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Item 7. Management’s Discussion and Analysis

2024-03-07 compared with 2023-03-14 · 258 added, 203 removed, 197 unchanged (70% of the section changed)

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 consolidated financial statements and related notes included in this Annual Report on Form 10-K, the Lawson Products, Inc.

audited consolidated financial statements and accompanying notes included in DSG's Annual Report on Form 10-K filed for the year ended December 31, 2021 and the Lawson Products, Inc.

unaudited condensed consolidated financial statements and accompanying notes included in DSG’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2022.

The following discussion and analysis of DSG's financial condition and results of operations should be read in conjunction with the consolidated financial statements and related notes included in this Annual Report on Form 10-K, the audited consolidated financial statements and accompanying notes included in DSG's 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 consolidated financial statements.

DSG is a multi-platform specialty distribution company providing high touch, value-added distribution solutions to the maintenance, repair & operations (“MRO”), the original equipment manufacturer (“OEM”) and the industrial technologies markets.

The Mergers that were consummated in April 2022 resulted in the combination of Lawson Products, Inc.

("Lawson"), TestEquity Acquisition, LLC ("TestEquity") and 301 HW Opus Holdings, Inc., conducting business as Gexpro Services ("Gexpro Services").

For a description of the business combination, refer to Item 1.

Organization and Structure

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, refer to Item 1.

Business and Note 1 – Nature of Operations and Basis of Presentation in Item 8.

Financial Statements.

Financial Statements and Supplementary Data.

We manage and report our operating results through three reportable segments:

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Business and Note 14 – Segment Information in Item 8.

Financial Statements.

Financial Statements and Supplementary Data.

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, electronic production supplies, and tool kits from its leading manufacturer partners supporting the technology, aerospace, defense, automotive, electronics, education, and medical industries.

Gexpro Services is a global supply chain solutions provider, specializing in developing and implementing 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 inconsequential results of a non-reportable segment.

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.

Recent Events

HIS Company, Inc.

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 $267.3 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 Amended 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.

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 Amended 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 Amended Credit Agreement.

Rights Offering

On May 30, 2023, the Company raised gross proceeds of 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.

The Company incurred transaction costs related to the issuance of DSG common stock for the Rights Offering of $1.5 million, which were recorded against Capital in excess of par value in the Consolidated Balance Sheets .

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 we operate.

The PMI is a composite index of economic activity in the U.S.

manufacturing sector.

We believe that a measure of that index above 50 generally indicates expansion of the manufacturing sector while a measure below 50 generally represents contraction.

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 47.1 in the year ended December 31, 2023 compared to 53.5 in the year ended December 31, 2022 .

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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 uses an inside sales team and an e-commerce site to generate sales.

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.

TestEquity Sales Drivers

Across both the test and measurement and electronic production supplies businesses, the North American market is highly fragmented with competitors ranging from large global distributors to national and regional distributors.

TestEquity management focuses on the internal metric of Sales per Day (“SPD”) and Day Adjust Growth (“DAG”).

The SPD calculates and compares TestEquity’s total sales divided by the number of selling days, adjusted for weekends and holidays.

A selling day generally represents a business day in which TestEquity ships products to its customers.

The DAG represents the percentage increase or decrease in the SPD for a defined period of time.

Specifically in respect of its electronic production supplies business, the current semi-conductor chip shortage, primarily due to the COVID-19 pandemic, 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 2023.

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.

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.

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’ 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.

Key Factors Affecting our Results of Operations and Financial Condition

Gexpro Services' strategy is to increase revenue through increasing wallet share with existing customers, customer-led geographic expansion, new customer development in its six key vertical markets and leveraging its portfolio of recent acquisitions to expand its installation and aftermarket services.

Supply Chain Disruptions

Along with the broader economy, we continue to be affected by rising supplier costs caused by inflation and increased transportation and labor costs .

This results in challenges in acquiring and receiving inventory in a timely fashion and fulfilling customer orders, which offset some of the sales gains we recorded in 2022 compared to 2021.

The supply chain disruptions have also led to higher product costs which have contributed to lower gross profit margins as a percentage of sales in certain pieces of our business.

We have instituted various price increases during 2021 and 2022 in response to rising supplier costs, as well as increased transportation and labor costs.

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 December 31, 2023, DSG had not incurred material costs as a result of the Cyber Incident.

On April 4, 2023, a putative 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 15 – Commitments and Contingencies within Item 8.

Financial Statements and Supplementary Data.

Factors Affecting Comparability to Prior Periods

Our results of operations are not directly comparable to prior results for the periods presented due to the Mergers that were completed on April 1, 2022.

Our results of operations for the year ended December 31, 2023 are not directly comparable to prior results for the year ended December 31, 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, 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 owns a majority of the voting rights of the combined entity, and therefore, only DSG experienced a change in control.

Accordingly, the consolidated financial statements as of December 31, 2022 and December 31, 2021 and for the years ended December 31, 2022 and 2021 reflect the results of operations and financial position of TestEquity and Gexpro Services on a consolidated basis, and the results of operations of DSG's legacy Lawson business are included only subsequent, and not prior, to the April 1, 2022 Merger Date.

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 consolidated financial statements for the year ended December 31, 2022 reflect the results of operations of TestEquity and Gexpro Services on a consolidated basis for the full year, 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 consolidated financial statements for the full year ended December 31, 2023.

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 costs, costs related to the execution of the Mergers, adjustments recorded to reduce inventory related to certain discontinued products, amortization of fair value step-up resulting from the Mergers, acquisition related costs (unrelated to the Mergers), and other non-recurring items.

The following table provides our calculation of Adjusted EBITDA for the year ended December 31, 2022 and 2021:

Reconciliation of Operating Income to Non-GAAP Adjusted EBITDA (Unaudited)

Management believes Adjusted EBITDA is an important measure of the Company's operating performance and may provide investors with additional meaningful comparisons between current results and results in prior operating periods because Adjusted EBITDA excludes certain non-operational or non-cash items whose fluctuations from period to period do not necessarily correspond to changes in the operating performance of our business and consequently may impact the overall

comparability from period to period.

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.

Management uses operating income and Adjusted EBITDA to evaluate the performance of its reportable segments.

See Note 14 – Segment Information of our consolidated financial statements within Item 8.

Financial Statements and Supplementary Data for additional information about our reportable segments.

The following table provides a reconciliation of Net income to Adjusted EBITDA on a consolidated basis and Operating income to Adjusted EBITDA by segment for the years ended December 31, 2023 and 2022 .

A reconciliation of Net income 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.

Reconciliation of Net Income (Loss) to Non-GAAP Adjusted EBITDA (Unaudited)

Year Ended December 31, 2023

(in thousands) 2022 (8)

(in thousands) Lawson TestEquity Gexpro Services All Other Consolidated

Net income (loss) $ (8,967)

Income tax expense (benefit) 6,960

Other income (expense), net 2,982

Change in fair value of earnout liabilities (758)

Interest expense 42,774

Operating income (loss) $ 32,498 $ (16,465) $ 27,000 $ (42) $ 42,991

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Stock-based compensation (1)

Severance costs (2)

Merger/integration costs (3)

Inventory net realizable value adjustment (4)

7,940 — — — 7,940

Severance and acquisition related retention expenses (2)

476 23,949 238 3 24,666

Merger and acquisition related costs (3)

3,015 6,215 1,081 1,250 11,561

Inventory step-up (5)

Acquisition related costs (6)

— 3,582 — — 3,582

Other non-recurring (6)

202 — 886 1,620 2,708

Adjusted EBITDA $ 63,663 $ 43,283 $ 45,191 $ 4,899 $ 157,036

(1) Expense primarily for stock-based compensation, of which a portion varies with the Company’s stock price.

(2) Includes severance expense from actions taken in 2022 and 2021, not related to a formal restructuring plan.

(3) Merger transaction costs related to the negotiation, review and execution of the Merger Agreements relating to the Mergers and subsequent integration costs.

(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 adjustments resulting from the reverse merger acquisition accounting for Lawson and acquisition accounting for additional acquisitions completed by Gexpro Services.

(6) Expense for acquisition related costs, unrelated to the Mergers.

(7) Other non-recurring costs consists of sales force optimization and other non-recurring items.

(8) 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.

Management uses operating income and Adjusted EBITDA to evaluate the performance of its reportable segments.

See Note 14 – Segment Information of our consolidated financial statements within Item 8.

Financial Statements for additional information about our reportable segments.

The following table provides Adjusted EBITDA by reportable segment:

Year Ended December 31, 2022

(in thousands) 2022 2021

(in thousands) Lawson (7)

TestEquity Gexpro Services All Other (7)

Net income (loss) $ 7,406

Income tax expense (benefit) 5,531

Other income (expense), net 670

Change in fair value of earnout liabilities 483

Loss on extinguishment of debt 3,395

Interest expense 24,301

Operating income (loss) $ 6,536 $ 11,375 $ 21,291 $ 2,584 $ 41,786

Depreciation and amortization 10,594 17,480 15,175 1,937 45,186

Stock-based compensation (1)

2,448 — — — 2,448

Severance and acquisition related retention expenses (2)

1,429 1,095 266 6 2,796

Merger and acquisition related costs (3)

4,698 4,786 5,957 — 15,441

Inventory net realizable value adjustment (4)

1,737 — — — 1,737

Inventory step-up (5)

1,943 — 163 761 2,867

Other non-recurring (6)

1,199 — 354 44 1,597

Adjusted EBITDA $ 30,584 $ 34,736 $ 43,206 $ 5,332 $ 113,858

TestEquity 34,736 16,107

Gexpro Services 43,206 23,310

All Other (2)

Consolidated Adjusted EBITDA $ 113,858 $ 39,417

(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 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.

(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.

(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 Amended Credit Agreement, certain non-recurring strategic projects and other non-recurring items.

(7) Includes the operating results of Lawson and 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 Pro Forma Operating Income and Non-GAAP Adjusted EBITDA

For management to discuss Lawson's operating results on a comparable basis, Lawson's GAAP results of operations were adjusted to include Lawson's historical pre-merger components of operating income, prior to the April 1, 2022 Merger Date, along with pre-merger pro forma adjustments prepared under SEC Regulation S-X Article 11, in order to reflect the total operating activities attributable to Lawson for each period presented.

Management believes this supplemental 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 users 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 8.

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 2021, 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 consolidated financial statements included in DSG's Annual Report on Form 10-K filed for the year ended December 31, 2021 and 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.

(in thousands) Year Ended December 31, 2022

Year Ended December 31, 2021

Financial Statements and Supplementary Data for information about the Mergers.

This supplemental information 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 the Lawson Products, Inc.

Quarterly Report on Form 10-Q filed for the quarterly period ended March 31, 2022.

The pro forma adjustments were obtained from the unaudited pro forma condensed combined financial information included in DSG's Current Report on Form 8-K/A filed on August 24, 2023.

Lawson Pro Forma Results - Calculation of Supplemental Information (Unaudited)

(in thousands) Year Ended December 31, 2023 Year Ended December 31, 2022

Lawson Operating Income GAAP Results (1)

Pre-Merger Results (2)

GAAP Results (2)

Pre-Merger Results (3)

Pro-Forma Adjustments (4)

Pro Forma Results (5)

Revenue from external customers $ 468,379 $ 324,783 $ 104,902 $ — $ 429,685

Intersegment revenue 332 — — — —

Revenue 468,711 324,783 104,902 — 429,685

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$ 63,663 $ 30,584 $ 8,042 $ 38,626

(1) Operating income prepared in accordance with GAAP.

No pre-merger or pro-forma adjustments were necessary because these results represent Lawson’s total operating activities for the full year ended December 31, 2023.

(2) 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.

For the year ended December 31, 2021, the operating results of Lawson were not included in the Company's GAAP results.

See Note 1 – Nature of Operations and Basis of Presentation and Note 3 – Business Acquisitions within Item 8.

Financial Statements.

(2) 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.

(3) 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 year ended December 31, 2022 and 2021 , regardless of the Mergers (that is, they reflect both pre- and post-Merger results of Lawson).

(4) Lawson's results of operations for the year ended December 31, 2021 , 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.

See Note 1 – Nature of Operations and Basis of Presentation and Note 3 – Business Acquisitions within Item 8.

Financial Statements.

(5) Refer to the Non-GAAP Adjusted EBITDA section above for a reconciliation of Adjusted EBITDA to operating income.

Financial Statements and Supplementary Data .

(3) Lawson's results of operations for the three months ended March 31, 2022, which occurred prior to the April 1, 2022 Merger Date and were not included in the Company's GAAP operating results under reverse merger acquisition accounting.

(4) Pro-forma adjustments include the incremental expense related to the fair value adjustment of share-based compensation awards of $1.9 million and the net impact of $2.2 million from the elimination of historical depreciation and amortization expense and recognition of new depreciation expense on the fair value of property, plant and equipment and amortization expense related to identifiable intangible assets.

(5) Lawson's pro forma results of operations adjusted for comparability on a period-over-period basis.

These results represent Lawson’s total operating activities for the year ended 2022 , regardless of the Merger Date (that is, they reflect both pre- and post-Merger results of Lawson, including the pro forma adjustments related to the pre-Merger period).

(6) Refer to the Non-GAAP Adjusted EBITDA section above for a reconciliation of operating income to Adjusted EBITDA.

Composition of Results of Operations

The following results of operations for the years ended December 31, 2022 and 2021 include the accounts of the TestEquity and Gexpro Services combined entity, as the accounting acquirer, and include the results of Lawson only subsequent, and not prior, to the April 1, 2022 Merger Date.

The following results of operations for the year ended December 31, 2023 include the combined operations of DSG.

The following results of operations for the year ended December 31, 2022 include the accounts of the TestEquity and Gexpro Services combined entity, as the accounting acquirer, for the full year, 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.

Segment revenue and Operating income (loss) by reportable segment includes sales to external customers and sales transactions between our segments, referred to as intersegment revenue, and the impact of those intersegment revenue transactions on operating activities.

Reconciliations of segment revenue and Operating income (loss) to our consolidated results of operations in the consolidated financial statements are provided in Note 14 – Segment Information within Item 8.

Financial Statements and Supplementary Data.

RESULTS OF OPERATIONS FOR 2023 AS COMPARED TO 2022

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55,890 3.6 % 48,955 4.3 %

Intersegment revenue elimination (1,700) (0.1) % — — %

Total Revenue 1,570,402 100.0 % 1,151,422 100.0 %

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32,396 2.1 % 31,052 2.7 %

Intersegment cost of goods sold elimination (1,700) (0.1) % — — %

Total Cost of goods sold 1,018,527 64.9 % 760,524 66.1 %

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Net income (loss) $ (8,967) (0.6) % $ 7,406 0.6 %

(1) Includes the operating results of Lawson subsequent, but not prior, to the Merger Date of April 1, 2022.

(1) Includes the operating results of Lawson subsequent, but not prior, to the April 1, 2022 Merger Date.

(2) Includes the operating results of All Other subsequent, but not prior, to the April 1, 2022 Merger Date.

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.

The increase in gross profit fo r 2022 compared to 2021 w as primarily due to the inclusion of Lawson operations only subsequent, and not prior, to the Merger Date.

Expenses for 2022 were impacted by the inclusion of Lawson operations only subsequent, and not prior, to the Merger Date, the 2021 and 2022 acquisitions, and Merger related costs.

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 2023 compared to 2022 was primarily due to the inclusion of Lawson operations only subsequent, and not prior, to the Merger Date and the Hisco and other acquisitions completed in 2023 and 2 022.

Expenses for 2023 were impacted by the other acquisitions completed in 2023 and 2022.

Refer to Results by Reportable Segment below for a complete discussion of our results of operations.

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(Dollars in thousands) 2023 2022 Amount %

Revenue from external customers $ 468,379 $ 324,783 $ 143,596 44.2 %

Intersegment revenue 332 — 332 — %

Revenue $ 468,711 $ 324,783 $ 143,928 44.3 %

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$ 63,663 $ 30,584 $ 33,079 108.2 %

(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 2022 compared to 2021 was due to the inclusion of Lawson operations beginning on the Merger Date and not including any Lawson operations prior to the Merger Date.

(1) Refer to the Non-GAAP Adjusted EBITDA section in Overview for a reconciliation of operating income to Adjusted EBITDA.

Revenue and Gross Profit

Revenue increased $143.6 million , or 44.2%, to $468.7 million in 2023 compared to revenue of $324.8 million in the same period of 2022 primarily due to $125.3 million of revenue in the first quarter of 2023 with no comparable amount in 2022 due to the inclusion of Lawson operations beginning on the Merger Date and not including any Lawson operations prior to the Merger Date .

The remaining increase was primarily driven by strengthening sales to Lawson's strategic and governmental customers and automotive end market customers from a combination of organic growth and the realization of price increases enacted throughout 2022 and 2023 to offset rising supplier costs.

Gross profit increased $94.7 million , or 55.5%, to $265.5 million in 2023 compared to gross profit of $170.8 million in the same period of 2022 primarily due to $70.9 million of gross profit in the first quarter of 2023 with no comparable amount in 2022 due to the inclusion of Lawson operations beginning on the Merger Date and not including any Lawson operations prior to the Merger Date.

The remaining increase was primarily the result of increased sales volume, price increases and lower net freight expense and spreading operating expenses over a higher sales level.

Lawson gross profit as a percent of revenue was 56.6% in 2023 compared to gross profit as a percent of revenue of 52.6% in the prior year period.

The gross profit margin percentage improvement for 2023 was primarily the result of price increases, lower net freight expense and leveraging operating expenses over a higher sales base.

The 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.

Gross profit margin for 2022 was also impacted by an inventory charge of $1.7 million to reduce inventory related to discontinued products where the anticipated net realizable value was lower than the cost reflected in our records and 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 $68.7 million to $233.0 million in 2023 compared to Selling, general and administrative expenses of $164.2 million in the same period of 2022 primarily due to $62.7 million of Selling, general and administrative expenses in the first quarter of 2023 with no comparable amount in 2022 due to the inclusion of Lawson operations beginning on the Merger Date and not including any Lawson operations prior to the Merger Date .

Adjusted EBITDA

During 2023 , Lawson generated Adjusted EBITDA of $63.7 million , an increase of 108.2% or $33.1 million from the same period a year ago p rimarily due to $18.5 million of Adjusted EBITDA in the first quarter of 2023 with no comparable amount in 2022 due to the inclusion of Lawson operations beginning on the Merger Date and not including any Lawson operations prior to the Merger Date and increased revenue and gross profit margin partially offset by an increase in Selling, general and administrative expenses .

Supplemental Information

For management to discuss Lawson's operating results on a comparable basis, Lawson's GAAP results of operations 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 presented in the table below are referred to within this results of operations discussion as "Adjusted".

Year Ended December 31, Adjusted Change

(Dollars in thousands) Adjusted 2022 (1)

Adjusted 2021 (1)

These pro forma results presented in the table below are referred to within this supplemental results of operations discussion as "pro forma".

Year Ended December 31, Change

(Dollars in thousands) 2023 Pro Forma 2022 (1)

Revenue from external customers $ 468,379 $ 429,685 $ 38,694 9.1%

Intersegment revenue 332 — 332 —%

Revenue $ 468,711 $ 429,685 $ 39,026 9.1%

6 unchanged sentences

$ 63,663 $ 38,626 $ 25,037 64.8%

(1) For comparability purposes, Lawson's GAAP results of operations were adjusted to include the historical 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 Adjusted 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.

(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 and certain pro-forma adjustments including the incremental expense related to the fair value adjustment of share-based compensation awards and incremental depreciation and amortization expense related to the fair value adjustments of property, plant and equipment and identifiable intangible assets.

Refer to the section Factors Affecting Comparability to Prior Periods and the section Supplemental Information - Lawson Pro Forma Operating Income and Non-GAAP Adjusted 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 operating income to Adjusted EBITDA.

Revenue and Gross Profit

Adjusted revenue increased 15.6% to $429.7 million for 2022 compared to adjusted revenue of $371.7 million for the same period a year ago.

The increase in adjusted revenue compared to the prior year was primarily driven by the realization of price increases enacted throughout 2021 and 2022 to offset rising supplier costs, increased quantity volumes and strengthening sales to our strategic customers and automotive end market.

Adjusted gross profit increased $25.8 million to $226.3 million for the year ended December 31, 2022 compared to $200.5 million in the prior year primarily as a result of increased sales and the related price increases put in place.

Lawson adjusted gross prof it as a percent of adjusted revenue was 52.7% for 2022 compared to 53.9% in the prior year.

gross margin percentage for 2022 was impacted by increased supplier costs from inflation, supply chain disruptions and a sales shift toward lower margin customers.

Adjusted gross profit was also impacted by an inventory charge of $1.7 million to reduce inventory related to discontinued products where the anticipated net realizable value was lower than the cost reflected in our records and the amortization of the fair value step-up of $1.9 million related to the Mergers.

Price increases enacted throughout 2021 and 2022 have generally offset the negative impacts of these higher costs.

Revenue increased $39.0 million , or 9.1%, to $468.7 million in 2023 compared to pro forma revenue of $429.7 million in the same period of 2022 .

The increase was primarily driven by strengthening sales to Lawson's strategic and governmental customers of $25.2 million and automotive end market customers of $13.5 million from a combination of organic growth and the realization of price increases enacted throughout 2022 and 2023 to offset rising supplier costs.

Gross profit increased $39.2 million to $265.5 million in 2023 compared to pro forma gross profit of $226.3 million in the same period of 2022 primarily as a result of increased sales volume and price increases, which contributed to an increase in gross profit of $29.4 million, lower net freight expense of $2.9 million, lower expense for write-offs of obsolete and excess inventory of $3.2 million and spreading operating expenses over a higher sales level.

Lawson gross profit as a percent of revenue was 56.6% in 2023 compared to pro forma gross profit as a percent of pro forma revenue of 52.7% in the prior year period.

The gross profit margin percentage improvement for 2023 was primarily the result of price increases, lower net freight costs, lower expense for write-offs of obsolete and excess inventory and leveraging operating costs over a higher sales base.

The pro forma 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.

P ro forma gross profit margin for 2022 was also impacted by an inventory charge of $1.7 million to reduce inventory related to discontinued products where

the anticipated net realizable value was lower than the cost reflected in our records and 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.

Adjusted selling, general and administrative expenses increased to $208.7 million for the year ended December 31, 2022 compared to the adjusted amount of $192.3 million in the same period a year ago.

Higher expense on a year-to-date basis versus a year ago were primarily driven by compensation expense to support increased sales, higher severance and higher amortization expense related to the reverse merger accounting, partially offset by lower costs related to the Mergers and stock-based compensation.

Selling, general and administrative expenses increased $20.2 million to $233.0 million in 2023 compared to pro forma Selling, general and administrative expenses of $212.7 million in the same period of 2022.

The increase was primarily driven by additional depreciation and amortization of $9.2 million as a result of the fair value step-up adjustments related to the reverse merger acquisition accounting and higher stock-based compensation of $12.2 million due to expense of $7.9 million in 2023 and a benefit of $4.2 million realized in 2022, partially offset by lower acquisition related costs of $4.7 million in 2023 compared to the same period of 2022.

Adjusted EBITDA

During the year ended December 31, 2022 , Lawson generated Adjusted EBITDA of $38.6 million , an increase of 27.1% or $8.2 million from the same period a year ago driven by increased revenue and margins.

During 2023 , Lawson generated Adjusted EBITDA of $63.7 million , an increase of 64.8% or $25.0 million from the same period a year ago primarily driven by increased revenue and gross profit margin partially offset by an increase in Selling, general and administrative expenses .

TestEquity Segment

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(Dollars in thousands) 2023 2022 Amount %

Revenue from external customers $ 641,643 $ 392,358 $ 249,285 63.5 %

Intersegment revenue 125 — 125 — %

Revenue 641,768 392,358 249,410 63.6 %

2 unchanged sentences

Selling, general and administrative expenses 158,317 78,003 80,314 103.0 %

Operating income (loss) $ 11,375 $ 329 $ 11,046 N/M

Operating income (loss) $ (16,465) $ 11,375 $ (27,840) (244.7) %

Gross profit margin 22.1 % 22.8 %

1 unchanged sentence

$ 43,283 $ 34,736 $ 8,547 24.6 %

(1) Refer to the Non-GAAP Adjusted EBITDA section in Overview for a reconciliation of Adjusted EBITDA to operating income.

(1) Refer to the Non-GAAP Adjusted EBITDA section in Overview for a reconciliation of operating income (loss) to Adjusted EBITDA.

Revenue and Gross Profit

Revenue increased to $392.4 million for the year ended December 31, 2022 from $264.2 million during the same period in 2021 .

This increase was primarily driven by the TEquipment and National Test Equipment acquisitions during the second quarter of 2022 and the acquisition of MCS in 2021, which generated aggregate revenue of $96.6 million for the post-acquisition periods, as well as organic growth of 12.1% in the existing base business.

Gross profit increased $32.2 million to $89.4 million in 2022 compared to $57.2 million in the same period of 2021 primarily due to acquisitions and increased sales in the base business.

As a percent of revenue, gross profit improved to 22.8% in 2022 as compared to 21.6% in 2021 driven by an expansion of margins within the existing base business and a shift in sales mix toward higher margin electronic production supplies.

Revenue increased $249.4 million , or 63.6%, to $641.8 million in 2023 compared to $392.4 million in the same period in 2022 .

The increase was primarily driven by $273.4 million of revenue generated from acquisitions completed in 2023 and 2022 offset by a $24.0 million decline in legacy TestEquity revenue 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 EPS end markets.

Gross profit increased $52.5 million to $141.9 million in 2023 compared to $89.4 million in the same period of 2022 primarily as a result of the inclusion of the acquisitions completed in 2023 and 2022, which generated $57.9 million of additional gross profit during 2023 offset by a decline in legacy TestEquity revenue.

TestEquity gross profit as a percent of revenue decreased to 22.1% in 2023 compared to 22.8% in the prior year primarily due to the amortization of the fair value step-up of inventory of $3.6 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 increased $21.1 million to $78.0 million in 2022 from $56.9 million in 2021 .

Approximately $14.8 million of the increased costs were due to the acquisitions made in 2021 and 2022.

The remainder of the increase was driven primarily by an increase in merger and acquisition related costs of $2.8 million and additional compensation and distribution costs to support the organic revenue growth in the base business.

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 $80.3 million to $158.3 million in 2023 compared to $78.0 million in the same period of 2022 .

Approximately $68.8 million of the increased expenses, including depreciation, was driven by the acquisitions completed in 2023 and 2022 of which $22.8 million was related to the Hisco retention bonuses.

The remaining increase in Selling, general and administrative expenses of $11.5 million is primarily due to $4.6 million of additional amortization of intangible assets acquired through the Hisco acquisition, $1.4 million of higher acquisition related expenses and $5.5 million of higher expenses for health insurance, allowance for doubtful accounts and other professional services.

Adjusted EBITDA

During the year ended December 31, 2022 , TestEquity generated Adjusted EBITDA of $34.7 million , an increase of $18.6 million from the same period a year ago with approximately $8.5 million of the Adjusted EBITDA increase driven by the acquisitions closed during 2021 and 2022 and increases in revenue and margins on the base business.

During 2023 , TestEquity generated Adjusted EBITDA of $43.3 million , an increase of $8.5 million from the same period a year ago with approximately $19.7 million driven by the acquisitions completed in 2023 and 2022 partially offset by $7.3 million due to lower gross profit margin on lower legacy TestEquity revenue and $3.9 million primarily due to higher expenses for health insurance, allowance for doubtful accounts and other professional services.

Gexpro Services Segment

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(Dollars in thousands) 2023 2022 Amount %

Revenue from external customers $ 404,490 $ 385,326 $ 19,164 5.0 %

Intersegment revenue 1,243 — 1,243 — %

Revenue 405,733 385,326 20,407 5.3 %

6 unchanged sentences

$ 45,191 $ 43,206 $ 1,985 4.6 %

(1) Refer to the Non-GAAP Adjusted EBITDA section in Overview for a reconciliation of Adjusted EBITDA to operating income.

(1) Refer to the Non-GAAP Adjusted EBITDA section in Overview for a reconciliation of operating income to Adjusted EBITDA.

Revenue and Gross Profit

Revenue for the year ended December 31, 2022 was $385.3 million .

This compares to revenue of $256.1 million for the same period a year ago, or a 50.4% increase.

A selling day generally represents a business day in which Gexpro Services ships products to its customers.

Average daily sales increased 51.1% over the same period a year ago, primarily as a result of revenue generated from the 2021 and 2022 acquisitions of $107.0 million for the post-acquisition periods and organic growth in the base business of 8.9% through an expansion of products and services to existing customers as well as the addition of new customers.

Gross profit was $112.9 million or 29.3% of revenue for the year ended December 31, 2022 compared to gross profit of $73.1 million or 28.5% for the same period a year ago.

The gross profit increase was driven by the 2021 and 2022 acquisitions, an improvement in the global supply chain over 2021 activities and price increases put in place.

Revenue increased $20.4 million, or 5.3%, to $405.7 million in 2023 compared to $385.3 million in the same period of 2022.

The increase was primarily driven by strengthening sales within Gexpro Services' Aerospace & Defense, Industrial Power, and Transportation end markets of $7.3 million, $17.7 million and $4.9 million, respectively, partially offset by continued softness in the Technology/Semiconductor end markets of $24.5 million.

The increase also came from a combination of organic growth and the realization of price increases enacted throughout 2022 and 2023 to offset rising supplier costs.

Gross profit increased $8.2 million to $121.1 million in 2023 compared to $112.9 million in the same period of 2022 primarily as a result of increased sales volume and price increases and lower net freight expense of $6.1 million partially offset by an increase in expense for write-offs for obsolete and excess inventory of $3.6 million and higher freight capitalization of $0.5 million.

Gexpro Services gross profit as a percent of revenue was 29.8% in 2023 compared to 29.3% in the prior year period.

The gross profit margin percentage improvement for 2023 was primarily the result of price increases and lower net freight costs partially offset by higher expense for write-offs of obsolete and excess inventory.

Selling, General and Administrative Expenses

Selling, general and administrative expenses consists 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 the business and service customers.

Selling, general, and administrative expenses for the year ended December 31, 2022 was $91.6 million compared to $62.0 million for the same period a year ago.

The increase of $29.6 million over a year ago was primarily driven by the inclusion of the 202 1 and 2022 acquisitions of approximately $24.5 million.

The remainder of the increase was driven primarily by an increase in merger related costs of $2.8 million and additional compensation and product fulfillment costs to support the organic growth of the existing base business.

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 $2.5 million to $94.1 million in 2023 compared to $91.6 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 sales growth.

Adjusted EBITDA

During the year ended December 31, 2022 , Gexpro Services generated Adjusted EBITDA of $43.2 million , an increase of $19.9 million from the same period a year ago with approximately $16.7 million driven by the acquisitions closed during 2021 and 2022 and increases in revenue and margins on the organic base business.

During 2023 , Gexpro Services generated Adjusted EBITDA of $45.2 million , an increase of $2.0 million, or 4.6% from the same period a year ago primarily driven by increased revenue and gross profit margin, partially offset by an increase in Selling, general, and administrative expenses.

Consolidated Non-operating Income and Expense

2 unchanged sentences

Interest expense $ (42,774) $ (24,301) $ (18,473) 76.0 %

Loss on extinguishment of debt $ (3,395) $ — $ (3,395) — %

Change in fair value of earnout liabilities $ (483) $ — $ (483) — %

Other income (expense), net $ (670) $ 577 $ (1,247) (216.1) %

Income tax expense (benefit) $ 5,531 $ 313 $ 5,218 N/M

Loss on extinguishment of debt $ — $ (3,395) $ 3,395 N/M

Change in fair value of earnout liabilities $ 758 $ (483) $ 1,241 N/M

Other income (expense), net $ (2,982) $ (670) $ (2,312) N/M

Income tax expense (benefit) $ 6,960 $ 5,531 $ 1,429 25.8 %

N/M Not meaningful

Interest Expense

Interest expense increased $7.6 million in the year ended December 31, 2022 primarily due to higher borrowings offset by a lower interest rate with the debt refinancing related to the Mergers.

Interest expense increased $18.5 million in 2023 compared to the same period of 2022 primarily due to an increase in interest rates and higher borrowings related to the Hisco and other 2023 and 2022 acquisitions.

Loss on Extinguishment of Debt

The $3.4 million loss on extinguishment of debt for the year ended December 31, 2022 was 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 Liability

The $0.5 million expense in the year ended December 31, 2022 related to the change in fair value of the earnout liabilities associated with the earnout provisions of the Merger Agreements and the Frontier earnout.

Refer to Note 8 – Earnout Derivative Liability and Note 3 – Business Acquisitions, respectively, within Item 8.

Financial Statement for information about the earnout liability.

The $3.4 million loss on extinguishment of debt in 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 Liabilities

The $0.8 million benefit in 2023 related to the change in fair value of the earnout liabilities associated with the Frontier acquisition and the Hisco Transaction.

The $0.5 million expense in 2022 primarily related to the change in fair value of the earnout derivative liability associated with the earnout provisions of the Merger Agreements and the Frontier earnout.

Refer to Note 8 – Earnout Liabilities and Note 3 – Business Acquisitions within Item 8.

Financial Statements and Supplementary Data for information about the earnout liabilities.

Other Income (Expense), Net

Other expense, net increased $1.2 million in the year ended December 31, 2022 compared to the prior year primarily due to the inclusion of Lawson operations subsequent to the April 1, 2022 Merger Date.

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 $2.3 million change in 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 $7.0 million, a (346.8)% effective tax rate for the year ended December 31, 2023 compared to income tax expense of $5.5 million and a 42.8% effective tax rate for the prior year.

The change in the year over year effective tax rate was primarily due to changes in the valuation allowance and merger costs incurred during 2022, and the creation of a consolidated group for federal income tax purposes as a result of the completion of the Mergers referenced in Note 3 – Business Acquisitions within Item 8.

Financial Statements .

Relative to the U.S.

statutory rate, the effective tax rate for the year ended December 31, 2022 was impacted by state taxes, foreign operations and liabilities and transaction expenses related to the Mergers.

The change in the year-over-year effective tax rate was primarily due to an increase in the partial valuation allowance against our excess interest expense carryforward balance, state taxes, foreign income and a pre-tax loss in the current year.

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 $83.9 million on December 31, 2023 compared to $24.6 million on December 31, 2022.

The Company believes its current balances of cash and cash equivalents, availability under its Amended and Restated Credit Agreement and cash flows from operations will be sufficient to meet its liquidity needs for the next twelve months.

As of December 31, 2022, liquidity for the Company was $101.6 million comprised of $24.6 million of cash and cash equivalents and $77.0 million of bo rrowing availability remaining, net of outstanding letters of credit, under the Amended and Restated Credit Agreement.

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 December 31, 2023, the Company had $83.9 million of cash and cash equivalents and $198.3 million of bo rrowing availability remaining, net of outstanding letters of credit, under the 2023 Amended Credit Agreement.

On June 2, 2023, the Company raised net proceeds of approximately $98.5 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 million under the incremental term loan of the 2023 Amended 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 debt obligations under the Amended and Restated Credit Agreement mature in April 2027.

Principal payments on the

Amended and Restated Credit Agreement for the next twelve months are $15.0 million.

Our current debt obligations under the 2023 Amended Credit Agreement mature in April 2027.

Required principal payments on the 2023 Amended Credit Agreement for the next twelve months are $30.3 million .

Refer to Note 9 – Debt within Item 8.

Financial Statements for additional information related to our debt obligations.

Financial Statements and Supplementary Data 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.

We do not anticipate having difficulty in obtaining financing from those markets in the future, however, we cannot provide assurance that unforeseen events or events beyond our control (such as a potential tightening of debt capital markets) will not have a material adverse impact on our liquidity.

Sources and Uses of Cash

5 unchanged sentences

Cash Provided by (Used in) Operating Activities

Net cash used in operations for the year ended December 31, 2022 was $11.0 million, excluding non-cash items, primarily due to increased accounts receivables and inventories driven by higher sales and increased supplier costs driven by inflation and global supply chain disruptions.

Net cash provided by operations for the year ended December 31, 2021 was $10.3 million, excluding non-cash items, primarily due to decreased accounts receivable and increased accrued expenses partially offset by increased inventories.

Net cash provided by operations for the year ended December 31, 2023 was $102.3 million primarily due to non-cash items, partially offset by a net loss and improvements in working capital.

Net cash used in operations for the year ended December 31, 2022 was $11.0 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 year ended December 31, 2022 was $126.7 million, primarily as a result of the other acquisitions completed during the year by TestEquity and Gexpro Services as described in Note 3 – Business Acquisitions within Item 8.

Financial Statements.

Net cash used in investing activities for the year ended December 31, 2021was $41.4 million, primarily due to business acquisitions and purchases of rental equipment.

Net cash used in investing activities for the year ended December 31, 2023 was $278.5 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 year ended December 31, 2022 was $126.7 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 was $148.5 million for the year ended December 31, 2022, primarily due to proceeds under the April 1, 2022 Amended and Restated Credit Agreement partially offset by repayment of previous indebtedness.

On April 29, 2022, the Company borrowed the $50 million available under the delayed draw term loan facility to finance the acquisition of Interworld Highway, LLC made by TestEquity.

Deferred financing costs of $12.0 million were incurred during the year in connection with the April 1, 2022 Amended and Restated Credit Agreement and January 3, 2022 Gexpro Services Credit Agreement.

Net cash provided by financing activities for the year ended December 31, 2021 was $34.7 million, primarily due to increased borrowings on the Company's revolving lines of credit partially offset by payments on the Company's term loans and a capital contribution to finance the MCS acquisition.

Net cash provided by financing activities for the year ended December 31, 2023 was $250.4 million due to proceeds from the 2023 Amended 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 $98.5 million, net of offering costs, through the Rights Offering which closed during the second quarter of 2023.

During 2023, deferred financing costs of $3.4 million were incurred related to the 2023 Amended Credit Agreement.

Net cash provided by financing activities for the year ended December 31, 2022 was $148.5 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 2022 related to these financing activities.

Financing and Capital Requirements

Credit Facility

On April 1, 2022, in connection with the closing of the Mergers, DSG entered into an Amended and Restated Credit Agreement, which includes a $200 million senior secured revolving credit facility, a $250 million senior secured initial term loan facility and a $50 million senior secured delayed draw term loan 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 Amended Credit Agreement, and provided for a $305 million incremental term loan facility.

The 2023 Amended Credit Agreement also provides for the Company to increase the 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 Amended 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 8.

Financial Statements for a description of the agreement.

On December 31, 2022, we had $417.1 million in outstanding borrowings and $77.0 million of bo rrowing availability remaining, net of outstanding letters of credit, under the revolving credit facility.

As of December 31, 2022, we were in compliance with all financial covenants under our Amended and Restated Credit Agreement.

While we were in compliance with our financial covenants as of December 31, 2022, failure to meet the covenant requirements of the Amended and Restated 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.

Financial Statements and Supplementary Data for a description of the 2023 Amended Credit Agreement.

On December 31, 2023, we had $574.7 million in outstanding borrowings under the 2023 Amended 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 December 31, 2023, we were in compliance with all financial covenants under our 2023 Amended Credit Agreement.

While we were in compliance with our financial covenants as of December 31, 2023, failure to meet the covenant requirements of the 2023 Amended 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 December 31, 2022, we had contractual commitments to purchase approximately $168 million of product from our suppliers and contractors which is expected to be paid in the next twelve months.

As of December 31, 2023, we had contractual commitments to purchase approximately $146 million of products from our suppliers and contractors over the next twelve months.

Capital Expenditures

During the year ended December 31, 2023, t otal capital expenditures for property, plant and equipment and rental equipment were $24.7 million excluding proceeds from the sale of rental equipment.

The Company expects to spend appro ximately $16 million to $20 million for capital expenditures during 2024 to support ongoing operations.

Stock Repurchase Program

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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.

On November 2, 2022, the Board of Directors increased the existing repurchase program from $7.5 million to $12.5 million, and as a result, the Company had $7.6 million of remaining availability for stock repurchases under the program as of December 31, 2022.

See Note 11 – Stock Repurchase Program within Item 8.

Financial Statements for further information.

CRITICAL ACCOUNTING ESTIMATES

In December 2023, the Board of Directors increased the existing repurchase program by $25.0 million bringing the total authorized to $37.5 million.

During 2023, the Company repurchased 138,725 shares of DSG common stock at an average cost of $26.09 per share for a total cost of $3.6 million.

During 2022, the Company repurchased 108,178 shares of DSG common stock at an average cost of $17.93 per share for a total cost of $1.9 million .

T he remaining availability for stock repurchases under the program was $29.0 million at December 31, 2023.

See Note 11 – Stockholders' Equity within Item 8.

Financial Statements and Supplementary Data for further information.

Retention Bonuses

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 during 2023 and will pay $34.6 million during 2024, with the remaining balance of $1.1 million to be paid in 2025.

CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES

We have disclosed our significant accounting policies in Note 2 – Summary of Significant Accounting Policies within Item 8.

Financial Statements.

Financial Statements and Supplementary Data.

The following provides information on the accounts requiring more significant estimates.

Inventory Reserves - Inventories principally consist of finished goods 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.

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 December 31, 2022, our inventory reserve was $10.7 million, equal to approximately 3.9% of our gross inventory.

A hypothetical change of one hundred basis points to our reserve as a percent of total inventory would have affected our cost of goods sold by $2.8 million.

Income Taxes - Deferred tax assets or liabilities reflect temporary differences between amounts of assets and liabilities for financial and tax reporting.

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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 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.

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• pre-existing liabilities or legal claims;

• contingent consideration, including estimating the likelihood and timing of achieving the relevant thresholds;

• 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.

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We allocate goodwill to the reporting units of the business that are expected to benefit from the business combination.

Valuation of Earnout Derivative Liability - The Company's earnout derivative liability is classified as a Level 3 instrument and is measured at fair value on a recurring basis.

The fair value of the earnout derivative liability is measured using the Monte Carlo simulation valuation model using a distribution of potential outcomes on a monthly basis for the year ended December 31, 2022.

Inputs to that model include the expected time to liquidity, the risk-free interest rate over the term, expected volatility based on representative peer companies and the estimated fair value of the underlying class of common stock.

The significant unobservable inputs used in the fair value measurement of the earnout derivative liability are the fair value of the underlying stock at the valuation date and the estimated term of the earnout arrangement periods.

Generally, increases (decreases) in the fair value of the underlying stock and estimated term would result in a directionally similar impact to the fair value measurement.

Other Information Regarding DSG’s Independent Registered Public Accounting Firms

While Lawson Products, Inc.

was the legal acquirer of TestEquity and Gexpro Services in the April 1, 2022 Mergers, TestEquity and Gexpro Services were treated as the combined accounting acquirer of Lawson Products, Inc.

(now DSG following the name change of the registrant on May 5, 2022) for financial reporting purposes.

As TestEquity and Gexpro Services were under common control for the historical periods presented prior to the Mergers in this Form 10-K, they are presented on a consolidated basis following consummation of the Mergers for all periods presented herein.

Under this guidance, TestEquity and Gexpro Services were treated as a combined entity as the accounting acquirer for financial reporting purposes, and DSG was identified as the accounting acquiree.

Accordingly, the consolidated financial statements as of December 31, 2022 and December 31, 2021 and for the year ended December 31, 2022 and 2021 reflect the results of operations and financial position 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.

BDO USA, LLP (BDO) was the principal auditor of Lawson Products, Inc., prior to consummation of the Mergers, and audited the 2021 financial statements of Lawson Products, Inc., which were included in Lawson Products, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2021.

Grant Thornton, LLP (GT) was the auditor of TestEquity prior to consummation of the Mergers.

The historical consolidated financial statements of Test Equity and Gexpro Services (and including, the legacy Lawson Products, Inc.

business since April 1, 2022) had not been audited prior to their inclusion in this Form 10-K.

In connection with and following consummation of the Mergers, the Company engaged BDO to audit the 2022 consolidated financial statements (and BDO’s engagement was ratified by the stockholders of DSG at the 2022 Annual Meeting of Stockholders, held on November 15, 2022), and engaged GT to audit the 2021 consolidated financial statements of DSG.

Under the applicable SEC rules and interpretations, a registrant may only have one principal auditor at any one time, and the auditor engaged to conduct the audit of the most recently to be completed fiscal year end period is considered to be the principal auditor.

As DSG had not been previously audited and BDO is both the principal auditor of DSG following the Mergers (as auditor of the most recently completed fiscal year included in this Form 10-K) and prior to the Mergers (as auditor of the registrant), the Company concluded that DSG did not experience a change in its principal auditor in 2022.

GT’s engagement as auditor of the 2021 financial statements was completed upon filing this Form 10-K.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis