. While we were in compliance with our financial covenants as of September 30, 2023, failure to meet the covenant requirements of the 2023 Credit Agreement in future quarters could lead to higher financing costs and increased restrictions, reduce or eliminate our ability to borrow funds, or accelerate the payment of our indebtedness and could have a material adverse effect on our business, financial condition and results of operations. Purchase Commitments As of September 30, 2023, we had contractual commitments to purchase approximately $200 million of products from our suppliers and contractors over the next twelve months. Capital Expenditures During the nine months ended September 30, 2023, t otal capital expenditures for property, plant and equipment and rental equipment were $18.9 million excluding proceeds from the sale of rental equipment. The Company expects to spend appro ximately $3 million to $4 million for capital expenditures during the remainder of 2023 to support ongoing operations. Stock Repurchase Program The Company's Board of Directors previously authorized a stock repurchase program that permits the Company to repurchase its common stock. The timing and the amount of any repurchases will be determined by management under parameters established by the Board of Directors and depend on various factors including an evaluation of our stock price, corporate and regulatory requirements, capital availability and other market conditions. During the third quarter of 2022, the Company repurchased 108,178 shares of Company common stock under the repurchase plan at an average cost of $17.93 per share for a total cost of $1.9 million. No shares were repurchased during 2023. The Company had $7.6 million of remaining availability for stock repurchases under the program as of September 30, 2023. See Note 11 – Stockholders' Equity with in Item 1. Financial Statements for further information. 53 Table of Contents ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ITEM 3 of Part I has been omitted from this report.