Business context and reporting period
Lawson Products, Inc. filed this unaudited Form 10-Q for the quarter ended March 31, 2021. The filing describes a distributor of maintenance, repair and operations products through its Lawson and Bolt Supply segments. The request metadata names Distribution Solutions Group, Inc.; however, the filing itself identifies Lawson Products, Inc. as the registrant.
Results include Partsmaster, acquired in August 2020. Partsmaster contributed $15.7 million of first-quarter revenue and $0.7 million of operating income. The quarter’s results are not necessarily indicative of full-year results.
Financial performance
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Revenue | $103.6 million | $91.0 million | +13.8% |
| Gross profit / margin | $54.6 million / 52.7% | $48.9 million / 53.7% | Profit +11.5%; margin down 1.0 percentage point |
| Operating income / margin | $4.8 million / 4.6% | $18.6 million / 20.5% | Down 74.2% |
| Net income | $3.6 million | $12.5 million | Down 71.3% |
| Diluted EPS | $0.39 | $1.34 | Down $0.95 |
| Adjusted non-GAAP operating income | $7.2 million | $7.9 million | Down 9.2% |
Gross margin pressure reflected product mix, higher net transportation costs, Partsmaster inventory rationalization reserves, and selling certain personal protective equipment below cost. Adjusted operating income excludes stock-based compensation, inventory reserves, severance and employee acquisition costs; it is a non-GAAP measure.
Cash, liquidity and obligations
- Cash and cash equivalents were $26.3 million at March 31, 2021, versus $28.4 million at year-end; restricted cash was an additional $1.0 million.
- Operating activities used $1.5 million of cash, compared with $6.9 million used in Q1 2020. Capital expenditures were $0.8 million. Cash, cash equivalents and restricted cash decreased $2.1 million to $27.3 million.
- No revolving-credit borrowings were outstanding. Availability was $64.4 million, net of letters of credit, including a $33.0 million letter of credit securing the Partsmaster payment. The $100 million facility matures October 2024; the company reported covenant compliance.
- A $33.0 million Partsmaster purchase-price payment was due in May 2021; the related discounted current liability was $32.9 million at quarter-end. Management expected to fund it with cash and, if needed, the revolver.
- Total lease liabilities were $16.1 million. Current liabilities also included $11.2 million for the security bonus plan and $10.8 million for deferred compensation.
- Working capital was approximately $50.0 million, based on current assets of $144.9 million less current liabilities of $95.0 million.
Material changes, outlook and risks
Revenue growth included Partsmaster and improved activity as pandemic restrictions eased. Average Lawson sales-representative headcount, including Partsmaster, rose to 1,083 from 998; sales per representative per day increased 7.3%. Management said organic sales remained below pre-pandemic levels and COVID-19 continued to affect sales, costs and customer service. Management cited a stronger manufacturing environment, with the average first-quarter PMI at 61.4 versus 50.0 a year earlier.
Reported operating income fell sharply in part because Q1 2020 included a $10.7 million stock-based compensation benefit, while Q1 2021 recorded $1.0 million of expense. G&A also included Partsmaster costs and higher severance and employee acquisition costs. No specific full-year revenue or earnings guidance was provided. Management said cash from operations and available credit were expected to meet operating, strategic and capital needs over the next 12 months, while noting that events beyond its control could adversely affect liquidity.
Key uncertainties include COVID-19 effects on demand, supply chains, collections and asset values; credit-facility covenant compliance; inventory obsolescence; cost inflation and transportation disruptions; and acquisition integration. Partsmaster purchase-price allocations remained preliminary. The company had deferred $3.5 million of employer Social Security taxes under the CARES Act, with $1.7 million expected to be paid in 2021 and the remainder in 2022. Environmental remediation monitoring costs were described as not significant and fully accrued.
Facts investors should verify
- Confirm the registrant identity: this filing is for Lawson Products, Inc., notwithstanding the metadata’s Distribution Solutions Group name.
- Track the May 2021 Partsmaster payment, resulting cash use and any revolver borrowings.
- Assess the sustainability of revenue growth excluding Partsmaster and the recovery in organic sales and representative productivity.
- Monitor gross-margin trends, inventory reserves, transportation costs and the drivers of adjusted versus GAAP operating income.
- Review future operating cash flow, covenant headroom and payments associated with deferred payroll taxes, leases and stock performance rights; the filing anticipated $9.2 million of outstanding stock performance rights would be paid within 12 months.