DSGR Q3 2025: Jexpro Services Drives 11.4% Organic Growth as Margin Investments Weigh
Jexpro Services delivered standout 11.4% organic revenue growth, offsetting margin pressure from mix shifts and heavy investment across DSGR’s verticals. Management’s cautious Q4 tone reflects tough comps and persistent cost drag, but operational focus and cash flow discipline remain clear. Investors should track the pace of margin recovery as strategic bets in talent, systems, and salesforce productivity mature into 2026.
Summary
- Jexpro Services Accelerates: Broad-based wins and global expansion fueled double-digit organic growth and record EBITDA.
- Margin Pressure Persists: Product mix shifts and deliberate SG&A investments compressed segment profitability despite top-line gains.
- Transformation in Focus: Salesforce and digital initiatives are progressing, but operating leverage recovery remains a key watchpoint entering 2026.
Performance Analysis
DSGR posted consolidated revenue of $518 million, up 10.7% year-over-year, with organic daily sales rising 6% and acquisitions contributing $23.3 million. Jexpro Services was the clear growth engine, achieving record adjusted EBITDA on 11.4% revenue growth driven by strength in aerospace, renewables, and industrial power, and continued wallet share gains. The Test Equity Group delivered 5.8% sales growth, but competitive pricing and mix shifts weighed on gross margins, while SG&A rose due to investments in sales incentives and leadership.
Lawson saw modest 3% organic sales growth but margins contracted due to ongoing salesforce transformation costs and higher employee-related expenses. The Canadian segment, led by Source Atlantic, improved gross margin by nearly 300 basis points year-over-year, reflecting successful integration and expense rationalization, though management acknowledges further room for expansion. Overall EBITDA margin landed at 9.4%, pressured by mix, compensation, and ongoing strategic investments, with management signaling margin improvement as initiatives mature.
- Jexpro’s Operating Leverage: EBITDA margin expanded 100 basis points sequentially, highlighting disciplined execution and value-added services.
- Test Equity Margin Drag: New customer programs and labor investments reduced profitability, but platform strategy aims for higher future margins.
- Lawson’s Salesforce Ramp: CRM adoption and sales rep expansion are progressing, though profitability lagged expectations as new hires scale.
Cash flow from operations remained robust at $38.4 million, and share buybacks totaled $20 million year-to-date, underscoring management’s confidence in long-term value creation despite near-term cost headwinds.
Executive Commentary
"With solid top-line performance, inclusive of the significant investments we continue to make on the income statement, we're pleased to report an increase in our shareholder returns measured through adjusted earnings per share of 40 cents for the third quarter, an increase of 8.1% compared to the same period last year."
Brian King, President & CEO
"For the quarter, we generated adjusted EBITDA of $48.5 million, or 9.4% of sales... Adjusted EBITDA dollars were essentially flat versus the second quarter and 30 basis points lower, primarily due to product and customer mix shifts, strategic investments in the business, and higher employee-related costs."
Ron Waddell, Executive Vice President & CFO
Strategic Positioning
1. Jexpro Services: Global Expansion and Value Creation
Jexpro Services is DSGR’s growth standout, leveraging cross-sell, acquisition synergies, and expanded VMI (Vendor Managed Inventory, a program where the supplier manages inventory levels at the customer site) and kitting offerings. The business is capitalizing on domestic manufacturing demand and tariff mitigation, with new Southeast Asia acquisitions broadening its geographic reach. Management notes extremely low churn and growing customer wallet share, positioning Jexpro as a resilient, margin-accretive platform.
2. Test Equity Group: Platform Realignment and Digital Investment
Test Equity is undergoing a strategic overhaul, with new leadership, a clarified value proposition, and targeted investments in e-commerce and systems. The group is shifting focus to higher-margin specialty products and private label expansion, while customer segmentation and digital upgrades aim to enhance operational effectiveness and cross-sell. Management expects the full impact of these changes to materialize over 18 to 30 months, structurally lifting margins and competitiveness.
3. Lawson: Salesforce Transformation and Productivity Challenge
Lawson’s multi-year salesforce transformation is in mid-flight, with over 60 net new reps added in the last year and CRM adoption exceeding 70%. While sales metrics are trending higher, management concedes that the path to profitability for new hires has been slower than planned, reflecting both macro headwinds and the complexity of ramping productivity in a fragmented customer base. Enhanced digital tools and leadership support are being deployed to accelerate progress.
4. Canadian Segment: Integration and Margin Recovery
Source Atlantic and Bolt Supply are progressing through facility consolidations, with a clear path to margin expansion above 10% as integration synergies and operating leverage improve. Management expects some Q4 lumpiness due to seasonality but views the acquisition as de-risked and on track for targeted profitability.
5. Capital Allocation and Cash Discipline
DSGR maintains strong liquidity with $335 million available, supporting ongoing M&A and organic investments. Free cash flow conversion remains high at 96%, and leverage is steady at 3.5x. The company continues to prioritize share buybacks and disciplined capital deployment as part of its long-term value creation strategy.
Key Considerations
DSGR’s Q3 highlighted the tension between near-term margin headwinds and long-term growth bets, as management invests in talent, digital, and operational capabilities across its verticals. The quarter’s results reinforce the importance of segment-level execution and the need for improved operating leverage as investments mature.
Key Considerations:
- Jexpro’s Resilience: Sustained organic growth and EBITDA expansion demonstrate the durability of its supply chain solutions and global customer demand.
- Margin Recovery Timing: Investments in SG&A and mix headwinds are expected to abate, but pace of margin normalization will be critical for valuation.
- Salesforce Productivity: Lawson’s transformation has yet to deliver full operating leverage, with new rep ramp slower than modeled, requiring continued process optimization.
- Acquisition Integration: Canadian segment progress suggests integration is on track, but further margin expansion is needed to meet underwriting targets.
- Capital Flexibility: Strong cash flow and liquidity provide optionality for future M&A, share buybacks, and organic investments.
Risks
Persistent margin pressure from product and customer mix shifts, combined with elevated SG&A from ongoing transformation projects, could limit near-term earnings growth. Macro volatility, customer project delays, and tariff impacts remain external risks, while the slower-than-expected ramp in salesforce productivity at Lawson poses an internal execution challenge. Management’s guidance acknowledges tougher Q4 comps and holiday-driven customer slowdowns, reinforcing a cautious near-term outlook.
Forward Outlook
For Q4, DSGR guided to:
- Flat to modestly lower sales due to fewer selling days and tough year-over-year comps, especially at Jexpro Services.
- EBITDA margin stability with no anticipated major one-time items, though mix and investment drag remain.
For full-year 2025, management maintained a disciplined outlook:
- CapEx expected at $22 to $25 million, or approximately 1% of revenues.
Management emphasized steady business activity, strong cash generation, and a focus on building structurally higher-margin businesses through 2026.
- Continued investment in salesforce, systems, and digital capabilities.
- Ongoing integration and synergy capture from recent acquisitions.
Takeaways
Jexpro’s growth and margin expansion offset broader margin drag, but the real test will be DSGR’s ability to convert ongoing investments into sustainable operating leverage and higher returns as end markets stabilize.
- Growth Engine: Jexpro Services’ global expansion and supply chain solutions are driving resilient, high-quality growth and record profitability.
- Margin Watch: Mix shifts and transformation costs are compressing margins, but management expects improvement as investments mature and integration synergies are realized.
- 2026 Inflection: Investors should monitor the pace of margin recovery, salesforce productivity, and acquisition integration as key drivers of DSGR’s earnings power into next year.
Conclusion
DSGR’s Q3 results show a company balancing robust segment growth with the near-term cost of transformation. While Jexpro’s momentum is clear, sustained margin recovery and operating leverage across all verticals will be the critical proof points for long-term value creation.
Industry Read-Through
DSGR’s performance highlights several sector-wide themes: Supply chain partners with global reach and value-added services are winning share in aerospace, renewables, and industrial power. Ongoing investments in digital platforms and salesforce productivity are necessary, but can weigh on margins before benefits materialize. Margin headwinds from mix shifts and labor costs are common across industrial distributors, underscoring the importance of disciplined execution and integration. The market’s focus will increasingly shift to operating leverage and cash flow conversion as macro volatility persists into 2026.