Business context and reporting period
This is Lawson Products, Inc.’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2021. The filing does not identify Distribution Solutions Group, Inc. as the registrant; investors should verify the company and ticker because the cover identifies Lawson Products (NASDAQ: LAWS). Lawson distributes maintenance, repair and operations products through its Lawson and Bolt Supply segments. Partsmaster, acquired in August 2020, was included for the full 2021 periods but only for September in the 2020 comparison.
Financial results
Amounts are in millions of dollars except per-share data. Comparisons are with the corresponding 2020 period.
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $105.6 | $90.3 | $315.7 | $253.5 |
| Gross profit / margin | $56.0 / 53.1% | $47.2 / 52.3% | $165.2 / 52.3% | $134.5 / 53.0% |
| Operating income / margin | $4.6 / 4.4% | $2.0 / 2.2% | $12.8 / 4.1% | $21.2 / 8.4% |
| Net income | $3.7 | $1.7 | $10.2 | $14.9 |
| Diluted earnings per share | $0.39 | $0.19 | $1.09 | $1.60 |
- Q3 revenue rose 16.9%; excluding Partsmaster, sales grew 8.4%. Nine-month revenue rose 24.5%; excluding Partsmaster, sales grew 9.3%.
- Net cash from operations was $6.2 million for the nine months, down from $20.0 million. Capital expenditures were $5.7 million versus $1.3 million; investing cash use included the $33.0 million final Partsmaster payment.
- At September 30, cash and cash equivalents were $7.5 million (versus $28.4 million at year-end 2020); restricted cash was $0.2 million. The company drew $10.9 million on its revolver and reported $87.4 million of remaining availability, net of letters of credit. Total liabilities were $120.1 million and stockholders’ equity was $134.4 million.
Material changes and management commentary
- Q3 gross margin improved year over year, but nine-month gross margin declined. Management cited supply constraints, higher supplier, freight and labor costs, product/customer mix, and inventory reserves. Pricing, sourcing and labor-allocation actions partially offset these pressures.
- Nine-month operating income fell despite higher sales, with operating expenses rising faster than revenue. These included higher selling costs, restored business activity, Partsmaster expenses, and $4.6 million of costs associated with evaluating an LKCM proposal. Q3 included $3.2 million of those proposal-related costs.
- Management reported adjusted non-GAAP operating income of $7.3 million in Q3 2021 versus $7.7 million, and $21.4 million for the nine months versus $20.5 million. The adjustments exclude items including stock compensation, inventory reserves, severance and acquisition-related costs; this measure is not a substitute for GAAP results.
- Partsmaster contributed $13.6 million of Q3 revenue and an operating loss of $0.8 million; for the nine months it contributed $44.6 million of revenue and $0.4 million of operating income.
- No specific earnings or revenue guidance is provided. Management said operating cash flow and available credit were expected to fund operating needs, strategic initiatives and capital improvements, while noting this is not assured. It also expected $8.4 million of outstanding stock performance rights to be paid within 12 months.
Risks, contingencies and unusual items
- Management highlighted COVID-19 uncertainty, supply-chain disruption, inflation, labor shortages, product availability and costs, and possible effects on customer payments and operations. It warned these conditions could adversely affect results, liquidity and asset valuations.
- The company had deferred $3.5 million of employer Social Security payments under the CARES Act; $1.7 million was expected to be paid in Q4 2021 and the remainder in 2022.
- The $33.0 million Partsmaster acquisition balance was paid in May 2021. Revolver borrowings mature under a facility ending October 2024; the company reported covenant compliance at quarter-end, but future noncompliance could restrict borrowing or increase costs.
- Inventory reserves increased, including $0.9 million for inventory whose cost exceeded estimated selling price and $1.0 million for Partsmaster inventory rationalization. Environmental monitoring costs at a site in Decatur, Alabama were accrued and described as not significant.
Important facts to verify
- Confirm the filing belongs to the intended issuer: the supplied filing is for Lawson Products, Inc., not Distribution Solutions Group, Inc.
- Assess whether revenue growth and margin trends persist after separating Partsmaster’s contribution and the effects of foreign exchange.
- Review cash conversion, working-capital needs, inventory reserves and the remaining deferred payroll tax payments.
- Track supply-chain and inflation impacts, Partsmaster performance, LKCM-related costs, and revolver covenant headroom.
- Consider the distinction between reported GAAP earnings and management’s adjusted non-GAAP operating income.