Filing summary
Issuer and period: The supplied filing is Lawson Products, Inc.’s Form 10-K for the fiscal year ended December 31, 2017, filed February 22, 2018. It is not a Distribution Solutions Group filing. The filing also reports unaudited fourth-quarter results.
Business context and financial results
Lawson distributes maintenance, repair and operations (MRO) products. Its Lawson segment primarily sells through a sales-representative and vendor-managed-inventory model; Bolt, acquired in October 2017, primarily sells through 13 branches in Western Canada. Bolt contributed only its post-acquisition results to 2017.
- Revenue: 2017 net sales were $305.9 million, up 10.6% from $276.6 million in 2016. Lawson segment sales rose 7.7%; Bolt contributed $8.0 million. Management cited higher sales-representative productivity, prior acquisitions and improved MRO conditions. Average daily sales increased to $1.214 million from $1.098 million.
- Profit and margins: Gross profit was $183.0 million, with gross margin of 59.8%, down from 60.8%. Operating income was $9.9 million versus an operating loss of $1.5 million. Net income was $29.7 million versus a net loss of $1.6 million; diluted EPS was $3.25 versus a loss of $0.19.
- Tax and unusual items: 2017 net income included a $19.6 million income tax benefit, primarily associated with releasing $21.2 million of U.S. deferred-tax valuation allowances. The company also recorded a $5.4 million gain on the sale of its Fairfield, New Jersey distribution center. These items materially affect comparisons of reported earnings.
- Cash flow and investment: Operating cash flow was $7.1 million, down from $8.6 million in 2016. Investing cash outflow was $27.4 million, including $32.3 million for acquisitions, partly offset by $6.2 million in net property-sale proceeds. Capital expenditures were $1.3 million.
- Liquidity and debt: At year-end, cash and cash equivalents were $4.4 million; revolving and Bolt borrowings totaled $14.5 million. Lawson reported $22.8 million of additional borrowing availability under its $40 million revolving facility. Total assets were $190.7 million and stockholders’ equity was $93.5 million. The company said expected operating cash and available credit should fund 2018 operating needs, strategic initiatives and capital improvements.
- Q4 performance: Fourth-quarter 2017 sales were $80.6 million versus $67.3 million a year earlier; net income was $20.2 million versus a $4.6 million loss. The filing’s quarterly table does not isolate the full quarter’s earnings effect from the annual tax benefit.
Changes versus prior period
- Revenue improved from near-flat growth in 2016 to 10.6% growth in 2017, aided by stronger market conditions and acquisition contributions.
- Gross margin declined by 1.0 percentage point. Management attributed pressure to Bolt’s lower margins, sales mix toward larger national accounts and added transportation costs associated with closing the Fairfield distribution center.
- Operating results turned positive, helped by improved sales and operating expense leverage, as well as the property-sale gain. Selling and administrative expenses increased in dollars but declined as a share of sales.
- Cash from operations decreased, while debt increased to finance the Bolt acquisition. Year-end cash also declined from $10.4 million to $4.4 million.
Outlook, risks and contingencies
- Management planned to pursue organic growth and acquisitions in 2018, expand the sales force and continue Lean Six Sigma operational improvements. It warned that new representatives could temporarily reduce average sales per representative and increase training costs. No specific 2018 revenue or earnings guidance is provided.
- Key risks include economic or sector weakness, competitive pressure, margin effects from customer and product mix, inventory forecasting and obsolescence, commodity and energy costs, sales-force recruiting and retention, acquisition integration, and information-system or cybersecurity disruptions.
- The company is exposed to Canadian-dollar movements; a hypothetical 10% exchange-rate change would have affected 2017 sales by $3.9 million and net assets by $5.2 million.
- For environmental contamination at a Decatur, Alabama property, approximately $1.0 million remained accrued at year-end. Estimated remediation approaches ranged from $0.9 million to $2.0 million, and agreement with Alabama’s voluntary cleanup program had not been reached.
- Year-end contractual cash obligations totaled $64.5 million, including $13.9 million of operating leases and $10.2 million of purchase commitments. The Lawson credit agreement matures in August 2020; covenant requirements can restrict borrowing if availability falls below specified levels. The company reported covenant compliance at year-end.
- The company expected to adopt the new revenue standard in 2018 and estimated a one-time increase in deferred revenue and decrease in retained earnings of approximately $1.0 million. Management noted this estimate was not final.
- The auditor issued unqualified opinions on the financial statements and internal controls. Management and the auditor excluded Bolt’s internal controls from the 2017 assessment because of the acquisition timing; integration was ongoing.
Important facts for investors to verify
- Confirm the issuer: this is Lawson Products, Inc. (NASDAQ: LAWS), not Distribution Solutions Group.
- Assess earnings excluding the $19.6 million tax benefit and $5.4 million property-sale gain; the filing does not present a single normalized earnings measure.
- Review Bolt’s post-acquisition performance, lower gross margin, purchase-price allocation and integration progress; 2017 includes only a short post-acquisition period.
- Track operating cash generation, borrowing availability, credit-facility covenants and the company’s ability to fund growth while managing debt.
- Monitor the final Decatur remediation plan and cost, and the actual impact of revenue-standard adoption compared with the preliminary $1.0 million estimate.
- Review sales-force expansion costs, margin trends and whether organic productivity supports management’s growth strategy.