Filing summary
Entity note: The supplied filing is Lawson Products, Inc.’s Form 10-Q, not a filing for Distribution Solutions Group, Inc. It covers the quarter and nine months ended September 30, 2018; financial amounts below are in U.S. dollars unless noted.
Business context and reporting period
Lawson distributes maintenance, repair and operations (MRO) products through its sales-representative and vendor-managed-inventory (VMI) model. Its other reportable segment, Bolt Supply, distributes MRO products through 13 Canadian branches. Bolt Supply was acquired in October 2017, so its results contribute to 2018 but not to the 2017 reported comparison.
Financial performance and liquidity
- Third quarter: Revenue was $88.5 million, up 17.0% from $75.7 million. Net loss was $0.8 million, or $0.09 per diluted share, versus net income of $1.3 million, or $0.14 per diluted share.
- First nine months: Revenue was $263.4 million, up 16.9%; net income was $3.6 million, or $0.39 per diluted share, compared with $9.5 million, or $1.04 per diluted share.
- Margins and operating results: Third-quarter gross margin was 54.3% versus 60.8%; operating loss was $2.3 million versus operating income of $1.1 million. Nine-month gross margin was 54.5% versus 60.4%, and operating income was $5.1 million versus $9.7 million.
- Cash flow: Nine-month operating cash flow was $10.2 million versus $3.8 million. Capital expenditures were $1.6 million. Cash and cash equivalents were $7.7 million at September 30, compared with $4.4 million at year-end 2017; restricted cash was an additional $0.8 million.
- Debt and availability: The balance sheet reports $9.9 million of revolving credit lines. The filing separately reports $8.4 million borrowed under Lawson’s facility, with $27.0 million of additional availability; Bolt Supply had C$2.0 million borrowed and C$3.5 million available under its facility. Lawson’s reported debt was classified as current under the agreement’s terms.
- Other balance-sheet data: Total assets were $197.0 million and total liabilities were $98.9 million at September 30, 2018.
Material changes and unusual items
- Lawson’s segment revenue increased 4.0% in the quarter and 4.6% year to date; Bolt Supply contributed $9.8 million and $27.6 million, respectively, to those periods’ revenue.
- Adoption of ASC 606 in 2018 created separate product and VMI-service revenue and cost categories and moved certain VMI costs from selling expense to cost of sales. Prior-year figures were not restated. Management said adoption had minimal impact on total revenue and net income, but it materially affects reported gross margin comparisons. On a prior-guidance pro forma basis, third-quarter gross margin would have been 58.3% and nine-month gross margin 58.4%.
- Stock-based compensation expense rose to $8.7 million for the first nine months, from $2.7 million a year earlier; management cited compensation and Bolt Supply costs as drivers of higher general and administrative expense.
- Prior-year nine-month results included a $5.4 million gain on sale of a distribution center, affecting the year-over-year operating-income comparison. The 2018 nine-month effective tax rate was 10.8%, which the company attributed largely to discrete tax items; excluding those items, it reported a 33.5% rate.
- In October 2018, after quarter-end, Lawson paid approximately $5.2 million cash to acquire Screw Products, Inc. A second-quarter 2018 headquarters lease termination generated a $0.2 million net gain and included a $0.5 million termination fee payable. The company accrued $1.4 million for environmental remediation at a former site, with work expected to begin in first-quarter 2019.
Outlook, risks and contingencies
Management cited a strong manufacturing market and improved sales-representative productivity, and anticipated moderate growth in its sales force for the rest of 2018. It stated that operating cash flow and borrowing availability should be sufficient for operating needs, strategic initiatives and capital improvements over the next 12 months. The filing provides no specific revenue or earnings guidance.
Risks highlighted include economic and customer-demand changes, inventory obsolescence, commodity and energy costs, foreign-exchange movements, cybersecurity or system disruptions, workforce retention, acquisition integration, environmental and regulatory matters, and the ability to generate cash and meet credit-agreement requirements. At quarter-end Lawson was not subject to its borrowing-capacity-triggered financial covenant; its informational EBITDA-to-fixed-charges ratio was 3.60:1 against a 1.10:1 requirement. Bolt Supply reported compliance with its facility covenants.
Important facts for investors to verify
- Confirm the issuer identity: this text is a Lawson Products filing, despite the request metadata naming Distribution Solutions Group.
- Reconcile the $9.9 million balance-sheet revolving-credit balance with the separately described Lawson borrowing and Bolt Supply facility balances.
- Assess operating performance excluding Bolt Supply and accounting-classification effects; the filing’s prior-year statements were not restated for ASC 606.
- Review the recurring versus market-linked components of stock-based compensation and the effect on reported earnings.
- Track cash use and borrowing capacity following the $5.2 million Screw Products acquisition, as well as progress and costs for the environmental remediation.