Executive Summary / Key Takeaways

• Distribution Solutions Group (DSGR) is executing a multi-faceted transformation, leveraging strategic acquisitions and significant internal investments in technology and sales force development to build a more profitable and resilient specialty distribution platform.
• The company delivered strong Q3 2025 results, with consolidated revenue up 10.7% year-over-year, driven by a 6% organic increase and contributions from 2024 acquisitions, marking its fourth consecutive quarter of organic sales growth. Adjusted EPS rose 8.1% to $0.40.
• DSGR is strategically differentiating through advanced digital platforms, proprietary products like TestEquity's USA-made chambers, and value-added services, enhancing customer intimacy and driving higher-margin opportunities across its diverse segments.
• Despite short-term pressures from inflation, tariffs, and investments in sales force transformation (Lawson) and new leadership (TestEquity), management is confident in achieving structurally higher margins and doubling EBITDA within the next three years, targeting ROIC exceeding 20% for mature assets.
• The company maintains a strong financial position with $335 million in liquidity and 3.5x debt leverage, actively returning capital to shareholders through share buybacks while pursuing accretive M&A opportunities.

A Specialty Distribution Powerhouse in Transformation

Distribution Solutions Group, Inc. (DSGR) operates as a premier multi-platform specialty distribution company, providing high-touch, value-added solutions across the maintenance, repair and operations (MRO), original equipment manufacturer (OEM), and industrial technology markets. The company's business model is built on deep customer intimacy, offering a diverse portfolio of products and services through its four core segments: Lawson, TestEquity, Gexpro Services, and the Canada Branch Division. This diversified approach allows DSGR to engage with customers across various end markets, from aerospace and defense to industrial power and automotive, mitigating risks associated with sector-specific downturns.

The company's journey to its current form is rooted in a significant transformation. Incorporated in 1952 as Lawson Products, Inc., the company underwent a strategic merger on April 1, 2022, rebranding as Distribution Solutions Group, Inc. This pivotal event integrated TestEquity and Gexpro Services as wholly-owned subsidiaries, fundamentally reshaping DSGR into a larger, more diversified entity. This strategic pivot has been accompanied by an aggressive acquisition strategy, with approximately $450 million invested in nine businesses by the end of Q3 2025. In 2024 alone, DSGR completed five strategic acquisitions, including Emergent Safety Supply (ESS) and SS Automotive for Lawson, Source Atlantic for the Canada Branch Division, Tech-Component Resources Pte Ltd (TCR) for Gexpro Services, and ConRes Test Equipment (ConRes TE) for TestEquity. These acquisitions were designed to expand offerings, geographic footprint, and customer base, targeting key capability areas to drive market position and financial returns.

The industrial distribution landscape is highly fragmented, with DSGR competing against large, established players like W.W. Grainger (GWW), Fastenal (FAST), MSC Industrial Direct (MSM), and Applied Industrial Technologies (AIT), as well as indirect competitors such as Amazon Business (AMZN). While larger rivals often boast superior scale and broader digital platforms, DSGR strategically carves out its niche through specialized offerings and a focus on customer intimacy. The company's strengths lie in its deep product knowledge, consultative sales models, and robust distribution network, which foster strong customer relationships and loyalty. However, its smaller scale compared to industry giants can lead to vulnerabilities in price competition and innovation speed, particularly against digitally advanced competitors. DSGR's strategic response involves leveraging its value-added services and technology to enhance efficiency and customer engagement, aiming to offset scale disadvantages with superior service and specialized expertise.

Technological Edge and Innovation Driving Differentiation

DSGR's core strategy is deeply intertwined with its technological differentiation and ongoing innovation, which serve as critical enablers for its competitive moat and long-term growth. The company is actively investing in and leveraging technology to enhance productivity, expand service offerings, and deepen customer relationships across its segments.

At Lawson, the multi-year sales force transformation is underpinned by significant technological advancements. The company fully implemented a comprehensive Customer Relationship Management (CRM) system in 2024, achieving over 70% adoption among its sales representatives. This CRM tool provides valuable analytical visibility by territory and sales rep, enabling data-driven decision-making and targeted performance management. In Q1 2025, Lawson also launched a completely reimagined and expanded 24/7 e-commerce website, which has received excellent customer feedback and is designed to improve customer conversion ratios and support a more flexible go-to-market strategy. These digital tools enhance the efficiency and effectiveness of Lawson's sales force, allowing for better customer connectivity and coverage.

TestEquity stands out with its portfolio of specialized brands, technical knowledge, and digital platforms tailored to specific needs across the electronics lifecycle. The company's multi-brand approach enables it to offer an extensive product range, expert support, and tailored technical solutions, positioning it as a trusted partner. A key technological differentiator is TestEquity's proprietary test chambers, which are made in the USA and consistently deliver strong double-digit revenue and bookings growth, contributing significantly to profitability. The company also offers a robust rental and used equipment business, which has seen its fleet value increase significantly with the 2024 ConRes acquisition. This segment's high-value-added capabilities, including rental, used, refurb, and calibration, enjoy current EBITDA contribution margins in the 20% to 40-plus percent range. New CEO Barry Litwin is focusing on targeted investments in systems and e-commerce capabilities to enhance operational effectiveness, unlock cross-selling, and streamline e-commerce sales, with full impact expected over 18 to 30 months.

Gexpro Services leverages technology to deliver industry-leading total cost of ownership savings through custom supply-chain management programs. These programs are built around technology-driven solutions that focus on high on-time delivery, quality, lean optimization, supplier rationalization, and total working capital improvement. The company's expanded VMI, kitting, manufacturing, and e-commerce offerings are all supported by technological capabilities that enhance its value proposition as a global supply chain solutions provider.

These technological investments are not merely operational enhancements; they are strategic differentiators. They enable DSGR to offer superior service, optimize its cost structure, and capture higher-margin opportunities. For investors, this translates into a stronger competitive moat, improved financial performance through efficiency gains and premium offerings, and a robust foundation for long-term growth in a dynamic industrial environment.

Financial Performance and Operational Momentum

DSGR's financial performance in the third quarter of 2025 reflects the early successes of its strategic initiatives and the resilience of its diversified business model. Consolidated revenue for Q3 2025 increased by $49.9 million to $518.0 million, representing a 10.7% year-over-year increase. This growth was fueled by a 6% organic revenue increase, marking the fourth consecutive quarter of organic sales expansion, alongside a $23.3 million contribution from 2024 acquisitions. For the nine months ended September 30, 2025, consolidated revenue reached $1.50 billion, up $174.8 million or 13.6% from the prior year, with organic revenue growing 4%.

Profitability metrics show a mixed but improving picture, influenced by strategic investments and market dynamics. Adjusted EBITDA for Q3 2025 was $48.5 million, translating to a 9.4% margin. While this margin was impacted by product and customer mix shifts and strategic investments, it supported an 8.1% year-over-year increase in adjusted EPS to $0.40, and a sequential increase of 14.3% from Q2 2025. For the nine months ended September 30, 2025, adjusted EBITDA was $139.8 million.

Segment-Specific Performance:

• Lawson: Q3 2025 revenue grew 3% to $121.5 million, driven by strategic, government, and automotive customers. Its gross profit margin was 54.6%, a slight decrease due to increased vendor costs and tariffs, partially offset by pricing actions. Adjusted EBITDA was $14.0 million (11.5% margin), impacted by higher employee-related costs and sales force transformation investments. The sales force transformation, which saw rep counts grow to approximately 930 by September 2025 (targeting 1,000 by H2 2025), is a significant long-term investment, with new rep profitability taking longer than expected.
• TestEquity: Q3 2025 revenue increased 5.8% to $206.5 million, primarily from test and measurement, rental, and refurbished equipment. Gross profit margin decreased to 21.1% due to higher depreciation from the expanded rental fleet and a mix shift towards lower-margin test and measurement products. Adjusted EBITDA was $12.4 million (6.0% margin), down sequentially due to mix shifts and higher employee expenses. New CEO Barry Litwin is leading a strategic overhaul to drive higher margins.
• Gexpro Services: Delivered a record adjusted EBITDA of $17.8 million (13.6% margin) in Q3 2025, on 11.4% organic revenue expansion to $130.5 million. This strong performance was driven by momentum in renewables, aerospace and defense, and industrial power. Gross profit margin was 31.3%, slightly down due to a shift to lower-margin projects. The segment achieved 100 basis points of sequential EBITDA margin expansion since Q1 2025, reflecting strong operating leverage and acquisition synergies.
• Canada Branch Division: Q3 2025 revenue surged 53.4% to $60.0 million, largely due to the full-quarter inclusion of Source Atlantic. Adjusted EBITDA was $5.8 million (9.6% margin), a significant 300 basis point sequential increase over Q2 2025. This improvement reflects progress on acquisition synergies and branch consolidations, with two of four planned facility consolidations completed by year-end. Source Atlantic's gross profit margin improved due to synergy execution and lower inventory step-up amortization.

DSGR's liquidity and capital resources remain robust. As of September 30, 2025, the company held $69.2 million in cash and cash equivalents and had $252.7 million in borrowing availability under its revolving credit facility, with no outstanding borrowings. Total liquidity stood at $335 million. The company's debt leverage was 3.5x, well within its targeted range of 3x to 4x. DSGR generated strong operating cash flow of over $38 million in Q3 2025, contributing to a trailing 12-month free cash flow conversion of approximately 96%. The company also returned over $20 million to shareholders through share buybacks in the first nine months of 2025, with $6 million remaining under its authorization. This disciplined capital allocation strategy balances organic growth investments, accretive M&A, and shareholder returns.

Outlook, Risks, and the Path Forward

DSGR maintains a cautious but optimistic outlook for the remainder of 2025, particularly for the fourth quarter, given tougher year-over-year comparisons and fewer selling days. However, management expects business activity to remain steady, with ongoing initiatives anticipated to realize returns and improved EBITDA margins in the coming quarters. The company projects full fiscal 2025 net capital expenditures to be in the range of $22 million to $25 million.

Management's long-term vision is clear: to double EBITDA again within the next three years and materially lift current EBITDA margins, with mature distribution assets expected to generate Return on Invested Capital (ROIC) exceeding 20% (currently 11% TTM). This ambitious goal is underpinned by several key assumptions:

• Market Recovery: Expectations for market conditions to improve sequentially across most end markets, with US PMI numbers trending above 50 in early 2025 signaling expansion.
• Tariff Management: A belief that the impact of new trade policies and tariffs on direct and indirect procurement will be modest (less than 6% from China), and the company's ability to offset these costs through strategic sourcing and pricing actions without significant margin deterioration.
• Operational Leverage: Anticipated operating leverage from Lawson's maturing sales force (targeting 1,000 reps by H2 2025) and the realization of synergies and cost controls in the Canada Branch Division (targeting double-digit EBITDA margins for Source Atlantic by next year).
• TestEquity Transformation: New CEO Barry Litwin's strategic overhaul is expected to drive structurally higher margins and accelerate value creation over the next 18 to 30 months, with sales and margins building as end markets return.
• Gexpro Services Momentum: Continued strong performance in key verticals like aerospace and defense, renewables, and industrial power, despite tougher sales comps in H2 2025.

Despite this positive outlook, several risks warrant investor attention. The broader macroeconomic environment, characterized by inflation, tariffs, and higher interest rates, continues to pose challenges. Supply chain constraints and labor shortages could impact operational efficiency. The integration of acquisitions, while progressing, carries inherent risks, and some have required "more heavy lifting" than initially underwritten. Specifically, the pace of new sales representative productivity at Lawson has been slower than expected, and the uncertainty surrounding military spending remains a "big question mark," with orders currently held up. Furthermore, product and customer mix shifts, as seen in TestEquity, can temporarily compress margins. Foreign currency exchange rate changes also introduce volatility, as evidenced by unfavorable changes impacting other income/expense in Q3 2025.

Conclusion

Distribution Solutions Group is a company in the midst of a profound transformation, strategically leveraging its multi-platform specialty distribution model to capitalize on evolving industrial and technological demands. Its history, marked by the pivotal 2022 merger and subsequent aggressive M&A, has laid the groundwork for a "compounding engine" focused on long-term value creation. DSGR's commitment to technological differentiation, through advanced CRM, e-commerce platforms, and proprietary products, is not merely an operational upgrade but a core strategic pillar designed to enhance customer intimacy, drive efficiency, and unlock higher-margin opportunities.

While the company faces short-term headwinds from macroeconomic pressures and the inherent "noisiness" of large-scale transformations, its recent financial performance, particularly the consistent organic revenue growth and improving profitability in key segments, demonstrates the resilience of its business model. With a clear roadmap for operational improvements, a disciplined capital allocation strategy, and a leadership team aligned with shareholder interests, DSGR is positioning itself for structurally higher margins and accelerated EBITDA growth. Investors should recognize DSGR as a compelling opportunity, where strategic investments in technology and market expansion are expected to yield significant returns, solidifying its competitive standing and driving substantial shareholder value in the years to come.