Distribution Solutions Group, Inc. annual report, FY2020

Filing summary

Entity and period: The supplied filing is Lawson Products, Inc.’s Form 10-K for the fiscal year ended December 31, 2020—not a Distribution Solutions Group, Inc. filing. It reports annual results; standalone fourth-quarter financial figures are not clearly provided in the supplied text.

Business context

Lawson distributes maintenance, repair and operations products through its Lawson sales-representative/VMI business and Bolt’s 14 Canadian branches. It acquired MRO distributor Partsmaster on August 31, 2020. Approximately 81% of 2020 sales were in the United States and 19% in Canada.

Financial results and liquidity

At year-end, cash and cash equivalents were $28.4 million; the company had no revolving-line borrowings and $66.0 million of borrowing availability, net of letters of credit. Total assets were $256.3 million and stockholders’ equity was $122.4 million. The Partsmaster acquisition left a $32.7 million current acquisition liability, representing $33.0 million due in May 2021; payment was expected from cash on hand and, if needed, the credit facility. The company reported covenant compliance, with a 4.77:1 fixed-charge coverage ratio against a 1.15:1 minimum and 0.60:1 net leverage against a 3.25:1 maximum.

Changes and unusual items

• Revenue fell 5.2% year over year. Excluding Partsmaster, sales declined 11.3%; Partsmaster contributed $22.6 million in post-acquisition revenue.
• Lawson segment sales declined 5.0% and Bolt sales declined 6.3%. Consolidated gross margin was nearly flat, while organic Lawson MRO gross margin declined to 59.8% from 60.7%.
• GAAP operating income rose as selling and administrative expenses fell, including a substantial reduction in stock-based compensation expense. Adjusted operating income, a company-defined non-GAAP measure, declined to $27.4 million from $28.6 million.
• The company recorded a $1.9 million goodwill impairment for Screw Products. Partsmaster added $15.8 million of goodwill and $7.7 million of intangible assets.
• Operating cash flow improved amid stronger operating results and working-capital management. The company recorded $1.4 million of Canadian wage subsidies and deferred $3.5 million of employer Social Security payments under the CARES Act.

Outlook, commentary and risks

Management planned to pursue organic growth, sales-force expansion, acquisitions and operational improvements in 2021, but gave no quantified financial guidance in the supplied text. Management described sequential business improvement in the third and fourth quarters as restrictions eased, while warning that COVID-19 could continue to affect demand, customer access, collections, sourcing, operations and asset valuations. Other stated risks include inventory obsolescence, competitive and margin pressure, sales-representative retention, cybersecurity, acquisition integration, foreign exchange, and covenant or funding constraints. The filing reports an unqualified audit opinion and effective internal controls, but Partsmaster’s controls were excluded from management’s 2020 assessment during integration.

Investor verification points

• Confirm the intended issuer: this filing is for Lawson Products, Inc., not Distribution Solutions Group, Inc.
• Review the timing and funding of the $33.0 million Partsmaster payment due in May 2021, and the effect of its letter of credit on available liquidity.
• Assess underlying sales and margin trends excluding Partsmaster, including the stated 11.3% decline in sales excluding the acquisition.
• Evaluate goodwill valuation assumptions, particularly for Bolt and Screw Products, and the risk of further COVID-related impairment.
• Check progress integrating Partsmaster, including internal-control coverage, and distinguish GAAP results from management’s adjusted non-GAAP measure.