DSG Q3 2026 Earnings: Organic Growth Lifts Adjusted EBITDA Margin

Distribution Solutions Group (NASDAQ: DSGR) reported Q3 2026 revenue of $573.6 million, up 10.7% from $518.0 million, while GAAP diluted EPS rose to $0.19 from $0.14. Organic sales increased 9.2% and adjusted EBITDA margin expanded by 50 basis points to 9.9%, although gross margin contracted because of customer mix and higher tariff rates on inbound shipments.

Core Earnings Data

Revenue growth in the quarter ended September 30 was primarily organic. Acquisitions completed during the first nine months of 2026 contributed $7.8 million of incremental revenue, including approximately $3.8 million from American Fasteners, while sequential revenue increased 2.8% from Q2.

GAAP operating income grew more slowly than revenue, but net income, adjusted operating income and adjusted EBITDA all increased. The difference partly reflects a higher level of items excluded from adjusted results.

Adjusted operating income was $47.9 million, up 19.7% from $40.1 million and 6.0% from Q2 2026.

Business and Segment Performance

Average daily sales improved across all business units. TestEquity produced the largest revenue increase and the most significant operating income improvement, while Gexpro Services’ operating income declined slightly despite higher sales.

TestEquity was DSG’s largest reported business by revenue and accounted for most of the increase in segment operating income. Conversely, the All Other operating loss widened to $6.4 million from $1.8 million, limiting the improvement in consolidated GAAP operating profit.

DSG completed its acquisition of American Fasteners during the quarter. It also closed the acquisition of GradeEight Holdings after September 30, so GradeEight did not contribute to the reported Q3 results.

Tariffs and Sales Mix Pressured Gross Margin While Adjusted Profitability Improved

Gross margin declined to 32.0% from 32.9%. DSG attributed the contraction to shifts in customer sales mix and higher tariff rates on inbound shipments, partially offset by pricing benefits.

Even with that pressure, adjusted EBITDA margin increased to 9.9%. Selling, general and administrative expenses rose 8.1% to $158.6 million, slower than revenue growth, reducing SG&A to approximately 27.6% of revenue from 28.3% a year earlier.

The gap between GAAP and adjusted performance also widened. Q3 2026 operating income included $11.3 million of acquired intangible amortization and $11.4 million of severance, acquisition-related retention costs, stock-based compensation, acquisition costs and other items. The comparable 2025 quarter included $11.7 million of amortization and $4.8 million of other excluded items. Consequently, adjusted operating income grew 19.7%, while GAAP operating income increased 6.9% and GAAP operating margin declined by 20 basis points.

Cash Flow and Balance Sheet

Operating cash flow was $18.7 million for Q3, compared with net capital expenditures of $5.9 million. For the first nine months of 2026, however, operating cash flow was only $20.4 million, down from $66.9 million in the comparable 2025 period.

Working capital absorbed substantial cash during the nine-month period. Accounts receivable used $72.4 million and inventory used $45.9 million, partly offset by a $43.1 million increase in accounts payable and a $12.8 million increase in accrued liabilities.

DSG ended September with $72.3 million of restricted and unrestricted cash and total liquidity of $378.0 million, including $305.7 million available under its credit facility. Net debt leverage was 3.4 times. Long-term debt excluding the current portion increased to $723.6 million from $664.2 million at the end of 2025, while business acquisitions used $58.3 million of cash during the first nine months.

Proposed $35 Merger Remains a Major Corporate Event

DSG entered into a merger agreement on July 15 under which affiliates of LKCM Headwater Investments would acquire the outstanding shares they do not already own for $35.00 per share. LKCM Headwater and its affiliates, including DSG CEO and Chairman J. Bryan King, beneficially own approximately 79% of the company’s common stock.

A special committee of disinterested directors unanimously approved the transaction, which would make DSG privately held and remove its shares from Nasdaq. The Hart-Scott-Rodino waiting period was terminated on August 20, but completion still requires stockholder approval, including approval by a majority of votes cast by unaffiliated shareholders, and satisfaction of other closing conditions.

Recent Insider Transactions

The supplied six-month insider summary showed no purchase or sale transactions and total insider ownership of approximately 651,280 shares. Among the latest ten reported transactions over two years, eight were stock awards, one was a purchase and one was a derivative-security exercise conversion; all were reported as direct transactions.

The stock awards should not be treated as open-market purchases. Robert Zamarripa’s March transaction was the only purchase among these ten entries.

Risks Investors Need to Watch

• Tariff and mix pressure: Higher inbound tariff rates and customer sales mix reduced gross margin by 90 basis points. Pricing provided only a partial offset during Q3.
• Working-capital demands: Nine-month operating cash flow declined sharply as receivables and inventory absorbed cash, creating a meaningful difference between quarterly earnings growth and year-to-date cash generation.
• Leverage and acquisition spending: Net debt leverage stood at 3.4 times, long-term debt increased from year-end, and the company continued to deploy cash for acquisitions.
• Merger completion risk: The proposed take-private transaction remains subject to stockholder approval and other closing conditions. Its completion timing and outcome are therefore not certain based on the reported information.

Summary

DSG’s Q3 2026 results combined broad-based organic sales growth with higher adjusted earnings, led by TestEquity. The central operating tension was that tariff costs and sales mix reduced gross margin even as SG&A leverage supported a higher adjusted EBITDA margin. Investors’ next areas of focus are cash conversion, tariff-related margin pressure, leverage following acquisitions and the remaining approvals for the proposed $35-per-share merger.