Lawson Products, Inc. — Form 10-Q Summary
Identity note: The supplied filing is for Lawson Products, Inc., not Distribution Solutions Group, Inc. Investors should verify the intended issuer before relying on this summary.
Business context and reporting period
The filing covers the quarter and nine months ended September 30, 2017. Lawson describes itself as a single-segment distributor of maintenance, repair and operations (MRO) products and services. Results are unaudited.
Financial results and liquidity
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net sales | $75.7 million | $70.2 million | $225.3 million | $209.3 million |
| Gross profit | $46.0 million | $42.6 million | $136.0 million | $127.6 million |
| Gross margin | 60.8% | 60.6% | 60.4% | 61.0% |
| Operating income | $1.1 million | $2.4 million | $9.7 million | $3.6 million |
| Net income | $1.3 million | $1.8 million | $9.5 million | $3.0 million |
| Diluted EPS | $0.14 | $0.20 | $1.04 | $0.34 |
Q3 sales increased 7.8%, but net income fell as general and administrative expenses rose, including higher stock-based and incentive compensation. Nine-month sales rose 7.7%. The nine-month operating result included a $5.4 million gain on sale of the Fairfield, New Jersey distribution center; excluding that gain, operating income was approximately $4.3 million.
For the first nine months, operating cash flow was $3.8 million, compared with $5.3 million in 2016. Investing activities provided $4.9 million, including $6.2 million in property-sale proceeds; capital expenditures were $1.2 million. Cash and cash equivalents were $19.0 million at September 30, versus $10.4 million at December 31, 2016. The company had no revolver borrowings and reported $36.0 million of availability at quarter-end. Financing lease obligations were $6.7 million.
Material changes, outlook and risks
- Management attributed sales growth to improved sales-representative productivity, the stronger MRO market, and contributions from 2016 acquisitions. Average daily sales increased 9.5% in Q3; sales per representative per day rose to $1,212 from $1,089.
- Nine-month gross margin declined year over year, reflecting customer mix, acquisition effects and transportation costs associated with the Fairfield distribution-center closure. Q3 margin improved slightly year over year.
- On October 3, 2017, after quarter-end, Lawson acquired Canadian distributor The Bolt Supply House for approximately $32.1 million, funded with cash and $16.3 million of revolver borrowings. Management said the acquisition would affect results beginning in Q4.
- Management anticipated moderate growth in the sales force and stated that operating cash flow and available credit were expected to fund operating needs, strategic initiatives and capital improvements through the remainder of 2017. No quantified earnings or revenue guidance was provided.
- The credit facility has a $40.0 million maximum commitment and expires in August 2020. A minimum EBITDA-to-fixed-charges covenant applies if excess borrowing capacity falls below $10.0 million; it was not triggered at quarter-end. The reported ratio was 3.20:1 against a 1.10:1 requirement.
- Substantially all deferred tax assets remained subject to a valuation allowance. Management said consistent future profitability could support a reduction of that allowance, but the timing and amount were uncertain.
- An environmental remediation liability of approximately $1.0 million remained accrued for a contaminated Alabama site. Estimated costs for potential remediation approaches ranged from $0.9 million to $2.0 million, and agreement with the state cleanup program had not been reached.
- Disclosed risks include economic and customer-demand changes, inventory obsolescence, credit-facility covenant compliance, commodity and energy costs, cyber and systems disruptions, workforce retention, acquisition integration, competition, and environmental and tax matters. Management reported disclosure controls as effective and no material quarterly change in internal control over financial reporting.
Key facts for investors to verify
- Confirm issuer identity: the filing names Lawson Products, Inc., despite the request metadata naming Distribution Solutions Group, Inc.
- Assess Q3 expense growth and the sensitivity of stock-based compensation to the share price.
- Separate recurring operating performance from the one-time Fairfield property-sale gain.
- Review post-quarter borrowing, liquidity and integration risks related to the Bolt Supply House acquisition.
- Monitor the environmental remediation estimate and any changes in the deferred-tax valuation allowance.