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Business Acquisitions | 9 Months Ended
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Sep. 30, 2024
Business Combination, Asset Acquisition, and Joint Venture Formation [Abstract] |
Business Acquisitions | Note 3 – Business Acquisitions DSG and its operating companies acquired businesses during the first nine months of 2024 and the year ended December 31, 2023. 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. The final valuations will be completed within the one-year measurement period following the respective acquisition date, and any adjustments will be recorded in the period in which the adjustments are determined. 2024 Acquisitions Source Atlantic On August 14, 2024, DSG acquired all of the issued and outstanding capital stock of Source Atlantic for a purchase price of approximately $103.1 million, net of cash acquired of $4.4 million. Source Atlantic, headquartered in Saint John, New Brunswick, Canada, is a wholesale distributor of industrial MRO supplies, safety products, fasteners, and related value-add services for the Canadian MRO market. Source Atlantic has 24 branch locations across Canada with a heavy focus in Eastern Canada. Source Atlantic was acquired to expand DSG’s operating footprint in the Canadian market. The results of operations of Source Atlantic are included in the Canada Branch Division. The acquisition was funded with borrowings under the Company’s Amended Credit Agreement. Refer to Note 9 – Debt for information about the Amended Credit Agreement. The following table summarizes the preliminary allocation of consideration exchanged to the estimated fair values of assets acquired and liabilities assumed, including the allocation to other intangible assets acquired:
|  | Source Atlantic |  |  |  |
(in thousands) |  | August 14, 2024 Acquisition Date |  |  |  |
Accounts receivable |  | $ | 33,679 |  |  |  |  |
Inventory |  | 28,427 |  |  |  |  |
Other current assets |  | 1,846 |  |  |  |  |
Property, plant and equipment |  | 21,217 |  |  |  |  |
Right of use assets |  | 6,780 |  |  |  |  |
Other intangible assets: |  |  |  |  |  |
Customer relationships |  | 11,035 |  |  |  |  |
Trade names |  | 10,012 |  |  |  |  |
Deferred tax liability, net of deferred tax asset |  | (10,314) |  |  |  |  |
Accounts payable |  | (17,857) |  |  |  |  |
Lease liabilities |  | (6,780) |  |  |  |  |
Accrued expenses and other liabilities |  | (5,422) |  |  |  |  |
Goodwill |  | 30,518 |  |  |  |  |
Total purchase consideration exchanged, net of cash acquired |  | $ | 103,141 |  |  |  |  |
Cash consideration |  | $ | 98,756 |  |  |  |  |
Deferred consideration(1) |  | 4,385 |  |  |  |  |
Total purchase consideration exchanged, net of cash acquired |  | $ | 103,141 |  |  |  |  |
(1) The Company paid $0.0 million of the Source Atlantic deferred consideration during the three and nine months ended September 30, 2024. Certain estimated values for the Source Atlantic Transaction, including working capital and other liability adjustments, right of use assets, the valuation of intangibles and property, plant and equipment and income taxes are not yet finalized, and the preliminary purchase price allocation is subject to change as the Company completes its analysis of the fair value at the date of acquisition. The customer relationships and trade names intangible assets have estimated useful lives of 17 years and 8 years, respectively. Goodwill generated from the Source Atlantic Transaction is not deductible for tax purposes and is primarily attributable to the benefits we expect to derive from expected synergies, including expanded product and service offerings and cross-selling opportunities. S&S Automotive On May 1, 2024, DSG acquired all of the issued and outstanding capital stock of S&S Automotive Inc. (“S&S Automotive” and the “S&S Automotive Transaction”), with a purchase price of approximately $80.1 million, net of cash acquired of $0.7 million. S&S Automotive is a distributor of automotive, industrial, and safety supplies primarily to the automotive dealership market based near Chicago in Woodridge, Illinois. S&S Automotive was acquired to expand Lawson’s services and products to the automotive end market. Accordingly, the results of operations of S&S Automotive are included within the Lawson reportable segment. The acquisition was funded using DSG’s cash on hand and its revolving credit facility. The following table summarizes the preliminary allocation of consideration exchanged to the estimated fair values of assets acquired and liabilities assumed, including the allocation to other intangible assets acquired:
|  | S&S Automotive
(in thousands) |  | May 1, 2024 Acquisition Date |  | Measurement Period Adjustments |  | Adjusted Total
Accounts receivable |  | $ | 4,100 |  |  | $ | — |  |  | $ | 4,100 |
Inventory |  | 7,100 |  |  | (203) |  |  | 6,897 |
Other current assets |  | 306 |  |  | — |  |  | 306 |
Property, plant and equipment |  | 2,351 |  |  | (117) |  |  | 2,234 |
Right of use assets |  | 7,581 |  |  | — |  |  | 7,581 |
Other intangible assets: |  |  |  |  |  |
Customer relationships |  | 30,200 |  |  | (6,700) |  |  | 23,500 |
Trade names |  | 12,200 |  |  | (300) |  |  | 11,900 |
Other assets |  | 35 |  |  | 2 |  |  | 37 |
Accounts payable |  | (1,120) |  |  | — |  |  | (1,120) |
Lease liabilities |  | (7,604) |  |  | — |  |  | (7,604) |
Accrued expenses and other liabilities |  | (1,989) |  |  | — |  |  | (1,989) |
Goodwill |  | 26,892 |  |  | 7,318 |  |  | 34,210 |
Total purchase consideration exchanged, net of cash acquired |  | $ | 80,052 |  |  | $ | — |  |  | $ | 80,052 |
Cash consideration |  | $ | 78,659 |  |  | $ | — |  |  | $ | 78,659 |
Deferred consideration(1) |  | 1,393 |  |  | — |  |  | 1,393 |
Total purchase consideration exchanged, net of cash acquired |  | $ | 80,052 |  |  | $ | — |  |  | $ | 80,052 |
(1) The Company paid $0.7 million of the S&S Automotive deferred consideration during the three and nine months ended September 30, 2024. Certain estimated values for the S&S Automotive Transaction, including working capital and other liability adjustments, right of use assets, the valuation of intangibles and property, plant and equipment and income taxes are not yet finalized, and the preliminary purchase price allocation is subject to change as the Company completes its analysis of the fair value at the date of acquisition. Following the initial fair value measurement, the Company updated the purchase price allocation for S&S Automotive primarily related to the ongoing review of the opening balance sheet and revised certain assumptions used in estimating the fair value. The adjustments resulted in a $7.0 million decrease to customer relationships and trade names and a $7.3 million increase to goodwill. The customer relationships and trade names intangible assets have estimated useful lives of 17 years and 8 years, respectively. As a result of the S&S Automotive Transaction, the Company recorded tax deductible goodwill of $34.2 million in 2024 that may result in a tax benefit in future periods and is primarily attributable to the benefits we expect to derive from expected synergies, including expanded product and service offerings and cross-selling opportunities. Emergent Safety Supply On January 19, 2024, DSG acquired 100% of the certain assets of Safety Supply Illinois LLC, conducting business as Emergent Safety Supply (“ESS” and the “ESS Transaction”), with a purchase price of $9.9 million. ESS is a national distributor of safety products based near Chicago in Batavia, Illinois. ESS was acquired to expand Lawson’s safety product category. Accordingly, the results of operations of ESS are included within the Lawson reportable segment. The acquisition was funded using DSG’s cash on hand. The following table summarizes the preliminary allocation of consideration exchanged to the estimated fair values of assets acquired and liabilities assumed, including the allocation to other intangible assets acquired:
|  | Emergent Safety Supply
(in thousands) |  | January 19, 2024 Acquisition Date |  | Measurement Period Adjustments |  | Adjusted Total
Accounts receivable |  | $ | 1,363 |  |  | $ | — |  |  | $ | 1,363 |
Inventory |  | 1,399 |  |  | — |  |  | 1,399 |
Other current assets |  | 10 |  |  | — |  |  | 10 |
Property, plant and equipment |  | 228 |  |  | — |  |  | 228 |
Right of use assets |  | 550 |  |  | — |  |  | 550 |
Other intangible assets: |  |  |  |  |  |
Customer relationships |  | 2,700 |  |  | 100 |  |  | 2,800 |
Trade names |  | 1,400 |  |  | — |  |  | 1,400 |
Other assets |  | 11 |  |  | — |  |  | 11 |
Accounts payable |  | (205) |  |  | — |  |  | (205) |
Lease liabilities |  | (550) |  |  | — |  |  | (550) |
Accrued expenses and other liabilities |  | (25) |  |  | — |  |  | (25) |
Goodwill |  | 2,973 |  |  | (100) |  |  | 2,873 |
Total purchase consideration exchanged, net of cash acquired |  | $ | 9,854 |  |  | $ | — |  |  | $ | 9,854 |
Cash consideration |  | $ | 8,904 |  |  | $ | — |  |  | $ | 8,904 |
Deferred consideration(1) |  | 950 |  |  | — |  |  | 950 |
Total purchase consideration exchanged, net of cash acquired |  | $ | 9,854 |  |  | $ | — |  |  | $ | 9,854 |
(1) The Company paid $0.2 million of the ESS deferred consideration during the three and nine months ended September 30, 2024. Certain estimated values for the ESS Transaction, including the valuation of intangibles and property, plant and equipment, are not yet finalized, and the preliminary purchase price allocation is subject to change as the Company completes its analysis of the fair value at the date of acquisition. Following the initial fair value measurement, the Company updated the purchase price allocation for ESS primarily related to the ongoing review of the opening balance sheet and revised certain assumptions used in estimating the fair value. The adjustments resulted in a $0.1 million increase to customer relationships and a $0.1 million decrease to goodwill. The customer relationships and trade names intangible assets have estimated useful lives of 16 years and 8 years, respectively. As a result of the ESS Transaction, the Company recorded tax deductible goodwill of $2.9 million in 2024 that may result in a tax benefit in future periods and is primarily attributable to the benefits we expect to derive from expected synergies, including expanded product and service offerings and cross-selling opportunities. 2023 Acquisition On June 8, 2023, DSG acquired all of the issued and outstanding capital stock of HIS Company, Inc., a Texas corporation (“Hisco” and the “Hisco Transaction”), a distributor of specialty products serving industrial technology applications, pursuant to a Stock Purchase Agreement dated March 30, 2023 (the “Purchase Agreement”). In connection with this transaction, DSG combined the operations of TestEquity and Hisco, further expanding the product and service offerings at TestEquity, as well as all of our operating businesses under DSG. The results of operations of Hisco are included within the TestEquity reportable segment. The total purchase consideration exchanged for the Hisco Transaction was $267.2 million, net of cash acquired of $12.2 million, with a potential additional earn-out payment subject to Hisco achieving certain performance targets. Refer to Note 8 – Earnout Liabilities for additional information on the earn-out. Under the Purchase Agreement, DSG became obligated to pay $37.5 million in cash or DSG common stock in retention bonuses to certain Hisco employees that remain employed with Hisco or its affiliates for at least twelve months after the closing of the Hisco Transaction. Pursuant to the Purchase Agreement, the Company paid $1.8 million of the retention bonuses in 2023 and $34.6 million of the retention bonuses in the first nine months of 2024. The remaining balance of $1.1 million will be paid in 2025. Compensation expense is recorded over the service period for the retention bonuses as a component of Selling, general and administrative expenses in the Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). Compensation expense inclusive of payroll taxes was $0.2 million and $16.2 million for the three and nine months ended September 30, 2024, respectively, and $10.1 million and $12.4 million for the three and nine months ended September 30, 2023, respectively. DSG funded the Hisco Transaction with borrowings under its Amended Credit Agreement and proceeds raised from the Rights Offering. Refer to Note 9 – Debt for information about the Amended Credit Agreement and Note 11 – Stockholders’ Equity for details on the Rights Offering. The Purchase Agreement allowed certain eligible Hisco employees to invest all or a portion of their respective closing payment in DSG common stock at $22.50 per share, up to an aggregate value of DSG common stock issued to such eligible Hisco employees of $25.0 million. During the third quarter of 2023, the Company issued 144,608 shares of DSG common stock to the eligible Hisco employees and received approximately $3.3 million. During the third quarter of 2023, approximately $0.4 million was recorded as compensation expense for the discount between the prevailing market price of the DSG common stock on the date of purchase and the purchase price of $22.50 per share as a component of Selling, general and administrative expenses in the Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). The following table summarizes the allocation of consideration exchanged to the estimated fair values of assets acquired and liabilities assumed, including the allocation to other intangible assets acquired:
|  | Hisco
(in thousands) |  | June 8, 2023 Acquisition Date |  | Measurement Period Adjustments |  | Adjusted Total
Accounts receivable(1) |  | $ | 66,792 |  |  | $ | (2,269) |  |  | $ | 64,523 |
Inventory |  | 61,300 |  |  | (645) |  |  | 60,655 |
Other current assets |  | 3,858 |  |  | 350 |  |  | 4,208 |
Property, plant and equipment |  | 48,326 |  |  | — |  |  | 48,326 |
Right of use assets |  | 21,102 |  |  | 1,188 |  |  | 22,290 |
Other intangible assets: |  |  |  |  |  |
Customer relationships |  | 41,800 |  |  | (1,800) |  |  | 40,000 |
Trade names |  | 25,600 |  |  | (300) |  |  | 25,300 |
Deferred tax liability, net of deferred tax asset |  | (2,544) |  |  | 81 |  |  | (2,463) |
Other assets |  | 2,495 |  |  | — |  |  | 2,495 |
Accounts payable |  | (16,689) |  |  | — |  |  | (16,689) |
Lease liabilities |  | (22,372) |  |  | 293 |  |  | (22,079) |
Accrued expenses and other liabilities |  | (8,961) |  |  | (289) |  |  | (9,250) |
Goodwill |  | 49,718 |  |  | 122 |  |  | 49,840 |
Total purchase consideration exchanged, net of cash acquired |  | $ | 270,425 |  |  | $ | (3,269) |  |  | $ | 267,156 |
Cash consideration |  | $ | 252,007 |  |  | $ | — |  |  | $ | 252,007 |
Deferred consideration(2) |  | 12,418 |  |  | 2,631 |  |  | 15,049 |
Contingent consideration |  | 6,000 |  |  | (5,900) |  |  | 100 |
Total purchase consideration exchanged, net of cash acquired |  | $ | 270,425 |  |  | $ | (3,269) |  |  | $ | 267,156 |
(1) Accounts receivable had an estimated fair value of $64.5 million and a gross contractual value of $66.8 million. The difference represents the Company’s best estimate of the contractual cash flows that will not be collected. (2) The Company paid $7.2 million of the Hisco deferred consideration during the first half of 2024 and $7.8 million during 2023. As of June 30, 2024 and September 30, 2024, there is no deferred consideration remaining. Following the initial fair value measurement, the Company updated the purchase price allocation for Hisco primarily related to the ongoing review of the opening balance sheet and contractual working capital adjustments and revised certain assumptions used in estimating the fair value of the contingent consideration. During 2023 and 2024, the adjustments to these balances resulted in a $0.1 million increase to goodwill and a $3.3 million decrease to the total purchase consideration, net of cash acquired. The accounting for the Hisco Transaction was completed during the second quarter of 2024. The customer relationships and trade names intangible assets have estimated useful lives of 12 years and 8 years, respectively. As a result of the Hisco Transaction, the Company recorded tax deductible goodwill of $41.4 million in 2023 that may result in a tax benefit in future periods and is primarily attributable to the benefits we expect to derive from expected synergies, including expanded product and service offerings and cross-selling opportunities. Unaudited Pro Forma Information The following table presents estimated unaudited pro forma consolidated financial information for DSG as if the acquisitions disclosed above occurred on January 1, 2023, for the acquisitions completed during 2024 and January 1, 2022 for the acquisition completed during 2023. 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 acquisitions been completed on the date indicated.
| Three Months Ended September 30, |  | Nine Months Ended September 30,
(in thousands) | 2024 |  | 2023 |  | 2024 |  | 2023
Revenue | $ | 492,144 |  |  | $ | 497,808 |  |  | $ | 1,457,666 |  |  | $ | 1,527,432 |
Net income | $ | 21,465 |  |  | $ | (3,040) |  |  | $ | 17,734 |  |  | $ | 9,438 |
Actual Results of Business Acquisitions The following table presents actual results attributable to our acquisitions that were included in the unaudited condensed consolidated financial statements for the third quarter and first nine months of 2024 and 2023. The results for these acquisitions are only included subsequent to their respective acquisition dates provided above.
|  | Three Months Ended September 30, |  | Nine Months Ended September 30,
(in thousands) |  | 2024 |  | 2023 |  | 2024 |  | 2023
Revenue |  | $ | 38,137 |  |  | $ | 104,796 |  |  | $ | 50,537 |  |  | $ | 132,797 |
Net income |  | $ | 3,916 |  |  | $ | (7,388) |  |  | $ | 3,505 |  |  | $ | (8,253) |
The Company incurred transaction and integration costs (credits) related to completed and contemplated acquisitions of $2.9 million and $8.5 million for the three and nine months ended September 30, 2024, respectively, and $(0.1) million and $9.1 million for the three and nine months ended September 30, 2023, respectively, which are included in Selling, general and administrative expenses in the Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).

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