Oct 25, 2018   SOURCE: BusinessWire

Lawson Products Announces Third Quarter 2018 Results

Lawson Products, Inc. (NASDAQ: LAWS) (“Lawson” or the "Company"), a distributor of products and services to the MRO marketplace, today announced results for the third quarter ended September 30, 2018.

Highlights

  • Sales of $88.5 million, up 17.0%. Average daily sales ("ADS") increased to $1.405 million during the third quarter of 2018 compared to $1.201 million in the third quarter of 2017
  • Lawson segment ADS increased 4.0%, excluding The Bolt Supply House ("Bolt Supply"), primarily due to a 6.6% improvement in sales rep productivity
  • Operating loss of $2.3 million, including $7.6 million in stock-based compensation expense due to a 39% increase in the market price of the Company's stock price, compared to operating income of $1.1 million in the third quarter of 2017. Non-GAAP adjusted operating income of $5.6 million compared to $3.9 million a year ago, up 44.6%. Adjusted EBITDA of $7.3 million which exceeded the $5.4 million from a year ago, up 34.6% (See reconciliation in Table 2)
  • Net loss of $0.8 million or $0.09 per diluted share. Adjusted net income, excluding stock-based compensation, acquisition costs and severance, was $5.0 million or $0.54 per diluted share (See reconciliation in Table 3)
  • Borrowings, net of cash, were $2.3 million at September 30, 2018, a reduction of $7.8 million during the quarter, driven by strong cash flows from operations
  • Continued to be active with acquisitions by acquiring Dallas-based Screw Products, Inc. on October 1, 2018
 
3Q 2018 Summary Financial Highlights
($ in millions)   3Q18     3Q17     Change
Net Sales   $88.5     $75.7     17.0%
Average Daily Net Sales $1.405 $1.201 17.0%
Number of Business Days 63 63
 
Reported Operating Income (Loss) $(2.3) $1.1 NM
Adjusted Operating Income (1) $5.6 $3.9 44.6%
Margin (1) 6.3% 5.2% +120 bps
 
Adjusted EBITDA (1) $7.3 $5.4 34.6%
Margin (1)   8.2%     7.1%     +110 bps
(1)   Excludes the impact of stock-based compensation, acquisition costs and severance. (See reconciliation in Table 2)
 

“The third quarter results evidenced strong demand, solid execution on our growth strategy and a continuation of our favorable 2018 performance. We delivered a 17.0% sales increase driven by improved Lawson sales rep productivity as well as the inclusion of Bolt Supply. In addition, our adjusted operating income grew by nearly 45% demonstrating our ability to leverage our existing infrastructure," said Michael DeCata, president and chief executive officer.

“Subsequent to the quarter, we announced the acquisition of Dallas-based Screw Products, Inc., a $3.0 million dollar customized fastener and component distributor that will expand our customer base in the job shop/manufacturing market segment. We will continue to make strategically-focused and disciplined investments. We remain confident that we will achieve continued earnings growth fueled by both organic sales and accretive acquisitions,” said DeCata.

Third Quarter Results

Net sales increased 17.0% to $88.5 million for the third quarter of 2018 compared to $75.7 million in 2017. Sales were positively impacted by a 6.6% improvement in the Lawson segment sales rep productivity compared to the third quarter of 2017 and the inclusion of Bolt Supply sales of $9.8 million. Average daily sales grew to $1.405 million compared to $1.201 million in the prior year quarter with 63 selling days in both quarters.

Third quarter gross profit increased $2.1 million to $48.1 million compared to $46.0 million in 2017, primarily due to increased sales and the acquisition of Bolt Supply. This was offset by $3.4 million due to the adoption of Accounting Standards Codification 606 ("ASC 606") on January 1, 2018. Under ASC 606, certain costs were reclassified from selling expenses to cost of sales. (See Table 1)

Consolidated gross profit as a percentage of sales was 54.3% for the third quarter. Prior to the adoption of ASC 606, consolidated gross profit as a percentage of sales was 58.3% including Bolt Supply. The Lawson segment gross profit percentage, prior to ASC 606, was 60.9% compared to 60.8% in the year ago quarter.

Selling expenses decreased to $22.2 million in the third quarter compared to $24.4 million a year ago. This decrease reflects the inclusion of $0.8 million of Bolt Supply expenses offset by $3.4 million of selling expenses now reported within gross profit. Selling expenses decreased to 25.0% from 32.2% of sales in the year ago quarter primarily due fixed selling costs leveraged over a higher sales base, the adoption of the new revenue recognition standard and the inclusion of Bolt Supply, which has lower selling expenses as a percent of sales.

General and administrative expenses were $28.2 million in the third quarter of 2018 compared to $20.6 million in the year ago quarter. The increase in general and administrative expense was driven by a $5.3 million increase in stock-based compensation in the third quarter of 2018 compared to the third quarter of 2017 and the inclusion of $2.2 million of general and administrative expenses for Bolt Supply. Excluding stock-based compensation, general and administrative expenses were 23.2% of sales for the quarter compared to 24.1% in the prior year third quarter.

Operating loss in the third quarter of 2018 was $2.3 million compared to income of $1.1 million a year ago. Adjusted non-GAAP operating income increased to $5.6 million in the third quarter of 2018 compared to $3.9 million in the year ago quarter. (See reconciliation in Table 2) The growth in adjusted non-GAAP operating income from a year ago was generated by an improvement of $1.0 million in the Lawson segment and the contribution of $0.7 million from Bolt Supply.

Net loss for the third quarter of 2018 was $0.8 million, or $0.09 per diluted share compared to net income of $1.3 million, or $0.14 per diluted share, for the same period a year ago. Net income for the third quarter of 2018 was negatively impacted by an increase in the market price of the Company's common stock price which resulted in a charge for stock-based compensation of $7.6 million, or $0.64 per diluted share. Adjusted net income, excluding stock-based compensation, acquisition costs and severance, was $5.0 million or $0.54 per diluted share. (See reconciliation in Table 3)

Borrowings and Cash Flow

As of September 30, 2018, the Company had $9.9 million of borrowings under its revolving credit facility and cash and cash equivalents of $7.7 million. On a net basis, this represents a reduction of $7.8 million in the third quarter of 2018 primarily driven by improved earnings and working capital management. On a year-to-date basis, the Company has generated cash flows from operating activities of $10.2 million.

Conference Call

Lawson Products, Inc. will conduct a conference call with investors to discuss third quarter 2018 results at 9:00 a.m. Eastern Time on October 25, 2018. The conference call is available by direct dial at 1-877-737-7051 in the U.S. or 1-201-689-8878 from outside of the U.S. A replay of the conference call will be available approximately two hours after completion of the call through November 30, 2018. Callers can access the replay by dialing 1-877-481-4010 in the U.S. or 1-919-882-2331 outside the U.S. The PIN access number for the replay is 37842#. A streaming audio of the call and an archived replay will also be available on the investor relations page of Lawson's website through November 30, 2018.

About Lawson Products, Inc.

Founded in 1952, Lawson Products, Inc., headquartered in Chicago, IL, sells and distributes specialty products to the industrial, commercial, institutional and government maintenance, repair and operations market (MRO). The Company is dedicated to helping customers in the U.S. and Canada lower their total cost of operation by increasing productivity and efficiency. The combination of Lawson Managed Inventory and the Company’s problem-solving professionals ensures customers always have the right parts to handle the job. Through The Bolt Supply House, customers in Western Canada have access to products at several branch locations. Under its Kent Automotive brand, the Company provides collision and mechanical repair products to the automotive aftermarket.

Lawson Products ships from several strategically located distribution centers to customers in all 50 states, Puerto Rico, Canada, Mexico, and the Caribbean.

For additional information, please visit https://www.lawsonproducts.com or https://www.kent-automotive.com.

This Release contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties. The terms "may," "should," "could," "anticipate," "believe," "continues," "estimate," "expect," "intend," "objective," "plan," "potential," "project" and similar expressions are intended to identify forward-looking statements. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. These statements are based on management's current expectations, intentions or beliefs and are subject to a number of factors, assumptions and uncertainties that could cause or contribute to such differences or that might otherwise impact the business and include the risk factors set forth in Item 1A of the December 31, 2017, Form 10-K filed on February 22, 2018. The Company undertakes no obligation to update any such factor or to publicly announce the results of any revisions to any forward-looking statements whether as a result of new information, future events or otherwise.

-TABLES FOLLOW-

 
Lawson Products, Inc.
Condensed Consolidated Statements of Operations
(Dollars in thousands, except per share data)
(Unaudited)
   
Three Months Ended Nine Months Ended
September 30, September 30,
2018   2017 2018   2017
 
Product revenue $ 78,377 $ 75,651 $ 233,744 $ 225,274
Service revenue 10,153   —   29,627   —  
Net revenue 88,530 75,651 263,371 225,274
 
Product cost of goods sold 36,979 29,646 109,667 89,249
Service costs 3,443   —   10,247   —  
Gross profit 48,108   46,005   143,457   136,025  
 
Operating expenses:
Selling expenses 22,175 24,354 66,119 72,964
General & administrative expenses 28,199   20,561   72,213   58,790  
Total SG&A 50,374 44,915 138,332 131,754
Gain on sale of property —   —   —   (5,422 )
Operating expenses 50,374   44,915   138,332   126,332  
 
Operating income (loss) (2,266 ) 1,090 5,125 9,693
 
Interest expense (251 ) (133 ) (755 ) (393 )
Other income (expense), net 170   843   (320 ) 953  
 
Income (loss) before income taxes (2,347 ) 1,800 4,050 10,253
Income tax (benefit) expense (1,531 ) 479   436   802  
 
Net income (loss) $ (816 ) $ 1,321   $ 3,614   $ 9,451  
 
Basic income (loss) per share of common stock $ (0.09 ) $ 0.15   $ 0.41   $ 1.07  
 
Diluted income (loss) per share of common stock $ (0.09 ) $ 0.14   $ 0.39   $ 1.04  
 
Lawson Products, Inc.
Condensed Consolidated Balance Sheets
(Dollars in thousands, except share data)
(Unaudited)
   
September 30, December 31,
2018 2017
 
ASSETS
Current assets:
Cash and cash equivalents $ 7,663 $ 4,416
Restricted cash 800 800
Accounts receivable, less allowance for doubtful accounts of $445
and $476, respectively 43,561 38,575
Inventories, net 51,154 50,928
Miscellaneous receivables and prepaid expenses 5,077   3,728  
Total current assets 108,255 98,447
 
Property, plant and equipment, net 24,535 27,333
Deferred income taxes 20,457 21,248
Goodwill 19,114 19,614
Cash value of life insurance 13,360 11,964
Intangible assets, net 10,901 11,813
Other assets 339   248  
Total assets $ 196,961   $ 190,667  
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Revolving lines of credit $ 9,918 $ 14,543
Accounts payable 16,332 12,394
Accrued expenses and other liabilities 38,583   33,040  
Total current liabilities 64,833 59,977
 
Security bonus plan 12,876 12,981
Financing lease obligation 5,524 6,420
Deferred compensation 6,107 5,476
Deferred rent liability 2,081 3,512
Deferred tax liability 3,073 3,115
Other liabilities 4,445   5,696  
Total liabilities 98,939   97,177  
 
Stockholders’ equity:
Preferred stock, $1 par value:
Authorized - 500,000 shares, issued and outstanding — None — —
Common stock, $1 par value:
Authorized - 35,000,000 shares
Issued - 8,952,918 and 8,921,302 shares, respectively
Outstanding - 8,919,644 and 8,888,028 shares, respectively 8,953 8,921
Capital in excess of par value 14,989 13,005
Retained earnings 74,738 71,453
Treasury stock – 33,274 shares (711 ) (711 )
Accumulated other comprehensive income 53   822  
Total stockholders’ equity 98,022   93,490  
Total liabilities and stockholders’ equity $ 196,961   $ 190,667  
 

LAWSON PRODUCTS, INC.

SEC REGULATION G GAAP RECONCILIATIONS

The Company reports its financial results in accordance with U.S. generally accepted accounting principles (GAAP). However, the Company's management believes that certain non-GAAP financial measures may provide users of this financial information with additional meaningful comparisons between current results and results in prior operating periods. Management believes that these non-GAAP financial measures can provide additional meaningful reflection of underlying trends of the business because they provide a comparison of historical information that excludes certain non-operational items that impact the overall comparability. See Tables below for supplemental financial data and corresponding reconciliations to GAAP financial measures for the three and nine months ended September 30, 2018 and 2017. Non-GAAP financial measures should be viewed in addition to, and not as an alternative for, the Company's reported results prepared in accordance with GAAP.

On January 1, 2018 the Company adopted Accounting Standards Codification 606-Revenue From Contracts With Customers (“ASC 606”). As part of the Company's adoption of ASC 606, it concluded that it has two separate performance obligations, and accordingly, two separate revenue streams: product and services. As a result, the Company is now reporting two separate revenue streams and two separate costs of revenues. The adoption of ASC 606 had a minimal impact on total reported revenues, costs and net income for the three and nine months ended September 30, 2018. However, the adoption required prospective reclassification of certain selling expenses associated with the separately identified vendor managed inventory services performance obligation costs historically classified as selling expenses to cost of sales. As ASC 606 was adopted on a modified retrospective method, prior quarters are not restated. The following information is intended to provide comparable information on selected financial statement line items in accordance with both ASC 606 and previous accounting literature (ASC 605 Revenue Recognition).

 
TABLE 1 - Impact of ASC 606 on Condensed Consolidated Statements of Income (Loss) (Unaudited)
     
Three Months Ended September 30, 2018
Pro-Forma as if
Service previous
Revenues and accounting
Costs guidance was in
(Dollars in thousands) As Reported Adjustments effect
 
Product revenue $ 78,377 $ 10,207 $ 88,584
Service revenue 10,153   (10,153 ) —  
Net Revenue 88,530   54   88,584  
 
Product cost of goods sold 36,979 — 36,979
Service costs 3,443   (3,443 ) —  
Total cost of goods sold 40,422   (3,443 ) 36,979  
 
Gross profit 48,108 3,497 51,605
Gross profit percentage 54.3 % 58.3 %
 
Selling expenses 22,175 3,468 25,643
General and administrative expenses 28,199   —   28,199  
Operating expenses 50,374   3,468   53,842  
 
Operating income (loss) $ (2,266 ) $ 29   $ (2,237 )
   
Nine Months Ended September 30, 2018
    Pro-Forma as if
Service previous
Revenues and accounting
Costs guidance was in
(Dollars in thousands) As Reported Adjustments effect
 
Product revenue $ 233,744 $ 29,609 $ 263,353
Service revenue 29,627   (29,627 ) —  
Net Revenue 263,371   (18 ) 263,353  
 
Product cost of goods sold 109,667 — 109,667
Service costs 10,247   (10,247 ) —  
Total cost of goods sold 119,914   (10,247 ) 109,667  
 
Gross profit 143,457 10,229 153,686
Gross profit percentage 54.5 % 58.4 %
 
Selling expenses 66,119 10,092 76,211
General and administrative expenses 72,213   —   72,213  
Operating expenses 138,332   10,092   148,424  
 
Operating income $ 5,125   $ 137   $ 5,262  
 
Table 2 - Reconciliation of GAAP Operating Income to Non-GAAP Adjusted Operating Income and
Adjusted EBITDA
(Unaudited)
       
Three Months Ended September 30,
2018 2017

Lawson

Bolt Supply
(Dollars in thousands)

Segment

Segment Consolidated Consolidated
 
Operating income (loss), as reported per GAAP $ (2,955 ) $ 689 $ (2,266 ) $ 1,090
 
Stock-based compensation (1) 7,637 — 7,637 2,337
 
Severance expense 27 4 31 139
 
Acquisition related costs 168   —   168   286
 
Non-GAAP adjusted operating income 4,877 693 5,570 3,852
 
Depreciation and amortization $ 1,691   $ 64   $ 1,755   $ 1,591
 
Non-GAAP adjusted EBITDA $ 6,568   $ 757   $ 7,325   $ 5,443
(1)   A portion of stock-based compensation expense varies with the Company's stock price
 
Table 3 - Reconciliation of GAAP Net Income and Diluted EPS to Non-GAAP Adjusted Net Income and
Adjusted Diluted EPS (Unaudited)
(Dollars in thousands, except per share amounts)   Three Months Ended September 30,
2018   2017
Amount   Diluted EPS (2) Amount   Diluted EPS
Net Income (loss), as reported per GAAP $ (816 )   $ (0.09 ) $ 1,321 $ 0.14
 
Pretax adjustments:
Stock-based compensation 7,637 0.82 2,337 0.26
Severance expense 31 0.00 139 0.02
Acquisition related costs 168 0.02 286 0.03
             
Pretax adjustments 7,836 0.84 2,762 0.31
Tax effect (1) (2,014 ) (0.21 ) (735 )   (0.08 )
Total adjustments, net of tax 5,822     0.63   2,027     0.23  
Non-GAAP adjusted net income $ 5,006     $ 0.54   $ 3,348     $ 0.37  
(1)  

Tax effected at quarterly effective tax rate of 26.6% for 2017 and 25.7% for 2018 which excludes the benefit of discrete items

(2) Pretax adjustments to diluted EPS calculated on 9.322 million of diluted shares
 
LAWSON PRODUCTS, INC.
TABLE 4 - QUARTERLY RESULTS (UNAUDITED)
Historic Lawson Segment Sales Representative and Productivity
   
Three Months Ended
Sep. 30 Jun. 30   Mar. 31   Dec. 31   Sep. 30
2018 2018 2018 2017 2017
 
Number of business days 63 64 63 61 63
 
Average daily net sales (Dollars in thousands) $ 1,249 $ 1,260 $ 1,213 $ 1,191 $ 1,201
Year over year increase 4.0 % 7.5 % 4.0 % 6.1 % 9.5 %
Sequential quarter increase (decrease) (0.9 )% 3.9 % 1.8 % (0.8 )% 2.5 %
 
Average active sales rep. count (1) 967 966 968 987 991
Period-end active sales rep. count 978 968 966 983 988
 
Sales per rep. per day $ 1,292 $ 1,304 $ 1,253 $ 1,207 $ 1,212
Year over year increase 6.6 % 9.1 % 6.4 % 8.3 % 11.3 %
Sequential quarter increase (decrease) (0.9 )% 4.1 % 3.8 % (0.4 )% 1.4 %
(1)   Average active sales rep count represents the average of the month-ends sales representative count
 
LAWSON PRODUCTS, INC.
TABLE 5 - CONSOLIDATED QUARTERLY RESULTS (UNAUDITED)
  Three Months Ended
Sep. 30   Jun. 30   Mar. 31   Dec. 31   Sep. 30
(Dollars in thousands) 2018 2018 2018 2017 2017
 
Average daily net sales $ 1,405 $ 1,412 $ 1,341 $ 1,322 $ 1,201
Year over year increase 17.0 % 20.5 % 15.0 % 17.8 % 9.5 %
Sequential quarter increase (decrease) (0.5 )% 5.3 % 1.4 % 10.1 % 2.5 %
 
Net Sales $ 88,530 $ 90,382 $ 84,459 $ 80,633 $ 75,651
Gross profit (1) 48,108 49,131 46,218 46,993 46,005
 
Gross profit percentage (1) 54.3 % 54.4 % 54.7 % 58.3 % 60.8 %
 
Selling, general & administrative expenses $ 50,374   $ 43,577   $ 44,381   $ 46,750   $ 44,915  
 
Operating income (loss) $ (2,266 ) $ 5,554   $ 1,837   $ 243   $ 1,090  
(1)   Reflects the adoption of ASC 606 effective January 1, 2018 including the reclassification of $3.4 million, $3.1 million, and $3.5 million of selling expense as a reduction of gross profit in the three months ended September 30, 2018, June 30, 2018 and March 31, 2018, respectively.