Distribution Solutions (DSGR) Q2 Up 14%

Distribution Solutions Group (DSGR -3.50%), a global specialty distributor of maintenance, repair, operations (MRO), and industrial products, reported Q2 2025 earnings on July 31, 2025. The headline results: GAAP revenue climbed to $502.4 million in Q2 2025, well above the $484.4 million consensus estimate, and marking a 14.3% year-over-year increase in GAAP revenue. Adjusted earnings per share (EPS) reached $0.35, beating EPS forecasts, while GAAP EPS was $0.11, missing expectations by $0.10. The period showed notable topline growth, with GAAP revenue increasing 14.3% year-over-year to $502.4 million, driven by acquisitions and ongoing integration efforts, but profit margins remained under pressure due to recent deals, especially in Canada. Overall, the quarter highlighted the company’s momentum in expanding sales, yet also underscored the challenge of converting that sales growth into higher bottom-line profitability as new assets are integrated.

Source: Analyst estimates for the quarter provided by FactSet.

What Distribution Solutions Group Does and Its Recent Focus

Distribution Solutions Group is a specialty distributor serving more than 200,000 customers with an extensive portfolio of products and services for the maintenance, repair, and operations sector, as well as original equipment manufacturers (OEMs) and industrial technology end-markets. Its main operating units include Lawson Products (fasteners and MRO parts), Gexpro Services (supply chain services and critical parts for OEMs), and TestEquity (test and measurement equipment, along with electronic components).

The last year has seen DSG executing an aggressive acquisition strategy, using deals to expand its footprint in key geographies and adjacent market niches. In 2024, the company completed five acquisitions, including Source Atlantic Limited (an MRO distributor in Canada) and ConRes Test Equipment (test equipment distribution in Southeast Asia). Management focuses on integrating these new businesses, leveraging shared technology and back-office systems, and seeking operational synergies to improve efficiency and margins. Key success factors are effective integration, maintaining financial discipline, and unlocking the expected margin improvements from these recent transactions.

Quarter in Detail: Performance, Acquisitions, and Integration Progress

GAAP revenue grew strongly in Q2 2025, up 14.3% from the prior-year quarter, as both the core business and acquired companies contributed. Of the $62.9 million increase in sales, $48.8 million came from the five businesses acquired in 2024, underlining the impact of the acquisition-led growth strategy. Organic average daily sales also improved by 3.3% year over year. In the words of management: “Sales increased 14.3% to $502.4 million for the quarter, driven by acquisitions and a 3.3% average daily organic sales growth versus last year.”

While Sales growth was robust, with sales increasing 14.3% to $502.4 million, profit margins faced headwinds from ongoing acquisition integration. Adjusted EBITDA climbed 7.5% year-over-year but, as a percent of revenue, slipped by 0.6 percentage points, mainly due to the impact of integrating Source Atlantic Limited in Canada. Management noted that “Adjusted EBITDA margins declined slightly, pressured by approximately 60bps from our Source Atlantic acquisition.” Across segments, notable margin expansion was nonetheless achieved sequentially. Net margins in the Lawson Products division increased from 11.9% to 12.6%, Gexpro Services adjusted EBITDA margin rose from 12.6% in Q1 2025 to 13.4%. TestEquity adjusted EBITDA margin expanded sequentially from 6.8% in Q1 2025 to 6.9%, and the Canada Branch Division improved from 5.2% to 6.5% sequentially.

The period also brought progress on synergy realization and integration. The company consolidated facilities in Western Canada and pushed forward with gross margin initiatives at Source Atlantic. According to management, these changes will be necessary to achieve the target 10% adjusted EBITDA margin in the Canada division, but the timeline for reaching those targets remains extended, with the firm aiming for significant progress by 2026. Capital allocation remained balanced between mergers and acquisitions and shareholder returns; DSG repurchased $8.8 million in stock during the quarter, bringing the total for the first half of 2025 to $20.0 million.

Looking at business segments, operating income (GAAP) was $14.158 million in Q2 2024. Lawson Products delivered a 2.6% sales increase and meaningful margin improvements, despite softness in military sales and the costs of expanding the sales team. TestEquity revenues declined by approximately 1.2% compared to Q2 2024. The Canada Branch segment, now including Source Atlantic, showed significant topline gains due to acquisition, with GAAP revenue of $55.9 million in Q2 2025 compared to $14.5 million in Q2 2024. but faces ongoing margin pressure, with adjusted EBITDA margin at 6.5%.

NASDAQ:DSGR does not currently pay a dividend.

Outlook, Guidance, and Key Items to Monitor

DSG management did not provide explicit financial guidance for upcoming quarters or for fiscal 2025. The company's leadership expressed cautious optimism for the remainder of the year but highlighted ongoing macroeconomic and policy uncertainties, especially regarding tariffs and Canadian market uncertainty. The company indicated that less than 6% of its aggregate product spend, both direct and indirect, involves China, but it emphasized its ability to pivot suppliers to mitigate trade-related risks.

Investors should keep an eye on further integration progress in the Canada Branch business, particularly how quickly margins at Source Atlantic improve and how the company manages top-line softness in Canada. Future periods may also see additional acquisitions, as the company maintains significant liquidity ($314.4 million at quarter-end) and a net leverage ratio of 3.5x. Given the importance of integration to the company’s stated profitability goals, the pace of margin normalizations—and continued improvement in organic sales—remain key factors to watch through the remainder of the year and into 2026.

Revenue and net income presented using U.S. generally accepted accounting principles (GAAP) unless otherwise noted.