DSGR — Q2 2026 Financial Report Analysis

Distribution Solutions Group (DSG) grew second-quarter 2026 revenue 11.0% to $557.7 million, almost all of it organic, led by a 17.4% jump at its TestEquity electronics-supplies unit. But the gain did not carry through to operating profit, which rose only 3.9% to $27.9 million: gross margin fell from 33.9% to 32.3% because of tariffs and a shift toward lower-margin customers, and margins at the Lawson Products MRO business collapsed. Net income rose 69.8% to $8.5 million ($0.18 per diluted share, from $0.11), but most of that came from a lower tax rate, not from the business itself. Hanging over everything is a pending $35.00-a-share cash buyout by LKCM Headwater, the investment firm that already owns about 79% of the stock.

What DSG does

DSG is a specialty distributor. It buys products from manufacturers and resells them to businesses along with services such as stocking customers' shelves, technical advice and equipment rental. It reports four segments:

• Lawson Products: "C-parts" for maintenance, repair and operations (MRO), meaning the fasteners, chemicals, tools and other consumables that factories, fleets and government sites use up. It sells through a field sales force in the US and Canada.
• TestEquity: test-and-measurement equipment, electronics production supplies and rentals for aerospace and defense, semiconductors, telecom and electronics makers. It is the largest segment, at 41% of quarterly revenue.
• Gexpro Services: supply-chain programs that keep original equipment manufacturers' (OEMs') production lines stocked with parts, in industrial power, technology, transportation and aerospace.
• Canada Branch Division: an MRO distributor with 38 branches across Canada, which now includes Eastern Valve (acquired March 2026).

The numbers

Operating margin is the share of revenue left after the cost of goods and running the business, before interest and tax. Adjusted EBITDA is the company's own profit measure. It adds back depreciation and amortization (non-cash charges for wear on assets and for the value of acquired customer lists and brands), stock-based pay and items management calls non-recurring.

Sequentially, revenue rose 12.4% from the first quarter's $496.0 million, helped by two more selling days. Organic sales per selling day were up 8.1%.

Segment by segment

TestEquity carried the quarter. Revenue rose $33.9 million. The 10-Q attributes $15.0 million to test and measurement, $16.8 million to electronics production supplies and $3.8 million to rentals, chambers and refurbished equipment, offset by a $1.7 million decline in fabrication services. Gross margin rose from 21.8% to 22.2% on higher supplier rebates. Because overhead grew more slowly than sales, segment operating income more than doubled from $4.8 million to $10.8 million, and adjusted EBITDA rose $6.5 million, more than the whole company's $5.4 million increase.

Lawson went the other way. Revenue edged up 1.0%: sales to strategic and government accounts grew, while sales to Lawson's core customers declined. Gross profit fell $4.2 million and gross margin dropped from 55.2% to 51.3%. The 10-Q blames a mix shift toward lower-margin customers, higher vendor costs and higher tariffs on inbound freight, partly offset by price increases. Expenses rose $1.3 million, including $1.3 million more severance and higher medical claims. Operating income fell from $8.0 million to $2.5 million, and adjusted EBITDA fell 24% to $11.9 million. Lawson was DSG's original business and is its highest-margin unit, so a four-point gross-margin drop there costs real money.

Gexpro Services grew 9.7%, led by the industrial power vertical (+$8.0 million) and technology (+$3.2 million), with aerospace and defense down $2.2 million. Gross margin slipped 0.2 points to 31.1%. The company says this is largely arithmetic: about $1.7 million of tariff charges were passed through to customers at no markup, which raises revenue but not profit. Medical claims and stock-based pay lifted expenses, so operating income rose only 4.5%.

Canada Branch Division revenue rose $7.9 million: $4.1 million from Eastern Valve and $3.8 million organic (about 6.8% organic growth). Expenses were flat, so adjusted EBITDA rose $2.1 million, of which Eastern Valve contributed about $0.9 million.

Takeaway: DSG's demand picture is strong (10.2% organic growth, with the US manufacturing PMI averaging 53.0 in the first half against 49.4 a year earlier), but tariffs and customer mix are taking the gain out of gross margin. Excluding TestEquity, segment operating income fell year over year. TestEquity's improvement is what kept consolidated profit growing.

What the headline numbers hide

• Most of the EPS jump is the tax rate. Pre-tax income rose 21.3%, from $11.9 million to $14.4 million, helped by $1.2 million less interest expense as rates fell. Net income rose 69.8% because the effective tax rate dropped from 57.8% to 41.0%, which the 10-Q attributes to valuation allowances on deferred tax assets tied to limits on deducting interest, plus state and foreign taxes. At last year's tax rate, this quarter's net income would have been about $6.1 million, roughly 21% growth rather than 70%. Buybacks played no part: none were made in 2026, and diluted shares were essentially flat at 46.4 million.
• The gap between GAAP and adjusted profit is wide. Adjusted EBITDA of $53.9 million is nearly double operating income of $27.9 million. Most of the gap is $19.9 million of depreciation and amortization, including $11.1 million of amortization on intangibles from past acquisitions, which is a real cost of DSG's buy-and-build strategy even though no cash leaves in the quarter. The rest is $2.2 million of stock pay, $2.2 million of severance and retention, $0.3 million of acquisition costs and $1.4 million of "other non-recurring" items, which include costs of the proposed buyout. Those exclusions totaled $6.2 million, against $1.4 million a year earlier, so the adjusted EPS of $0.47 flatters the GAAP $0.18 by more than usual.
• Cash conversion was weak in the first half. Operating cash flow was $1.6 million for six months, against $28.5 million a year earlier. Receivables grew $63.0 million and inventory $29.5 million, partly offset by $37.2 million more payables. Since December, receivables are up 22% (to $331.6 million) and inventory 7%, while revenue grew 7.5% year over year for the half. Part of the receivables rise is seasonal, because second-quarter sales were 12.4% above the first quarter's. The second quarter on its own turned positive at $22.0 million.
• Leverage is high and all of it floats. Borrowings were $733.8 million at June 30, and the company puts net debt at 3.4 times EBITDA. All of it is floating-rate and unhedged: a 1-point move in rates changes annual interest by about $7.3 million, roughly a quarter of this quarter's operating income. First-half revolver borrowings rose a net $46.9 million to fund working capital and the $16.5 million Eastern Valve purchase.

The buyout

On July 15, 2026, DSG agreed to be taken private by entities controlled by LKCM Headwater at $35.00 per share in cash. LKCM Headwater's managing partner, J. Bryan King, is also DSG's chairman and CEO. The price is $5.50 above LKCM's initial $29.50 proposal and about 81% above the $19.31 closing price on March 13, 2026, the last trading day before the offer became public. A special committee of disinterested directors negotiated the deal. Closing requires antitrust clearance and a "majority of the minority" vote, meaning a majority of votes cast by shareholders other than LKCM and its affiliates. There is no financing condition: the credit agreement was amended so revolver loans can fund the deal.

While the deal is pending, DSG cannot buy back stock, and outstanding revolver borrowings are capped at $100 million, except for certain contemplated acquisitions. Acquisitions are still happening: on October 12, 2026, Lawson agreed to acquire GradeEight Holdings for about $145 million (8-K filed October 14).

Outlook

DSG gave no revenue or earnings guidance. Its only stated 2026 target is $25-30 million of net capital spending. Our read:

• For public shareholders, the $35.00 cash price now matters more than the quarter. If the minority vote and antitrust review go through, the stock leaves Nasdaq, so results mainly matter as a check on whether the price is fair.
• What to watch in the third-quarter 10-Q (last year's arrived October 30): whether Lawson's gross margin stabilizes as price increases catch up with tariffs, or keeps sliding toward 50%; whether TestEquity's 17% growth holds against a tougher comparison; whether second-half cash flow recovers the working capital tied up in the first half; and how the $145 million GradeEight purchase, if funded with debt, moves leverage from its 3.4x starting point.
• Demand looks solid for now, with organic growth in every segment and PMI above 50, but this quarter shows that sales growth alone isn't widening margins.

The figures in this analysis come from DSG's Form 10-Q for the quarter ended June 30, 2026 and its second-quarter earnings release (8-K Exhibit 99.1, August 6, 2026). Adjusted EBITDA, adjusted operating income and adjusted EPS are company-defined non-GAAP measures.