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Distribution Solutions Group, Inc. (DSGR)·Q3 2025 Earnings Summary

Executive Summary

  • Solid quarter with double-digit top-line growth and resilient cash generation: revenue $0.518B (+10.7% YoY; +3.1% QoQ), adjusted EBITDA $48.5M (9.4% margin), and operating cash flow $38.4M; organic daily sales grew 6.0% YoY and 3.1% sequentially .
  • Mix, tariff, and employee cost headwinds compressed margins YoY; Canada Branch Division and Gexpro delivered sequential margin expansion; Lawson and TestEquity faced mix and cost pressures; adjusted EPS rose to $0.40 (+8% YoY; +14% QoQ) .
  • Balance sheet/liquidity remain strengths (no revolver borrowings; $335M+ liquidity; net leverage 3.5x), with buybacks of ~$20M YTD and $6.3M authorization remaining, supporting shareholder returns and optionality for M&A .
  • Near-term outlook “cautious” into Q4 given fewer selling days and tougher comps; October pacing not showing dramatic shifts; likely stock reaction catalysts include: continued sequential margin gains at Gexpro/Canada, TestEquity mix normalization, Lawson salesforce productivity ramp, and tariff mitigation via domestic supply chain capabilities .

What Went Well and What Went Wrong

  • What Went Well
    • Gexpro Services: record adjusted EBITDA with 11.4% organic revenue growth YoY; sequential EBITDA margin expanded and backlog/funnel remain healthy across aerospace/defense, renewables, technology, and industrial power .
    • Canada Branch Division: meaningful sequential improvement; adjusted EBITDA margin rose to 9.6% (from 6.5% in Q2) on synergy capture and branch consolidations; Source Atlantic integration progressing .
    • Cash generation and liquidity: operating cash flow $38.4M in Q3; total liquidity ~$335M; no revolver draw; TTM FCF conversion ~96% and ROIC ~11% .
  • What Went Wrong
    • Margin compression: consolidated adjusted EBITDA margin 9.4% (down 110 bps YoY) from mix (e.g., test & measurement) and higher employee/healthcare costs; Source Atlantic compressed YoY margin by ~11 bps .
    • TestEquity pressures: mix shift toward lower-margin test & measurement, higher depreciation on rental fleet, and higher employee-related costs (leadership build-out); bad debt/severance also weighed .
    • Lawson transformation pacing: higher SG&A from salesforce expansion (930 reps), with slower-than-expected time-to-productivity; margin impacted by healthcare and large customer mix; CRM adoption >70% with improving activity, but ramp remains gradual .

Financial Results

MetricQ3 2024Q2 2025Q3 2025
Revenue ($USD Billions)$0.468 $0.502 $0.518
GAAP Diluted EPS ($)$0.46 $0.11 $0.14
Non-GAAP Adjusted EPS ($)$0.37 $0.35 $0.40
Operating Income ($USD Millions)$18.95 $26.83 $23.62
Operating Margin (%)4.0% 5.3% 4.6%
Adjusted EBITDA ($USD Millions)$49.11 $48.56 $48.46
Adjusted EBITDA Margin (%)10.5% 9.7% 9.4%

Segment performance (Revenue and Operating Income)

SegmentQ3 2024 Revenue ($M)Q3 2025 Revenue ($M)Q3 2024 Op Inc ($M)Q3 2025 Op Inc ($M)
Lawson Products117.96 121.55 0.73 5.39
TestEquity195.24 206.48 4.33 2.64
Gexpro Services116.14 130.53 11.54 13.88
Canada Branch Division39.09 59.98 2.52 3.49
Total (after interco)468.02 517.96 18.95 23.62

Key KPIs

KPIQ2 2025Q3 2025
Organic Average Daily Sales (YoY)+3.3% +6.0%
Organic ADS Sequential Growth+2.4% +3.1%
Operating Cash Flow ($M)$33.3 $38.4
Total Liquidity at Q-end ($M)$314.4 $335.4
Net Debt Leverage (x)3.5x 3.5x
Net Capex ($M)$5.5 $7.7
Revolver Borrowings at Q-endNone None

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Net CapExFY 2025$22–$25M (~1% of revenue) $22–$25M (~1% of revenue) Maintained
Revenue/EBITDAQ4 2025None provided; “cautious” tone None provided; “cautious” tone; fewer selling days (61 vs 64), tougher comps Maintained qualitative caution
Share Repurchase AuthorizationCurrentn/a~$6.3M remaining n/a
Leverage/FCF FocusOngoingDeleveraging via earnings/FCF Reiterated deleveraging and high FCF conversion focus Maintained

Earnings Call Themes & Trends

TopicPrevious Mentions (Q1 2025, Q2 2025)Current Period (Q3 2025)Trend
Tariffs/MacroQ1: Cautiously optimistic amid trade policy shifts . Q2: Ongoing trade policy changes; customer engagement rising .Cautious Q4 outlook; mitigation via domestic manufacturing and transparent tariff passthrough; price ~1/3 of 6% organic growth (volume ~2/3) .Stable caution; improved mitigation
Digital/CRM/E-commerceQ1: Platform scaling; early e-comm push . Q2: Execution progress across initiatives .Lawson CRM adoption >70%; enhanced website launched in Q1; TestEquity targeting systems and e-commerce capability upgrades .Building capability, steady adoption
Test & Measurement vs EPS mixQ1: T&M rising; EPS soft (implied) . Q2: Minor margin expansion .T&M improved; mix weighed on margins; rental/refurb ramp; leadership adds press SG&A .Mixed: growth with lower % margins
Canada (Source Atlantic)Q1: Margin compression from SA . Q2: Sequential margin expansion; synergy progress .EBITDA margin 9.6% (vs 6.5% in Q2); 2 of 4 facility consolidations done; Eastern Canada project softness persists .Improving, integration on track
Gexpro momentumQ1: EBITDA margin ~12.6% . Q2: Sequential margin up to 13.4% .Record adjusted EBITDA; 13.6% margin; strong funnel; APAC/EMEA expansion; domestic capabilities help tariff mitigation .Strengthening
Lawson salesforce transformationQ1: Net margin up; transformation underway . Q2: Margin 12.6% .~930 reps; productivity ramp slower than expected; margin 11.5% with healthcare and strategic-account mix pressure; CRM metrics trending up .Investments ahead of returns

Management Commentary

  • CEO (Bryan King): “We delivered double-digit revenue growth of 10.7%... supported by strong momentum in organic average daily sales which grew 6.0%... Sales growth was realized across each of our segments... We’re entering the final stretch of the year with solid momentum and confidence in our growth strategy” .
  • CEO (on outlook and liquidity): “We ended the quarter with no outstanding revolver debt and total liquidity of over $335 million… As we look at the fourth quarter, we’re maintaining a cautious outlook given tougher year-over-year comparisons and ongoing economic uncertainty” .
  • CFO (Ron Knutson) on Q4 pacing: “October is a little skewed… we’re not seeing any dramatic shifts… fewer selling days (61 vs 64)… holiday shutdowns create some typical fourth-quarter pressure” .
  • CFO on margins: “~30 bps of the YoY margin compression from ongoing investments; ~80 bps timing/non-recurring (incentive accruals, customer startups)… no significant one-time items expected in Q4” .
  • CEO/CFO on price vs volume: Of the 6% organic sales increase, about one-third was price and about two-thirds was volume; all three verticals saw unit volume growth .

Q&A Highlights

  • Q4 outlook and selling days: Management emphasized fewer selling days and tougher comps; October did not show dramatic shifts; seasonality and customer holiday shutdowns noted .
  • EBITDA margin bridge: Mix, healthcare costs, incentive accruals, new customer start-ups, and timing drove YoY compression; no known large one-timers in Q4 .
  • Gexpro durability: Strong wallet share, low churn, long sales cycle with visibility; investments in people/locations and APAC/EMEA expansion underpin backlog .
  • Lawson salesforce ramp: Productivity slower than expected; continuing to add leadership/support roles, tools, and pilots to accelerate onboarding and wallet share; CRM metrics improving .
  • TestEquity headwinds: Mix shift to T&M (lower margin), added leadership and sales investments, healthcare, bad debt reserve, severance, and inventory allowance weighed on margins; initiatives underway in pricing, services, and digital .

Estimates Context

  • Wall Street consensus from S&P Global for Q3 2025 revenue/EPS and next quarter was unavailable at the time of this analysis; therefore, no estimate vs actual comparison is provided (Values retrieved from S&P Global).
  • Absent consensus, we note adjusted EPS improved YoY and sequentially ($0.40 vs $0.37 YoY; $0.40 vs $0.35 QoQ), while adjusted EBITDA dollars were roughly flat sequentially and down slightly YoY due to mix and investment .

Key Takeaways for Investors

  • Momentum with balance: Top-line strength is broad-based with 6% organic ADS growth and four straight quarters of sequential revenue increases, but mix and cost factors are holding consolidated margins below 10% near term .
  • Segment divergence: Gexpro and Canada are delivering sequential margin gains and execution on growth/integration, while TestEquity and Lawson are in investment/mix phases; watch for normalization of T&M mix and Lawson salesforce productivity as margin catalysts .
  • Cash discipline intact: Strong operating cash flow, no revolver borrowings, and ~$335M liquidity provide flexibility for organic initiatives and bolt-ons; leverage steady at 3.5x with focus on FCF-driven deleveraging .
  • Near-term setup: Q4 has fewer selling days and difficult comps; expect seasonality and modest pressure, but no known large one-offs; monitor October/November pacing and holiday impact .
  • Tariff mitigation as competitive edge: Domestic manufacturing and transparent tariff pass-throughs are supporting customer retention and share gains—particularly at Gexpro—amid an uneven macro backdrop .
  • Execution milestones to track: Lawson CRM-driven productivity, Canada branch consolidations and synergy delivery, TestEquity pricing/services mix, and Gexpro backlog conversion and APAC/EMEA scaling .
  • Capital deployment: With $6.3M buyback capacity remaining and active M&A pipeline, management can balance returns of capital with tuck-in opportunities while maintaining capex at ~1% of revenue (FY25: $22–$25M) .