Business context and reporting period
The supplied filing is Lawson Products, Inc.’s unaudited Form 10-Q for the quarter ended March 31, 2019—not a filing under the supplied company name, Distribution Solutions Group, Inc. Lawson distributes maintenance, repair and operations products through its Lawson and Bolt Supply segments. Lawson primarily uses a sales-representative and vendor-managed-inventory model; Bolt sells mainly through branches.
Financial results and liquidity
Dollar amounts are in millions, except per-share data. Q1 2019 compared with Q1 2018:
- Revenue was $91.3 million, up 8.2% (reported sales growth including foreign exchange was 9.0%). Product revenue rose to $81.9 million; service revenue was $9.4 million.
- Gross profit increased 5.9% to $48.9 million. Gross margin declined to 53.6% from 54.7%.
- Operating income increased to $5.5 million from $1.8 million; operating margin was 6.1% versus 2.2%.
- Net income was $4.1 million versus $1.2 million. Diluted EPS was $0.44 versus $0.13. The effective tax rate was 28.8%, compared with 34.4%.
- Operating cash flow was negative $10.5 million, versus negative $2.5 million. Capital expenditures were $0.2 million. Cash and cash equivalents were $3.6 million at quarter-end, down from $11.9 million at year-end; cash, cash equivalents and restricted cash totaled $4.4 million.
- At March 31, total assets were $203.9 million and total liabilities were $97.3 million. The balance sheet reported $13.1 million in revolving-line borrowings. Lawson separately disclosed $10.8 million borrowed and $26.0 million of availability under its facility; Bolt had C$3.1 million borrowed and C$2.4 million available under its commitment letter.
Material changes and management commentary
- Lawson segment revenue grew 7.9% to $82.5 million; Bolt Supply revenue grew 10.5% to $8.9 million. Lawson operating income was $5.3 million versus $1.4 million, while Bolt operating income was $0.3 million versus $0.5 million.
- Management attributed sales growth to stronger sales-representative productivity, a strong MRO market, the October 2018 Screw Products acquisition, and Bolt product-line expansion. Lawson sales per representative per day increased 4.4% to $1,308; average daily consolidated sales rose to $1.450 million from $1.341 million.
- Gross margin pressure reflected sales mix toward lower-margin strategic customers, lower Bolt margins, Screw Products’ generally lower margins, and higher service-related costs. Management cited lower selling and administrative expenses relative to sales as drivers of improved operating results.
- Management said cash from operations and available borrowing capacity should be sufficient for operating needs, strategic initiatives and capital improvements over the next 12 months. No numerical earnings or revenue guidance was provided.
Outlook, risks and unusual items
- The company described the manufacturing market as strong but slowing: average PMI was 55.4 in Q1 2019, versus 59.7 a year earlier. Management expected the sales force to remain relatively stable for the rest of 2019, with emphasis on training and productivity.
- Operating cash use increased, primarily reflecting higher receivables associated with sales growth and payments of prior-period incentives, environmental remediation and other accruals.
- Lawson’s credit facility covenant was not triggered because excess borrowing capacity exceeded $10 million; the reported EBITDA-to-fixed-charges ratio was 4.26:1 against a 1.10:1 requirement. Bolt reported compliance with its covenants. The Lawson facility expires in August 2020.
- Adoption of ASC 842 on January 1, 2019 resulted in $12.3 million of lease assets and $15.3 million of lease obligations at quarter-end, and a $1.9 million increase to opening retained earnings. Prior periods were not restated.
- The Decatur, Alabama environmental remediation plan’s injection work was completed in Q1; monitoring continues. The company reported a remaining accrued liability of $0.8 million and said it believes this will cover remaining plan costs. A lease of the site includes put options tied to completion of remediation.
- Disclosed risks include economic and manufacturing conditions, cash generation and credit covenants, inventory obsolescence, customer and product-mix shifts, commodity and energy costs, oil-and-gas demand, cyber or system disruptions, workforce retention, acquisition integration, foreign exchange, competition, regulation and taxes.
Important facts for investors to verify
- Confirm the issuer identity: the supplied document is Lawson Products, Inc., although the request metadata names Distribution Solutions Group, Inc.
- Assess the sustainability of revenue and profit growth, including acquisition contribution, representative productivity and the effects of lower gross margins.
- Review the drivers of negative operating cash flow and whether receivables and accrued-liability payments normalize.
- Verify revolver availability, covenant headroom and the distinction between Lawson facility borrowings and consolidated balance-sheet borrowings.
- Track the Decatur remediation liability and monitoring results, and the timing or consequences of the property lease put options.