DSG(DSGR) - 2022 Q4 - Annual Report

Financial Performance - DSG reported a consolidated Adjusted EBITDA of $113.858 million for the year ended December 31, 2022, compared to$39.417 million in 2021, reflecting significant growth post-merger[165][168]. - Lawson's revenue for the year was $324.783 million, with a gross profit of$170.753 million, resulting in an operating income of $6.536 million[171]. - TestEquity achieved an Adjusted EBITDA of$34.736 million in 2022, up from $16.107 million in 2021, indicating strong operational performance[168]. - Gexpro Services generated an Adjusted EBITDA of$43.206 million for 2022, compared to $23.310 million in the previous year, showcasing effective market strategies[168]. - Total revenue for 2022 reached$1,151.4 million, a significant increase from $520.3 million in 2021, reflecting a growth of 121.5$429.7 million in 2022 compared to $371.7 million in 2021, driven by price increases and higher sales volumes[179][180]. - Adjusted gross profit for Lawson rose by$25.8 million to $226.3 million in 2022, with a gross profit margin of 52.7$38.6 million in 2022, reflecting a 27.1% increase from the previous year[184]. - TestEquity segment revenue increased by 48.5% to $392.4 million in 2022, driven by acquisitions and organic growth of 12.1$385.3 million in 2022, with an operating income of $21.3 million, up 91.9$7.4 million in 2022, a turnaround from a net loss of $5.1 million in 2021[174]. - Net income for 2022 was$20.9 million, a significant increase from $0.4 million in 2021[330]. Mergers and Acquisitions - The Mergers completed on April 1, 2022, have significantly impacted the comparability of financial results, with Lawson's results included only post-merger[162]. - The mergers with TestEquity and Gexpro Services were completed on April 1, 2022, with Lawson Products, Inc. as the legal acquirer, and the combined entity is treated as the accounting acquirer for financial reporting purposes[228]. - The consolidated financial statements reflect the results of operations and financial position of TestEquity and Gexpro Services for all periods presented, while the legacy Lawson business results are included only after the merger date[228]. - The Company acquired$43.0 million of intangible assets related to trade names during the mergers, valued using the relief from royalty method[242]. - The Company completed mergers on April 1, 2022, issuing a total of 10.3 million shares of common stock valued at approximately $351.5 million[321][324]. - The total consideration exchanged for the mergers amounted to$353.4 million, with transaction costs of $12.7 million recorded for 2022[324][328]. - The company acquired several businesses in 2022, with total purchase consideration for these acquisitions amounting to$122.2 million[332]. - The Frontier acquisition includes a potential earn-out payment of up to $3.0 million based on performance milestones, with a fair value of$1.7 million recorded as of December 31, 2022[334]. - The company recognized a gain on bargain purchase of $1.4 million related to the acquisition of NEF, reflecting the excess of net assets over the consideration transferred[336]. Financial Position and Assets - Total assets increased to$1,215,610 in 2022, up from $491,360 in 2021, reflecting a growth of 147$562,995 in 2022 from $165,769 in 2021, reflecting a growth of 239$348.0 million of goodwill as of December 31, 2022, up from $104.2 million in 2021, indicating significant business acquisitions[290]. - The allocation of consideration for the mergers included$148.3 million in current assets and $119.1 million in other intangible assets[328]. Cash Flow and Expenses - The company incurred interest expenses of$24.3 million in 2022, compared to $16.7 million in 2021, reflecting increased debt levels[174]. - Selling, general and administrative expenses for Lawson increased to$208.7 million in 2022, up from $192.3 million in 2021, primarily due to higher compensation and severance costs[183]. - Net cash used in operating activities was$11.0 million for the year ended December 31, 2022, primarily due to increased accounts receivables and inventories[207]. - Net cash used in investing activities was $126.7 million, mainly due to acquisitions completed during the year[209]. - The company incurred interest expenses of$24,301 in 2022, up from $16,737 in 2021, indicating increased borrowing costs[255]. - Net cash paid for income taxes increased to$13,813 from $2,998, reflecting a significant rise in tax obligations[261]. - Net cash paid for interest rose to$22,153 compared to $15,395, indicating higher financing costs[261]. Operational Challenges and Strategies - Supply chain disruptions have led to increased supplier costs and lower gross profit margins, prompting DSG to implement price increases in 2021 and 2022[161]. - TestEquity is currently facing challenges due to a semiconductor chip shortage, which is expected to recover in 2023[158]. - Lawson plans to enhance sales team productivity and expand product offerings to existing customers while attracting new clients[154]. - Gexpro Services aims to increase wallet share with existing customers and expand geographically in its six key vertical markets[160]. Audit and Compliance - BDO USA, LLP was engaged to audit the 2022 consolidated financial statements, ratified by stockholders at the 2022 Annual Meeting[229]. - The Company’s internal control over financial reporting received an adverse opinion as of December 31, 2022, indicating significant deficiencies[235]. - The financial statements for the year ended December 31, 2022, present fairly the financial position of the Company in conformity with generally accepted accounting principles[234]. - The historical consolidated financial statements of TestEquity and Gexpro Services had not been audited prior to their inclusion in the Form 10-K[229]. - The Company’s management is responsible for the financial statements, while the auditors express an opinion based on their audit[248]. Inventory and Revenue Recognition - The majority of the company's revenue is generated through the sale of specialized products, with less than 5.0% coming from Vendor Managed Inventory services[280]. - The company evaluates the collectability of accounts receivable based on historical experience, with reserves for bad debts recorded as necessary[282]. - The company’s inventory is primarily valued using the first-in-first-out method for the Lawson segment and the weighted average method for TestEquity and Gexpro Services segments[283]. - The Lawson segment generated revenue primarily from MRO product sales, with revenue recognized upon transfer of control to the customer[345]. - Revenue from customers is recognized when obligations under the contract are satisfied, generally upon delivery of products or services[341].