Business context and reporting period
This is Lawson Products, Inc.’s unaudited Form 10-Q for the quarter and six months ended June 30, 2019—not a filing identified in its text as Distribution Solutions Group, Inc. The company distributes maintenance, repair and operations products through its Lawson sales-representative/VMI business and Bolt Supply, which operates 14 branches in Western Canada.
Financial performance
Unless otherwise noted, amounts are U.S. dollars.
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $96.1m | $90.4m | $187.4m | $174.8m |
| Gross profit / margin | $51.0m / 53.1% | $49.1m / 54.4% | $100.0m / 53.3% | $95.3m / 54.5% |
| Operating income / margin | $1.6m / 1.7% | $5.6m / 6.1% | $7.2m / 3.8% | $7.4m / 4.2% |
| Net income | $1.3m | $3.2m | $5.5m | $4.4m |
| Diluted EPS | $0.14 | $0.35 | $0.58 | $0.48 |
Six-month operating cash flow was negative $2.2m, versus positive $1.8m a year earlier. Investing cash outflow was $0.9m and financing cash outflow was $2.1m, mainly reflecting revolving-credit paydowns. Cash and cash equivalents were $6.9m at June 30, down from $11.9m at year-end; restricted cash was $0.8m.
At June 30, the balance sheet reported $8.8m of revolving-line borrowings and $14.2m of lease obligations ($3.7m current and $10.5m long-term). Lawson’s facility had $6.0m drawn and $30.7m available; Bolt had C$3.7m drawn and C$1.8m available. Total assets were $209.0m and stockholders’ equity was $109.3m. A conventional debt-to-EBITDA measure is not provided in the filing text.
Material changes and management commentary
- Q2 revenue rose 6.3%; six-month revenue rose 7.2%. Management attributed growth to improved Lawson sales-representative productivity, a solid MRO market, Bolt Supply growth, and the Screw Products acquisition completed in October 2018. Excluding currency effects, reported growth was 7.1% for Q2 and 8.1% year to date.
- Margin pressure and higher expenses sharply reduced Q2 operating income and net income despite higher sales. Consolidated gross margin fell 1.3 percentage points in Q2 and 1.2 points year to date. Management cited service-related costs and lower-margin Bolt and Screw Products sales; core Lawson MRO margin before allocated service costs was described as essentially stable.
- General and administrative expense increased $6.0m in Q2, including $4.8m of stock-based compensation and $1.5m of severance expense. For the first half, stock-based compensation expense was $5.2m versus $1.1m in 2018, and severance expense was $1.5m in Q2, primarily from position eliminations. Selling expense was nearly flat in dollars and lower as a share of sales.
- Other income was $0.3m in Q2 and $0.8m for the first half, compared with other expense in the prior-year periods; management cited Canadian currency exchange-rate movements. Foreign-currency translation added $1.4m to first-half comprehensive income, versus a $1.5m loss in 2018.
- Lawson adopted ASC 842 leases on January 1, 2019, recognizing lease assets and liabilities; adoption increased opening retained earnings by $1.9m. Prior periods were not restated.
Outlook, liquidity, and risks
Management expects the sales force to remain relatively stable through the rest of 2019 while it focuses on training and productivity. It said operating cash flow and available credit should be sufficient for operating needs, strategic initiatives, and capital improvements over the next 12 months. The filing provides no numerical earnings or revenue guidance.
Management cited a slower pace of U.S. manufacturing expansion: the average PMI was 52.2 in Q2 2019 versus 58.9 a year earlier. Risks include economic and customer-demand changes, inventory obsolescence, input costs and tariffs, oil-and-gas demand, currency movements, cybersecurity and systems disruption, workforce retention, acquisitions and integration, competition, and credit-facility covenant compliance. The Lawson facility’s borrowing capacity exceeded the $10m threshold that triggers its EBITDA-to-fixed-charges covenant, so the company was not subject to that test at quarter-end; the informational ratio was 7.55 versus a 1.10 minimum. Bolt reported covenant compliance, with its next review due by August 31, 2019.
The company authorized a common-stock repurchase program of up to $7.5m; no shares were repurchased under the program in Q2. Separate share withholding purchases for tax obligations were also nil in the quarter. At the Decatur, Alabama site, remediation injections were completed in Q1 and monitoring continued; management estimated the remaining accrued remediation liability at approximately $0.1m after $1.3m of first-half payments.
Important facts for investors to verify
- Confirm the issuer: the supplied filing is for Lawson Products, Inc., while the request metadata names Distribution Solutions Group, Inc.
- Assess whether revenue growth can continue while consolidated gross margin remains below the prior-year level and operating income is pressured by compensation and severance costs.
- Review the drivers and potential recurrence of stock-based compensation and severance, including the portion of compensation expense that varies with the share price.
- Monitor working-capital cash use, particularly receivables and payments of accrued liabilities, as well as borrowing availability and covenant headroom.
- Track the Decatur environmental monitoring and remediation costs, and the status of Bolt’s upcoming covenant review.
- Evaluate the $7.5m repurchase authorization against liquidity needs and the company’s stated capital requirements; authorization is not evidence that repurchases occurred.