Business context and reporting period
Lawson Products, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2021. The filing identifies the registrant as Lawson Products, Inc.; it does not identify Distribution Solutions Group, Inc. as the issuer. Lawson distributes maintenance, repair and operations (MRO) products through its Lawson and Bolt Supply segments. Lawson primarily serves customers through sales representatives and vendor-managed inventory services; Bolt Supply operates 14 branches in Western Canada.
Results reflect the August 2020 acquisition of Partsmaster, which contributed $15.3 million of Q2 revenue and $31.0 million for the first half of 2021.
Financial performance and liquidity
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $106.5 million | $72.1 million | $210.1 million | $163.2 million |
| Gross profit | $54.6 million | $38.3 million | $109.2 million | $87.2 million |
| Gross margin | 51.3% | 53.1% | 52.0% | 53.5% |
| Operating income | $3.4 million | $0.6 million | $8.2 million | $19.2 million |
| Net income | $2.9 million | $0.6 million | $6.5 million | $13.2 million |
| Diluted earnings per share | $0.31 | $0.07 | $0.70 | $1.41 |
For the first six months, cash from operations was $9.3 million, compared with $7.8 million a year earlier. Investing activities used $36.9 million, including $33.0 million to pay the remaining Partsmaster purchase price and $3.9 million in capital expenditures. Cash and cash equivalents were $5.9 million at June 30, 2021, versus $28.4 million at year-end 2020.
At June 30, the company had $5.0 million drawn on its revolving credit facility and $91.9 million of availability, net of letters of credit. The $100 million facility matures in October 2024; the company reported compliance with its financial covenants. Total liabilities were $113.6 million and stockholders’ equity was $130.9 million.
Material changes versus the prior comparable period
- Q2 revenue rose 47.7%; first-half revenue rose 28.8%. The company attributed growth to improved business conditions after the severe COVID-19 disruption in 2020, higher sales productivity, and Partsmaster. Lawson segment revenue increased 50.1% in Q2 and Bolt Supply revenue increased 30.8%.
- Despite higher sales, gross margin declined 1.8 percentage points in Q2 and 1.5 points for the first half. Management cited higher freight and supply-chain costs, product and customer mix, and Partsmaster inventory-related items.
- Q2 operating income improved year over year, but first-half operating income and net income fell substantially. First-half G&A included a $10.1 million year-over-year increase in stock-based compensation expense; the comparable 2020 period included a $7.5 million stock-based compensation benefit. Partsmaster expenses and costs related to evaluating an LKCM proposal also affected expenses.
- Adjusted non-GAAP operating income was $6.8 million in Q2 versus $4.8 million, and $14.1 million for the first half versus $12.7 million. These measures exclude specified items and are not GAAP results.
- Cash declined primarily because the company paid the $33.0 million Partsmaster acquisition liability in May. It also drew $5.0 million on its credit facility.
Outlook, risks and unusual items
Management gave no specific revenue or earnings guidance. It said operating cash flow and available credit were expected to be sufficient for operating needs, strategic initiatives and capital improvements over the next 12 months, while cautioning that events outside its control could adversely affect liquidity. The company reported that a June 2021 company-wide price increase was implemented in response to rising supplier costs.
- Management highlighted uncertainty from COVID-19, including potential effects on demand, sourcing, customer payments, facilities and liquidity. It also cited global supply-chain disruption, freight costs, inventory obsolescence, competition, cybersecurity, workforce retention and acquisition integration risks.
- The company had $3.5 million of employer Social Security tax payments deferred under the CARES Act: $1.7 million expected in the second half of 2021 and the balance in 2022.
- Management anticipated that stock performance rights valued at $9.7 million at June 30 would be paid within the following 12 months.
- Inventory reserves increased by $1.4 million in the first half, including $1.0 million for Partsmaster inventory rationalization and $0.4 million for inventory whose cost exceeded estimated selling price. The filing also reports $1.4 million of Q2 costs related to evaluating an LKCM proposal.
- Environmental monitoring costs at a former company-owned site were described as not significant and fully accrued. Tax examinations cover U.S. federal years 2017–2019 and various other jurisdictions for 2013–2019.
Important facts for investors to verify
- Confirm the issuer’s identity: this filing is for Lawson Products, Inc., despite the request metadata naming Distribution Solutions Group, Inc.
- Assess how much of revenue growth and operating performance is attributable to Partsmaster versus improvement in the existing business.
- Monitor gross-margin pressure from freight, supply constraints, mix and inventory actions, and whether the June price increase offsets higher costs.
- Review the drivers of the sharp first-half GAAP earnings decline, especially stock-based compensation and its volatile prior-year comparison.
- Track cash generation, deferred tax payments, stock performance-rights payouts, credit-facility availability and covenant compliance.