Business context and reporting period
This is Lawson Products, Inc.’s Form 10-K for the fiscal year ended December 31, 2019, not a quarterly report. The request names Distribution Solutions Group, Inc.; the filing itself identifies Lawson Products, Inc. (NASDAQ: LAWS) as the registrant. Unless otherwise noted, amounts below are U.S. dollars.
Lawson distributes maintenance, repair and operations (MRO) products and services through two segments: Lawson, which primarily serves customers through sales representatives and vendor-managed inventory services, and Bolt, which serves Western Canada through 14 branches. The filing reports more than 80,000 identified customers across the segments; no customer represented more than approximately 3% of sales.
Financial performance and condition
| Metric | 2019 | 2018 |
|---|---|---|
| Net sales | $370.8 million | $349.6 million |
| Gross profit / margin | $197.4 million / 53.2% | $189.5 million / 54.2% |
| Operating income / margin | $9.1 million / 2.4% | $9.2 million / 2.6% |
| Net income | $7.2 million | $6.2 million |
| Diluted EPS | $0.77 | $0.67 |
| Cash from operating activities | $9.2 million | $20.3 million |
| Cash and restricted cash at year-end | $6.3 million | $12.7 million |
| Total assets / stockholders’ equity | $204.4 million / $108.0 million | $197.1 million / $99.2 million |
Sales increased 6.0%; excluding a $1.9 million currency impact, management reported growth of 6.6%. Lawson segment sales rose 5.2% and Bolt sales rose 13.3%. Average daily sales increased to $1.471 million from $1.393 million. Gross margin declined by 1.0 percentage point, reflecting higher service costs and lower margins at Bolt and Screw Products.
Selling expense fell 2.6% to $85.3 million, while general and administrative expense rose 11.1% to $102.9 million, mainly due to higher stock-based compensation and severance. Stock-based compensation was $17.8 million, versus $7.5 million in 2018. GAAP operating income was $9.1 million; management’s non-GAAP adjusted operating income was $28.6 million, versus $18.4 million in 2018, excluding stock-based compensation, severance and specified other items.
Operating cash flow fell by $11.1 million year over year, with working-capital movements among the factors shown in the cash flow statement. Capital expenditures were $2.0 million. The company ended 2019 with $2.3 million drawn on its revolving facility and $96.7 million of reported borrowing availability. The new $100 million revolving credit agreement matures October 11, 2024; leverage and fixed-charge covenants were met at year-end. Operating leases added $12.7 million of lease liabilities, with $13.3 million total lease liabilities including financing leases.
Material changes, outlook and risks
- The company entered a new $100 million credit agreement in October 2019, replacing prior facilities totaling $40 million for Lawson and a separate Bolt commitment. It also authorized a $7.5 million share repurchase program; 32,362 shares were bought under that program in 2019. Additional shares were repurchased to cover employee tax withholding.
- Screw Products, acquired in October 2018, was included for the full year in 2019. It contributed approximately $2.6 million of 2019 sales, compared with $0.6 million in 2018.
- Management’s stated 2020 priorities were organic growth, acquisitions believed to be financially accretive, sales-force expansion and operational improvement. No quantified revenue or earnings guidance is provided. Management cautioned that new sales representatives may temporarily reduce average sales per representative as territories develop.
- Management noted that the average U.S. manufacturing PMI declined to 51.2 in 2019 from 58.8 in 2018, indicating slower expansion. Key risks include economic and sector downturns, competition, gross-margin pressure, inventory obsolescence, recruiting and retaining sales staff, acquisition integration, currency movements, supplier or transport disruptions, cybersecurity, and changes in input costs, energy prices or tariffs.
- A Decatur, Alabama site has soil and groundwater contamination from operations before Lawson’s ownership. The approved remediation plan’s injections were completed in early 2019, and monitoring continues. After $1.3 million of 2019 payments, the remaining accrued liability was $20,000; the company believes it is sufficient, but further procedures could affect results. Management considers pending ordinary-course litigation not likely to have a material adverse effect.
- Other notable items include a 25.4% effective tax rate, versus 9.5% in 2018, and adoption of the lease accounting standard, which brought operating lease assets and liabilities onto the balance sheet. The 2019 accounts include $1.9 million of opening retained-earnings adjustment related to lease adoption. The independent auditor gave unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Confirm the intended issuer: this filing is for Lawson Products, Inc., whereas the request names Distribution Solutions Group, Inc.
- Review the decline in operating cash flow, year-end cash, working-capital requirements, and the substantial cash payments for stock performance rights ($13.4 million in 2019).
- Assess whether reported margin pressure persists, particularly given the lower consolidated gross margin and the large difference between GAAP and adjusted operating income.
- Check the terms, borrowing availability and covenant headroom under the new credit agreement, alongside lease obligations and supplier purchase commitments of approximately $10.9 million.
- Monitor the Decatur remediation, tax valuation estimates and unrecognized tax benefits, as well as execution of the sales-force and acquisition strategies.