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Business Acquisitions | 9 Months Ended
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Sep. 30, 2022
Business Combination and Asset Acquisition [Abstract] |
Business Acquisition | Business Acquisitions Completion of Mergers On April 1, 2022, the Mergers were completed via all-stock merger transactions. Pursuant to the Merger Agreements, DSG issued an aggregate of 10.3 million shares of DSG common stock to the former owners of TestEquity and Gexpro Services. An additional 1.7 million shares of DSG common stock remain potentially issuable upon meeting the conditions of certain earnout provisions. Refer to Note 1 - Nature of Operations and Basis of Presentation for further information regarding the Mergers. The business combination of Lawson, TestEquity and Gexpro Services combines three value added complementary distribution businesses. Lawson is a distributor of products and services to the industrial, commercial, institutional, and governmental MRO marketplace. TestEquity is a distributor of parts and services to the industrial, commercial, institutional and governmental electronics manufacturing and test and measurement market. Gexpro Services is a provider of supply chain solutions, specializing in developing and implementing VMI and kitting programs to high-specification manufacturing customers. Gexpro Services provides critical products and services to customers throughout the lifecycle of highly technical OEM products. Refer to Note 1- Nature of Operations and Basis of Presentation for more information on the nature of operations for these businesses. The Mergers were accounted for as a reverse merger under the acquisition method of accounting for business combinations, whereby TestEquity and Gexpro Services were identified as the accounting acquirers and were treated as a combined entity for financial reporting purposes, and DSG was identified as the accounting acquiree. Accordingly, under the acquisition method of accounting, the purchase price was allocated to DSG's tangible and identifiable intangible assets acquired and liabilities assumed, based on their estimated acquisition-date fair values. These estimates were determined through established and generally accepted valuation techniques. Allocation of Consideration Exchanged Under the acquisition method of accounting, the estimated consideration exchanged was calculated as follows:
(in thousands, except share data) |  | April 1, 2022
Number of DSG common shares exchanged |  | 9,120,167
DSG closing price per common stock on March 31, 2022 |  | $ | 38.54 |
Fair value of shares exchanged |  | $ | 351,491 |
Other consideration(1) |  | 1,910 |
Total consideration exchanged |  | $ | 353,401 |
(1)Fair value adjustment of stock-based compensation awards. Due to the publicly traded nature of shares of DSG common stock, the equity issuance of shares of DSG common stock based on this value was considered to be a more reliable measurement of the fair market value of the transaction compared to the equity interests of the accounting acquirer. The allocation of consideration exchanged to the tangible and identifiable intangible assets acquired and liabilities assumed was based on estimated fair values as of the Merger Date. The fair values were determined based upon a preliminary valuation and the estimates and assumptions used in such valuation are pending completion and subject to change. Certain estimated values for the acquisition, including the valuation of intangibles and income taxes (including deferred taxes and associated valuation allowances), are not yet finalized, and the preliminary purchase price allocations are subject to change as the Company completes its analysis of the fair value at the date of acquisition. Goodwill generated from the acquisition is not deductible for tax purposes. The Company will continue to obtain information necessary to finalize the fair values, which may differ materially from these preliminary estimates. The final valuation will be completed within the one-year measurement period ending March 31, 2023, and any measurement period adjustments will be applied in the reporting period in which the adjustments are determined. During the quarter ended September 30, 2022, the Company recorded measurement period adjustments that resulted in a $1.7 million net decrease to goodwill. The measurement period adjustments were associated with adjustments to the fair value of certain property, plant and equipment assets, as well as changes in estimates related to leases. The following table summarizes the preliminary allocation of consideration exchanged to the estimated fair values of assets acquired and liabilities assumed at the Merger Date and after applying measurement period adjustments:
(in thousands) |  | Merger Date |  | Measurement Period Adjustments |  | Adjusted Total |  |
Current assets |  | $ | 148,308 |  |  | $ | — |  |  | $ | 148,308 |  |  |
Property, plant and equipment |  | 57,053 |  |  | 361 |  |  | 57,414 |  |  |
Right of use assets |  | 17,571 |  |  | 687 |  |  | 18,258 |  |  |
Other intangible assets |  | 119,060 |  |  | — |  |  | 119,060 |  |  |
Deferred tax liability, net of deferred tax asset |  | (26,237) |  |  | 39 |  |  | (26,198) |  |  |
Other assets |  | 18,373 |  |  | — |  |  | 18,373 |  |  |
Current liabilities |  | (71,097) |  |  | (68) |  |  | (71,165) |  |  |
Long-term obligations |  | (25,722) |  |  | 20 |  |  | (25,702) |  |  |
Lease and financing obligations |  | (29,474) |  |  | 647 |  |  | (28,827) |  |  |
Derivative earnout liability |  | (43,900) |  |  | — |  |  | (43,900) |  |  |
Goodwill |  | 189,466 |  |  | (1,686) |  |  | 187,780 |  |  |
Total consideration exchanged |  | $ | 353,401 |  |  | $ | — |  |  | $ | 353,401 |  |  |
The preliminary allocation of consideration exchanged to other intangible assets acquired is as follows:
(in thousands) |  | Fair Value |  | Estimated Life (in years)
Customer relationships |  | $ | 76,050 |  |  | 19
Trade names |  | 43,010 |  |  | 8
Total other intangible assets |  | $ | 119,060 |  |  |
The Company incurred transaction costs related to the Mergers of $2.4 million and $9.6 million for the three and nine months ended September 30, 2022, respectively and $0.6 million and $1.2 million for the three and nine months ended September 30, 2021, respectively. Pro Forma Information The following table presents estimated unaudited pro forma consolidated financial information for DSG as if the Mergers and other acquisitions disclosed below occurred on January 1, 2021 for the 2022 acquisitions and January 1, 2020 for the 2021 acquisitions. The unaudited pro forma information reflects adjustments including amortization on acquired intangible assets, interest expense, and the related tax effects. This information is presented for informational purposes only and is not necessarily indicative of future results or the results that would have occurred had the Mergers been completed on the date indicated.
| Three Months Ended September 30, |  | Nine Months Ended September 30,
(in thousands) | 2022 |  | 2021 |  | 2022 |  | 2021
Revenue | $ | 347,151 |  |  | $ | 289,612 |  |  | $ | 986,572 |  |  | $ | 869,340 |
Net income | 14,860 |  |  | 12,400 |  |  | 19,655 |  |  | 16,053 |
Other Acquisitions TestEquity and Gexpro Services acquired other businesses during the first nine months of 2022 and year ended December 31, 2021. The consideration exchanged for the acquired businesses included various combinations of cash, sellers notes, and forms of share based payments. The acquisitions were accounted for under ASC 805, the acquisition method of accounting. For each acquisition, the allocation of consideration exchanged to the assets acquired and liabilities assumed was based on estimated acquisition-date fair values. Certain estimated values for the acquisitions, including the valuation of intangibles, contingent consideration, and income taxes (including deferred taxes and associated valuation allowances), are not yet finalized, and the preliminary purchase price allocations are subject to change as the Company completes its analysis of the fair value at the date of acquisition. The final valuations will be completed within the one-year measurement periods following the respective acquisition dates, and any adjustments will be recorded in the period in which the adjustments are determined. During the first nine months of 2022, TestEquity acquired Interworld Highway, LLC and National Test Equipment, and Gexpro Services acquired Resolux ApS ("Resolux") and Frontier Technologies Brewton, LLC and Frontier Engineering and Manufacturing Technologies, Inc. ("Frontier"). The purchase consideration for each business acquired and the preliminary allocation of the consideration exchanged to the estimated fair values of assets acquired and liabilities assumed is summarized below:
(in thousands) |  | Interworld Highway LLC |  | Resolux |  | Frontier |  | National Test Equipment |  |  |  |
Acquisition date |  | April 29, 2022 |  | January 3, 2022 |  | March 31, 2022 |  | June 1, 2022 |  | Total |  |
Current assets |  | $ | 15,018 |  |  | $ | 8,551 |  |  | $ | 3,381 |  |  | $ | 2,789 |  |  | $ | 29,739 |  |  |
Property, plant and equipment |  | 313 |  |  | 459 |  |  | 1,065 |  |  | 642 |  |  | 2,479 |  |  |
Right of use assets |  | — |  |  | 1,125 |  |  | 9,313 |  |  | — |  |  | 10,438 |  |  |
Other intangible assets: |  |  |  |  |  |  |  |  |  |  |  |
Customer relationships |  | 6,369 |  |  | 11,400 |  |  | 9,300 |  |  | 2,100 |  |  | 29,169 |  |  |
Trade names |  | 4,600 |  |  | 6,100 |  |  | 3,000 |  |  | — |  |  | 13,700 |  |  |
Other assets |  | 10 |  |  | 1,745 |  |  | — |  |  | — |  |  | 1,755 |  |  |
Accounts payable |  | (8,856) |  |  | (3,058) |  |  | (778) |  |  | (2,268) |  |  | (14,960) |  |  |
Accrued expenses and other liabilities |  | — |  |  | (939) |  |  | (1,461) |  |  | (1,169) |  |  | (3,569) |  |  |
Lease obligation |  | — |  |  | (1,125) |  |  | (9,313) |  |  | — |  |  | (10,438) |  |  |
Goodwill |  | 37,236 |  |  | 6,498 |  |  | 11,667 |  |  | 5,701 |  |  | 61,102 |  |  |
Total purchase consideration exchanged, net of cash acquired |  | $ | 54,690 |  |  | $ | 30,756 |  |  | $ | 26,174 |  |  | $ | 7,795 |  |  | $ | 119,415 |  |  |
As of September 30, 2022, the Company updated the purchase price allocation for Frontier to reflect adjustments from the third-party valuation firm's preliminary report valuing Frontier's intangible assets which included changes in working capital, accrued expenses and other liabilities. The adjustments to these balances resulted in a $1.2 million increase to goodwill and $0.5 million increase to the total purchase consideration, net of cash acquired. Also, as of September 30, 2022, the Company updated the purchase price allocation for National Test Equipment to reflect adjustments from the third-party valuation firm's preliminary report valuing National Test Equipment's intangible assets which included changes in working capital, accrued expenses and other liabilities. The adjustments to these balances resulted in a $0.3 million decrease to goodwill. The consideration for the Frontier acquisition includes a potential earn-out payment up to $3.0 million based upon the achievement of certain milestones and relative thresholds during the earn out measurement period which ends on December 31, 2024. The fair value of the contingent consideration arrangement was classified within Level 3 and was determined using a probability-based scenario analysis approach. As of March 31, 2022 and September 30, 2022, the fair value of the earn-out was $0.9 million and $1.6 million, respectively, with amounts recorded in Accrued expenses and other current liabilities and Other liabilities in the Unaudited Condensed Consolidated Balance Sheets. During the year ended December 31, 2021, TestEquity acquired MCS Test Group Limited ("MCS"), and Gexpro Services acquired Omni Fasteners Inc. ("Omni"), National Engineered Fasteners ("NEF") and State Industrial Supply ("SIS"). The accounting for the Omni and MCS acquisitions was complete as of June 30, 2022. Certain estimated values for the NEF and SIS acquisitions are preliminary, including goodwill and income taxes (including deferred taxes and associated valuation allowances). These values are subject to change as the Company completes its analysis of the fair value at the date of acquisition. The final valuations will be completed within the one-year measurement periods following the respective acquisition dates, and any adjustments will be recorded in the period in which the adjustments are determined. The purchase consideration for each business acquired during 2021 and the allocation of the consideration exchanged to the estimated fair values of assets acquired and liabilities assumed is summarized below:
(in thousands) |  | Omni |  | NEF(1) |  | SIS |  | MCS |  |  |  |
Acquisition date |  | June 8, 2021 |  | November 1, 2021 |  | December 31, 2021 |  | July 31, 2021 |  | Total |  |
Current assets |  | $ | 2,259 |  |  | $ | 17,882 |  |  | $ | 3,541 |  |  | $ | 6,521 |  |  | $ | 30,203 |  |  |
Property, plant and equipment |  | 600 |  |  | 589 |  |  | 125 |  |  | — |  |  | 1,314 |  |  |
Right of use assets |  | — |  |  | 1,774 |  |  | 799 |  |  | — |  |  | 2,573 |  |  |
Other intangible assets: |  |  |  |  |  |  |  |  |  |  |  |
Customer relationships |  | 2,530 |  |  | 5,007 |  |  | 4,800 |  |  | 2,621 |  |  | 14,958 |  |  |
Trade names |  | 200 |  |  | 2,503 |  |  | 1,500 |  |  | 41 |  |  | 4,244 |  |  |
Other intangible assets |  | 9 |  |  | — |  |  | 380 |  |  | — |  |  | 389 |  |  |
Other assets |  | — |  |  | 1,236 |  |  | 10 |  |  | — |  |  | 1,246 |  |  |
Accounts payable |  | (50) |  |  | (3,506) |  |  | (1,464) |  |  | (2,523) |  |  | (7,543) |  |  |
Accrued expenses and other liabilities |  | — |  |  | (3,332) |  |  | — |  |  | (685) |  |  | (4,017) |  |  |
Lease obligation |  | — |  |  | (1,774) |  |  | (799) |  |  |  |  | (2,573) |  |  |
Goodwill |  | 953 |  |  | — |  |  | 3,010 |  |  | 7,245 |  |  | 11,208 |  |  |
Gain on bargain purchase |  | — |  |  | (1,363) |  |  | — |  |  | — |  |  | (1,363) |  |  |
Total purchase consideration exchanged, net of cash acquired |  | $ | 6,501 |  |  | $ | 19,016 |  |  | $ | 11,902 |  |  | $ | 13,220 |  |  | $ | 50,639 |  |  |
(1)The consideration exchanged in the NEF acquisition included a shared-based payment valued at $2.8 million with the remainder of the payment in cash. A gain on bargain purchase related to the acquisition of NEF was recognized within Other income (expense), net in the Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) in the fourth quarter of 2021. The gain of $1.4 million was calculated as the excess of net assets recognized over the consideration transferred. The bargain purchase was primarily attributable to owners that were highly motivated to sell. The Company incurred transaction costs related to the other acquisitions of $0.0 million and $1.2 million for the three and nine months ended September 30, 2022, respectively and $0.8 million and $1.8 million for the three and nine months ended September 30, 2021, respectively. Other Acquisitions Pro Forma Information - The pro forma information for other acquisitions was included in the estimated unaudited pro forma consolidated financial information for DSG, which is presented above under Pro Forma Information. Actual Results of Business Acquisitions The following table presents actual results attributable to our business combinations that were included in the unaudited condensed consolidated financial statements for the third quarter and first nine months of 2022 and 2021. The results of DSG's legacy Lawson business are included only subsequent to the April 1, 2022 Merger Date, and the results for other acquisitions are only included subsequent to their respective acquisition dates provided above.
(in thousands) | Three Months Ended September 30, 2022 |  | Three Months Ended September 30, 2021
| Lawson |  | Other Acquisitions |  | Total |  | Lawson |  | Other Acquisitions |  | Total
Revenue | $ | 126,693 |  |  | $ | 71,216 |  |  | $ | 197,909 |  |  | $ | — |  |  | $ | 2,803 |  |  | $ | 2,803 |
Net Income | $ | 8,282 |  |  | $ | 4,363 |  |  | $ | 12,645 |  |  | $ | — |  |  | $ | 545 |  |  | $ | 545 |
| Nine Months Ended September 30, 2022 |  | Nine Months Ended September 30, 2021
| Lawson |  | Other Acquisitions |  | Total |  | Lawson |  | Other Acquisitions |  | Total
Revenue | $ | 250,364 |  |  | $ | 146,742 |  |  | $ | 397,106 |  |  | $ | — |  |  | $ | 3,271 |  |  | $ | 3,271 |
Net Income | $ | 12,883 |  |  | $ | 12,651 |  |  | $ | 25,534 |  |  | $ | — |  |  | $ | 233 |  |  | $ | 233 |

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- Definition The entire disclosure for a business combination (or series of individually immaterial business combinations) completed during the period, including background, timing, and recognized assets and liabilities. The disclosure may include leverage buyout transactions (as applicable). + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -URI https://asc.fasb.org/topic&trid=2303972 Reference 2: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 20 -Section 50 -Paragraph 5 -Subparagraph (b) -URI https://asc.fasb.org/extlink&oid=128092470&loc=d3e4946-128472 + Details
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