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Lawson Products Announces Second Quarter 2018 Results

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20.5% Sales Increase Drives Strong Performance

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

Highlights

  • Total sales of $90.4 million, up 20.5%. Average daily sales ("ADS")
    increased to $1.412 million during the second quarter of 2018 compared
    to $1.172 million in the second quarter of 2017 and increased 5.3%
    sequentially over the first quarter
  • Organic Lawson segment ADS, excluding The Bolt Supply House ("Bolt
    Supply"), increased 7.5% compared to the prior year quarter driven by
    the sixth consecutive quarterly increase in sales rep productivity
    which increased 9.1% for the quarter
  • Bolt Supply, which was acquired in October of 2017, added $9.8 million
    of sales and $0.9 million of adjusted EBITDA in the second quarter
    2018 (see reconciliation in Table 2), in line with the Company's
    expectations
  • Operating income was $5.6 million compared to $7.9 million in the
    second quarter of 2017 which included a $5.4 million non-recurring
    gain on the sale of a facility. Non-GAAP adjusted EBITDA was $7.7
    million compared to $4.5 million a year ago, up 71%. The Lawson
    segment adjusted EBITDA was $6.8 million, up 50% over the year ago
    quarter (see reconciliation in Table 2)
  • Borrowings, net of cash, ended at $10.1 million representing a decline
    of $3.5 million during the quarter

"Demand for our value-added MRO services remained robust in the second
quarter as evidenced by the increase in our average daily sales. The
20.5% sales increase was largely driven by improved Lawson sales rep
productivity as well as the inclusion of Bolt Supply. The 43% growth in
our adjusted EBITDA percentage, which is over twice the sales gain,
demonstrates the strengthening of our business and our ability to
leverage our existing infrastructure," said Michael DeCata, president
and chief executive officer. "Additionally, we increased our Lawson
segment gross profit to 60.4% prior to the selling expense
reclassification while driving adjusted EBITDA as a percent of sales to
8.6% from 6.0% a year ago."

Second Quarter Results

Net sales increased 20.5% to $90.4 million for the second quarter of
2018 compared to $75.0 million in 2017. Both quarters had 64 selling
days. Average daily sales grew to $1.412 million compared to $1.172
million in the previous year quarter. Sales were positively impacted by
$9.8 million from the inclusion of the Bolt Supply acquisition completed
in the beginning of the fourth quarter of 2017 and a 9.1% improvement in
Lawson's sales per rep per day productivity compared to the second
quarter 2017.

Second quarter gross profit increased $4.0 million to $49.1 million
compared to $45.1 million in 2017, primarily due to increased sales and
the acquisition of Bolt Supply, offset by $3.4 million due to the
adoption of the new revenue recognition accounting standard. On a
like-for-like basis, gross profit of the Lawson segment improved to
60.4% from 60.2% the year ago quarter. Reported gross profit as a
percentage of sales was 54.4% for the second quarter. Prior to the
adoption of the new revenue recognition standard, consolidated gross
profit as a percent of sales was 58.0% including Bolt Supply.

Selling expenses decreased as a percentage of sales to 24.3% from 31.7%
in the second quarter of 2017 due to increasing organic sales, the
adoption of the new revenue recognition standard, and the inclusion of
Bolt Supply, which has lower selling expenses. The Lawson segment
selling expenses decreased as a percent of sales to 30.5% from 31.7% on
increasing organic sales. Reported selling expenses of $22.0 million in
the second quarter compared to $23.8 million a year ago reflect the
inclusion of $0.8 million of Bolt Supply expenses offset by $3.1 million
of selling expenses now reported within gross profit.

General and administrative expenses decreased as a percentage of sales
to 23.9% from 25.2%, primarily from leveraging our costs on growing
sales. Total general and administrative expenses of $21.6 million in the
second quarter of 2018 compared to $18.9 million a year ago quarter
reflect the inclusion of $2.1 million for Bolt Supply and $0.5 million
for a discontinued operation accrual.

Operating income in the second quarter of 2018 was $5.6 million compared
to $7.9 million a year ago which included a non-recurring gain of $5.4
million from the sale of a distribution facility. Adjusted non-GAAP
EBITDA increased to $7.7 million in the second quarter of 2018 compared
to $4.5 million in the year ago quarter (see reconciliation in Table 2).
The growth in adjusted non-GAAP EBITDA from a year ago was generated by
an improvement of $2.3 million in the Lawson segment and the
contribution of $0.9 million from Bolt Supply.

Net income for the second quarter of 2018 was $3.2 million, or $0.35 per
diluted share compared to net income of $7.3 million, or $0.80 per
diluted share, for the same period a year ago. The second quarter of
2017 benefited by $0.60 per diluted share from a non-recurring gain on
the sale of a facility. Excluding this non-recurring gain, net income
per diluted share increased to $0.35 from $0.20 in the year ago quarter.

"Excluding last year's benefit from the sale of a facility, our results
significantly improved this quarter as a result of our acquisition
strategy, improving the productivity of our sales team, and the ability
to leverage our infrastructure on strong organic sales growth. The
continued improvement in our financial performance is a result of
investments that we have made over the past several years. We are
encouraged by our performance to date and are confident that we will
achieve increased earnings through growth in organic sales and accretive
acquisitions," concluded Mr. DeCata.

Conference Call

Lawson Products, Inc. will conduct a conference call with investors to
discuss second quarter 2018 results at 9:00 a.m. Eastern Time on
July 26, 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 August 31, 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 33666#. A
streaming audio of the call and an archived replay will also be
available on the investor relations page of Lawson's website through
August 31, 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 retail branches. 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 Income
(Dollars in thousands, except per share data)
(Unaudited)
   
Three Months Ended Six Months Ended
June 30, June 30,
2018   2017 2018   2017
 
Product revenue $ 80,397 $ 75,006 $ 155,367 $ 149,623
Service revenue 9,985     19,474    
Net revenue 90,382 75,006 174,841 149,623
 
Product cost of goods sold 37,856 29,865 72,688 59,603
Service costs 3,395     6,804    
Gross profit 49,131   45,141   95,349   90,020  
 
Operating expenses:
Selling expenses 22,004 23,806 43,944 48,610
General & administrative expenses 21,573   18,866   44,014   38,229  
Total SG&A 43,577 42,672 87,958 86,839
Gain on sale of property   (5,422 )   (5,422 )
Operating expenses 43,577   37,250   87,958   81,417  
 
Operating income 5,554 7,891 7,391 8,603
 
Interest expense (264 ) (166 ) (504 ) (260 )
Other (expense) income, net (777 ) (115 ) (490 ) 110  
 
Income before income taxes 4,513 7,610 6,397 8,453
Income tax expense 1,319   337   1,967   323  
 
Net income $ 3,194   $ 7,273   $ 4,430   $ 8,130  
 
Basic income per share of common stock $ 0.36   $ 0.82   $ 0.50   $ 0.92  
 
Diluted income per share of common stock $ 0.35   $ 0.80   $ 0.48   $ 0.89  
Lawson Products, Inc.
Condensed Consolidated Balance Sheets
(Dollars in thousands, except share data)
(Unaudited)
   
June 30, December 31,
2018 2017
 
ASSETS
Current assets:
Cash and cash equivalents $ 5,992 $ 4,416
Restricted cash 800 800
Accounts receivable, less allowance for doubtful accounts of $447
and $476, respectively
42,613 38,575
Inventories, net 51,032 50,928
Miscellaneous receivables and prepaid expenses 4,295   3,728  
Total current assets 104,732 98,447
 
Property, plant and equipment, net 25,605 27,333
Deferred income taxes 19,892 21,248
Goodwill 18,804 19,614
Cash value of life insurance 12,074 11,964
Intangible assets, net 10,963 11,813
Other assets 316   248  
Total assets $ 192,386   $ 190,667  
 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving lines of credit $ 16,071 $ 14,543
Accounts payable 14,794 12,394
Accrued expenses and other liabilities 29,329   33,040  
Total current liabilities 60,194 59,977
 
Security bonus plan 12,802 12,981
Financing lease obligation 5,833 6,420
Deferred compensation 5,862 5,476
Deferred rent liability 2,452 3,512
Deferred tax liability 3,007 3,115
Other liabilities 4,782   5,696  
Total liabilities 94,932   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 - 8,951,913 and 8,921,302
shares, respectively
Outstanding - 8,918,639 and 8,888,028
shares, respectively
8,952 8,921
Capital in excess of par value 14,298 13,005
Retained earnings 75,554 71,453
Treasury stock – 33,274 shares (711 ) (711 )
Accumulated other comprehensive income (loss) (639 ) 822  
Total stockholders' equity 97,454   93,490  
Total liabilities and stockholders' equity $ 192,386   $ 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 six months ended June 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 six months ended June 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 (Unaudited)
     
Three Months Ended June 30, 2018
Pro-Forma as if
Service previous
Revenues and accounting
Costs guidance was
(Dollars in thousands) As Reported Adjustments in effect
 
Product revenue $ 80,397 $ 9,738 $ 90,135
Service revenue 9,985   (9,985 )  
Net Revenue 90,382   (247 ) 90,135  
 
Product cost of goods sold 37,856 37,856
Service costs 3,395   (3,395 )  
Total cost of goods sold 41,251   (3,395 ) 37,856  
 
Gross profit 49,131 3,148 52,279
Gross profit percentage 54.4 % 58.0 %
 
Selling expenses 22,004 3,078 25,082
General and administrative expenses 21,573     21,573  
Operating expenses 43,577   3,078   46,655  
 
Operating income $ 5,554   $ 70   $ 5,624  
  Six Months Ended June 30, 2018
    Pro-Forma as if
Service previous
Revenues and accounting
Costs guidance was
(Dollars in thousands) As Reported Adjustments in effect
 
Product revenue $ 155,367 $ 19,402 $ 174,769
Service revenue 19,474   (19,474 )  
Net Revenue 174,841   (72 ) 174,769  
 
Product cost of goods sold 72,688 72,688
Service costs 6,804   (6,804 )  
Total cost of goods sold 79,492   (6,804 ) 72,688  
 
Gross profit 95,349 6,732 102,081
Gross profit percentage 54.5 % 58.4 %
 
Selling expenses 43,944 6,624 50,568
General and administrative expenses 44,014     44,014  
Operating expenses 87,958   6,624   94,582  
 
Operating income $ 7,391   $ 108   $ 7,499  
Table 2 - Reconciliation of GAAP Operating Income to Non-GAAP
Adjusted EBITDA
(Dollars in thousands)
(Unaudited)
       
Three Months Ended June 30,
2018 2017
Lawson Bolt Supply
Segment Segment Consolidated Consolidated
 
Operating income, as reported per GAAP $ 4,660 $ 894 $ 5,554 $ 7,891
 
Depreciation and amortization 1,624 55 1,679 1,644
 
Stock-based compensation (1) 87 87 415
 
Severance expense 64 64 (9 )
 
Discontinued operation accrual (2) 529 529
 
Lease termination gain (164 ) (164 )
 
Gain on sale of property (3) (5,422 )
       
Non-GAAP adjusted EBITDA $ 6,800   $ 949   $ 7,749   $ 4,519  
(1)   A portion of stock-based compensation expense varies with the
Company's stock price
 
(2) Additional estimated future remediation of an environmental matter
at the Decatur, Alabama property
 
(3) Gain on Sale of Fairfield, New Jersey distribution center
LAWSON PRODUCTS, INC.
TABLE 3 - QUARTERLY RESULTS (UNAUDITED)
Historic Lawson Segment Sales Representative and Productivity
 
Three Months Ended
Jun. 30   Mar. 31   Dec. 31   Sep. 30   Jun. 30
2018 2018 2017 2017 2017
 
Number of business days 64 63 61 63 64
 
Average daily net sales (Dollars in thousands) $ 1,260 $ 1,213 $ 1,191 $ 1,201 $ 1,172
Year over year increase 7.5 % 4.0 % 6.1 % 9.5 % 8.1 %
Sequential quarter increase (decrease) 3.9 % 1.8 % (0.8 )% 2.5 % 0.5 %
 
Average active sales rep. count (1) 966 968 987 991 981
Period-end active sales rep. count 968 966 983 988 987
 
Sales per rep. per day $ 1,304 $ 1,253 $ 1,207 $ 1,212 $ 1,195
Year over year increase 9.1 % 6.4 % 8.3 % 11.3 % 8.1 %
Sequential quarter increase (decrease) 4.1 % 3.8 % (0.4 )% 1.4 % 1.4 %
(1)   Average active sales rep count represents the average of the
month-ends sales representative count
LAWSON PRODUCTS, INC.
TABLE 4 - CONSOLIDATED QUARTERLY RESULTS (UNAUDITED)
  (Dollars in thousands)
Three Months Ended
Jun. 30   Mar. 31   Dec. 31   Sep. 30   Jun. 30
2018 2018 2017 2017 2017
 
Average daily net sales $ 1,412 $ 1,341 $ 1,322 $ 1,201 $ 1,172
Year over year increase 20.5 % 15.0 % 17.8 % 9.5 % 8.1 %
Sequential quarter increase 5.3 % 1.4 % 10.1 % 2.5 % 0.5 %
 
Net Sales $ 90,382 $ 84,459 $ 80,633 $ 75,651 $ 75,006
Gross profit (1) 49,131 46,218 46,993 46,005 45,141
 
Gross profit percentage (1) 54.4 % 54.7 % 58.3 % 60.8 % 60.2 %
 
Selling, general & administrative expenses $ 43,577 $ 44,381 $ 46,750 $ 44,915 $ 42,672
 
Gain on sale of property (2)         (5,422 )
 
43,577   44,381   46,750   44,915   37,250  
 
Operating income $ 5,554   $ 1,837   $ 243   $ 1,090   $ 7,891  
(1)   Reflects the adoption of ASC 606 effective January 1, 2018 including
the reclassification of $3.1 million and $3.5 million of selling
expense as a reduction of gross profit in the three months ended
June 30, 2018 and March 31, 2018, respectively
 
(2) The three months ended June 30, 2017 includes $5.4 million related
to the sale of the Fairfield, NJ distribution center

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