Business context and reporting period
This is Lawson Products, Inc.’s unaudited Form 10-Q for the quarter and six months ended June 30, 2018. The filing describes two MRO distribution segments: Lawson, which sells through a sales-representative and vendor-managed-inventory network, and Bolt Supply, acquired in October 2017 and operating 13 Canadian branches. The filing’s registrant is Lawson Products, Inc., which does not match the request metadata naming Distribution Solutions Group, Inc.; verify the intended issuer.
Key financial metrics
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $90.4m | $75.0m | $174.8m | $149.6m |
| Gross profit / margin | $49.1m / 54.4% | $45.1m / 60.2% | $95.3m / 54.5% | $90.0m / 60.2% |
| Operating income / margin | $5.6m / 6.1% | $7.9m / 10.5% | $7.4m / 4.2% | $8.6m / 5.7% |
| Net income | $3.2m | $7.3m | $4.4m | $8.1m |
| Diluted EPS | $0.35 | $0.80 | $0.48 | $0.89 |
For the first six months, operating cash flow was $1.8m, versus cash used of $4.5m a year earlier; capital expenditures were $1.4m. Cash and cash equivalents at June 30 were $6.0m, plus $0.8m of restricted cash. Current assets were $104.7m and current liabilities $60.2m.
The balance sheet reports $16.1m of revolving-line borrowings. The loan note separately reports $13.8m under Lawson’s facility and Bolt Supply borrowings of C$2.9m. Lawson had $21.7m of additional availability; Bolt had C$2.6m. The filing classifies revolving borrowings as current. Six-month interest expense was $0.5m.
Material changes versus prior comparable periods
- Q2 revenue grew 20.5%; six-month revenue grew 16.9%. Growth reflected Bolt Supply, stronger sales productivity and a strong MRO market. Lawson sales-representative productivity rose 9.1% in Q2 to $1,304 per representative per day.
- Net income fell 56% in Q2 and 46% for the first half. Comparisons include a $5.4m property-sale gain in 2017, absent in 2018, as well as higher taxes, currency-related expense and acquisition effects.
- Reported gross margin fell 5.8 percentage points in both comparisons. Management attributes much of the decline to ASC 606 reclassifying VMI service costs from selling expense to cost of revenue, plus Bolt Supply’s lower-margin mix and sales to large national customers. On a previous-accounting basis, the filing estimates gross margins of 58.0% for Q2 and 58.4% for the first half of 2018.
- Six-month Lawson segment revenue increased 5.0%; Bolt Supply contributed $17.8m. Bolt’s reported gross margin was 40.1% for the first half.
Outlook, commentary, risks and unusual items
No quantified earnings or revenue guidance is provided. Management expects moderate growth in the sales force during the remainder of 2018 and plans to focus on training and productivity. It believes operating cash flow and available credit will fund operating requirements, strategic initiatives and capital improvements for the next 12 months.
ASC 606 was adopted January 1, 2018 using the modified retrospective method. It created separate product and service revenue lines; prior-year periods were not restated. The adoption had minimal impact on total revenue, costs and net income, but materially affected presentation of margins and expenses. Opening retained earnings was reduced by $0.3m.
In June 2018, the company accrued an additional $0.5m for environmental remediation at a Decatur, Alabama site, bringing the liability to $1.4m. The revised plan expands injection work and requires four quarters of monitoring. The company also agreed to terminate its Chicago headquarters lease and sublease in June 2019; it recorded a $0.2m net gain, accrued a $0.5m termination fee, and expects net future lease-obligation reduction of $0.8m.
Principal disclosed risks include economic and customer-demand changes, inventory obsolescence, commodity and energy costs, currency movements, cyber or systems disruption, recruiting and retaining sales personnel, acquisition integration, competition, environmental and other regulatory matters, tax matters, and maintaining sufficient cash and credit-covenant compliance. Lawson was not subject to its EBITDA-to-fixed-charges covenant at June 30 because borrowing capacity exceeded the $10m threshold; its informational ratio was 3.10 versus a 1.10 minimum. Bolt reported covenant compliance. Disclosure controls were assessed as effective, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Confirm the issuer: the supplied filing is for Lawson Products, Inc., not Distribution Solutions Group, Inc.
- Reconcile the $16.1m balance-sheet revolving-credit amount with the note’s $13.8m Lawson borrowing and Bolt Supply’s Canadian-dollar debt.
- Assess underlying margin trends apart from ASC 606 reclassification, the Bolt acquisition and the lower-margin customer/product mix; 2017 also included the property-sale gain.
- Monitor operating cash generation and working-capital investment, borrowing availability, and future covenant headroom.
- Track the final Decatur remediation scope and cost, tax measurement-period adjustments, and completion and economics of the lease termination.