Filing identity and period
The supplied filing is Lawson Products, Inc.’s unaudited Form 10-Q for the three months ended March 31, 2017. It does not identify Distribution Solutions Group, Inc.; confirm that this is the intended filing before relying on this summary.
Lawson describes itself as a single-segment maintenance, repair and operations (MRO) distributor. Financial amounts below are in millions of dollars unless stated otherwise.
Key financial results
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Net sales | $74.6 | $69.7 |
| Gross profit / margin | $44.9 / 60.1% | $42.5 / 60.9% |
| Operating income / margin | $0.7 / 1.0% | $1.2 / 1.7% |
| Net income | $0.9 | $1.0 |
| Diluted earnings per share | $0.09 | $0.11 |
| Operating cash flow | $(3.3) | $(1.0) |
| Capital expenditures | $0.2 | $0.5 |
Sales rose 7.0% year over year; excluding 2016 acquisitions, management reported growth of 5.0%. Average daily sales were $1.166 million versus $1.089 million. The filing attributes growth to improved market conditions, more sales representatives, acquisitions and higher representative productivity.
Material changes and financial position
- Gross margin declined 0.8 percentage points. Management cited sales mix toward larger strategic customers with lower product margins, 2016 acquisitions, and labor and freight costs associated with closing the Fairfield, New Jersey distribution center.
- Operating expenses increased to $44.2 million from $41.3 million. Selling costs rose with higher sales, salesforce hiring and training, and health insurance costs; general and administrative costs reflected lower stock-compensation benefit and higher severance expense.
- Net income fell to $0.9 million from $1.0 million. The 2017 period included a $14,000 income tax benefit versus $109,000 tax expense in Q1 2016. Substantially all deferred tax assets remain subject to a valuation allowance.
- Cash and cash equivalents were $8.0 million at March 31, down from $10.4 million at year-end; a further $0.8 million was restricted. Working-capital increases and performance-compensation payments contributed to operating cash outflow.
- Revolver borrowings were $1.8 million, with $34.0 million of additional availability. The facility is $40.0 million and expires in August 2020. A $7.3 million financing lease obligation was also reported. Total liabilities were $73.9 million and stockholders’ equity was $62.3 million.
Outlook, risks and unusual items
Management said cash from operations and available borrowing capacity should be sufficient to fund operating needs, strategic initiatives and capital improvements through the remainder of 2017. No specific earnings or revenue guidance was provided. Management anticipated slower sales-representative growth while focusing on training and productivity.
The company was under contract to sell the Fairfield distribution center in Q2 2017 and expected to recognize a gain; the filing does not state the expected gain amount. The site’s $0.7 million net book value was classified as held for sale, and depreciation ceased.
At quarter-end, borrowing capacity exceeded the $10 million threshold that triggers the facility’s minimum EBITDA-to-fixed-charges covenant. The reported ratio was 2.01:1 against a 1.10:1 requirement, for informational purposes. Management cautioned that failure to meet the covenant in future periods could increase financing costs, restrict borrowing or adversely affect the business.
Other notable matters include approximately $1.0 million accrued for environmental remediation at a Decatur, Alabama site; final remediation terms and costs remain uncertain. The filing identifies risks including economic conditions, cash generation, credit-facility compliance, inventory obsolescence, customer demand, oil-and-gas exposure, competition, cybersecurity, workforce retention, acquisition integration and regulatory or tax matters.
The company adopted ASU 2016-09 in Q1 2017, including a $178,000 cumulative reduction to retained earnings for its change to recognizing stock-award forfeitures as they occur. The filing also reported a $30,000 stock-based compensation benefit in Q1 2017 compared with a $1.2 million benefit in Q1 2016.
Important facts for investors to verify
- Confirm the issuer: the supplied filing is for Lawson Products, Inc., not Distribution Solutions Group, Inc.
- Assess whether sales growth can translate into improved margins given lower-margin customer mix and elevated selling costs.
- Review cash conversion and working-capital needs, since operating cash flow was negative and cash declined during the quarter.
- Monitor covenant headroom, borrowing availability and the company’s ability to meet the facility’s requirements if capacity falls below the trigger.
- Check the outcome and proceeds of the Fairfield property sale and any change in the Decatur remediation estimate.