Distribution Solutions Group, Inc 10-Q for FY2021 Q3
Distribution Solutions Group, Inc. (DSGR)
10-Q
2021-10-28
For: 2021-09-30
View Original
Added on
April 06, 2026
About this 10-Q
Distribution Solutions Group, Inc filed this 10-Q on October 28, 2021, covering the quarter ended September 30, 2021 (FY2021 Q3).
Headline figures
Quarter ended September 30, 2021, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $105.57M
- up 16.9% from $90.28M a year earlier
- Net income
- $3.66M
- up 110.4% from net income of $1.74M a year earlier
- Diluted EPS
- $0.39
- up 105.3% from $0.19 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
| Quarterly Report under Section 13 or 15(d) of the Securities Exchange Act of 1934 | ||||||||
For quarterly period ended September 30, 2021
or
| Transition Report under Section 13 or 15(d) of the Securities Exchange Act of 1934 | ||||||||
For the transition period from to
Commission file Number: 0-10546
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||||||||
| (Address of principal executive offices) | (Zip Code) | |||||||||||||
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol | Name of each exchange on which registered | ||||||||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ý No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ¨ | ☒ | |||||||||
| Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | Smaller reporting company | |||||||||
| Emerging growth company | |||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý
The number of shares outstanding of the registrant’s common stock, $1 par value, as of October 15, 2021 was 9,078,347 .
1
TABLE OF CONTENTS
| Page # | ||||||||
2
“Safe Harbor” Statement under the Securities Litigation Reform Act of 1995:
This Quarterly Report on Form 10-Q 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 actual results to differ materially from those described in the forward-looking statements. Factors that could cause or contribute to such differences or that might otherwise impact the business include:
•the effect of the COVID-19 virus on the overall economy, demand for our products, our supply chain, our employees and our operating results;
•the effect of general economic and market conditions;
•the ability to generate sufficient cash to fund our operating requirements;
•the ability to meet the covenant requirements of our line of credit;
•the market price of our common stock may decline;
•inventory obsolescence;
•work stoppages and other disruptions at transportation centers or shipping ports;
•changing customer demand and product mixes;
•increases in energy costs, tariffs and the cost of raw materials, including commodity prices;
•decreases in demand from oil and gas customers due to lower oil prices;
•disruptions of our information and communication systems;
•cyber attacks or other information security breaches;
•failure to recruit, integrate and retain a talented workforce including productive sales representatives;
•the inability to successfully make or integrate acquisitions into the organization;
•foreign currency fluctuations;
•failure to manage change within the organization;
•highly competitive market;
•changes that affect governmental and other tax-supported entities;
•violations of environmental protection or other governmental regulations;
•negative changes related to tax matters;
•Luther King Capital's significant influence over the Company given its ownership percentage; and
•all other factors discussed in the Company’s “Risk Factors” set forth in its Annual Report on Form 10-K for the year ended December 31, 2020 and in this Quarterly Report on Form 10-Q for the period ended September 30, 2021.
The Company undertakes no obligation to update any such factors or to publicly announce the results of any revisions to any forward-looking statements contained herein whether as a result of new information, future events or otherwise.
3
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
Lawson Products, Inc.
Condensed Consolidated Balance Sheets
(Dollars in thousands, except share data)
| September 30, | December 31, | ||||||||||
| 2021 | 2020 | ||||||||||
| ASSETS | (Unaudited) | ||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Restricted cash | |||||||||||
Accounts receivable, less allowance for doubtful accounts of $ | |||||||||||
| Inventories, net | |||||||||||
| Miscellaneous receivables and prepaid expenses | |||||||||||
| Total current assets | |||||||||||
| Property, plant and equipment, net | |||||||||||
| Goodwill | |||||||||||
| Deferred income taxes | |||||||||||
| Intangible assets, net | |||||||||||
| Cash value of life insurance | |||||||||||
| Right of use assets | |||||||||||
| Other assets | |||||||||||
| Total assets | $ | $ | |||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Accrued acquisition liability | $ | $ | |||||||||
| Accounts payable | |||||||||||
| Lease obligation | |||||||||||
| Accrued expenses and other liabilities | |||||||||||
| Total current liabilities | |||||||||||
| Revolving line of credit | |||||||||||
| Security bonus plan | |||||||||||
| Deferred compensation | |||||||||||
| Lease obligation | |||||||||||
| Deferred tax liability | |||||||||||
| Other liabilities | |||||||||||
| Total liabilities | |||||||||||
| Stockholders’ equity: | |||||||||||
Preferred stock, $ | |||||||||||
Authorized - | |||||||||||
Common stock, $ | |||||||||||
Authorized - Issued - Outstanding - | |||||||||||
| Capital in excess of par value | |||||||||||
| Retained earnings | |||||||||||
Treasury stock – | ( | ( | |||||||||
| Accumulated other comprehensive income | |||||||||||
| Total stockholders’ equity | |||||||||||
| Total liabilities and stockholders’ equity | $ | $ | |||||||||
See notes to condensed consolidated financial statements.
4
Lawson Products, Inc.
Condensed Consolidated Statements of Income and Comprehensive Income
(Dollars in thousands, except per share data)
(Unaudited)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Revenue | $ | $ | $ | $ | |||||||||||||||||||
| Cost of goods sold | |||||||||||||||||||||||
| Gross profit | |||||||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Selling expenses | |||||||||||||||||||||||
| General and administrative expenses | |||||||||||||||||||||||
| Operating expenses | |||||||||||||||||||||||
| Operating income | |||||||||||||||||||||||
| Interest expense | ( | ( | ( | ( | |||||||||||||||||||
| Other income (expense), net | ( | ||||||||||||||||||||||
Income before income taxes | |||||||||||||||||||||||
| Income tax expense | |||||||||||||||||||||||
| Net income | $ | $ | $ | $ | |||||||||||||||||||
Basic income per share of common stock | $ | $ | $ | $ | |||||||||||||||||||
Diluted income per share of common stock | $ | $ | $ | $ | |||||||||||||||||||
| Weighted average shares outstanding: | |||||||||||||||||||||||
| Basic weighted average shares outstanding | |||||||||||||||||||||||
| Effect of dilutive securities outstanding | |||||||||||||||||||||||
Diluted weighted average shares outstanding | |||||||||||||||||||||||
| Comprehensive income: | |||||||||||||||||||||||
| Net income | $ | $ | $ | $ | |||||||||||||||||||
| Other comprehensive income (expense), net of tax | |||||||||||||||||||||||
| Adjustment for foreign currency translation | ( | ( | |||||||||||||||||||||
| Net comprehensive income | $ | $ | $ | $ | |||||||||||||||||||
See notes to condensed consolidated financial statements.
5
Lawson Products, Inc.
Condensed Consolidated Statements of Changes in Stockholders’ Equity
(Dollars in thousands)
(Unaudited)
| Common Stock | Capital in Excess of Par Value | Accumulated Other Comprehensive Income | Total Stockholders' Equity | ||||||||||||||||||||||||||||||||||||||
| Outstanding Shares | $1 Par Value | Retained Earnings | Treasury Stock | ||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2020 | $ | $ | $ | $ | ( | $ | $ | ||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Adjustment for foreign currency translation | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Shares issued | ( | — | — | — | |||||||||||||||||||||||||||||||||||||
| Shares repurchased held in treasury | ( | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||
| Balance at March 31, 2021 | $ | $ | $ | $ | ( | $ | $ | ||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Adjustment for foreign currency translation | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Shares issued | ( | — | — | — | |||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2021 | $ | $ | $ | $ | ( | $ | $ | ||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Adjustment for foreign currency translation | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Shares issued | ( | — | — | — | |||||||||||||||||||||||||||||||||||||
| Shares repurchased held in treasury | ( | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||
| Balance at September 30, 2021 | $ | $ | $ | $ | ( | $ | $ | ||||||||||||||||||||||||||||||||||
6
Lawson Products, Inc.
Condensed Consolidated Statements of Changes in Stockholders’ Equity
(Dollars in thousands)
(Unaudited)
| Common Stock | Capital in Excess of Par Value | Accumulated Other Comprehensive Loss | Total Stockholders' Equity | ||||||||||||||||||||||||||||||||||||||
| Outstanding Shares | $1 Par Value | Retained Earnings | Treasury Stock | ||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2019 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||||||||
Net income | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Shares repurchased held in treasury | ( | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||
Adjustment for foreign currency translation | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||
Stock-based compensation | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2020 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||||||||
| Net income | — | $ | — | $ | — | $ | $ | — | $ | — | |||||||||||||||||||||||||||||||
| Adjustment for foreign currency translation | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Shares issued | — | — | — | ||||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2020 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||||||||
| Net income | — | $ | — | $ | — | $ | $ | — | $ | — | |||||||||||||||||||||||||||||||
| Treasury stock repurchase | ( | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||
| Adjustment for foreign currency translation | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Shares issued | ( | — | — | — | |||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2020 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||||||||
See notes to condensed consolidated financial statements.
7
Lawson Products, Inc.
Condensed Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
| Nine Months Ended September 30, | |||||||||||
| 2021 | 2020 | ||||||||||
| Operating activities: | |||||||||||
| Net income | $ | $ | |||||||||
| Adjustments to reconcile net income to net cash used in operating activities: | |||||||||||
| Depreciation and amortization | |||||||||||
| Stock-based compensation | ( | ||||||||||
| Deferred income taxes | ( | ||||||||||
| Changes in operating assets and liabilities, net of acquisition | |||||||||||
| Accounts receivable | ( | ( | |||||||||
| Inventories | ( | ||||||||||
| Miscellaneous receivables, prepaid expenses and other assets | ( | ( | |||||||||
| Accounts payable and other liabilities | |||||||||||
| Other | |||||||||||
| Net cash provided by operating activities | $ | $ | |||||||||
| Investing activities: | |||||||||||
| Purchases of property, plant and equipment | $ | ( | $ | ( | |||||||
| Business acquisition | ( | ( | |||||||||
| Net cash used in investing activities | $ | ( | $ | ( | |||||||
| Financing activities: | |||||||||||
| Net proceeds from revolving line of credit | $ | $ | ( | ||||||||
| Repurchase treasury shares | ( | ( | |||||||||
| Payment of financing lease principal | ( | ( | |||||||||
| Proceeds from stock option exercise | |||||||||||
| Net cash provided by (used in) financing activities | $ | $ | ( | ||||||||
| Effect of exchange rate changes on cash and cash equivalents | $ | $ | ( | ||||||||
| Increase (decrease) in cash, cash equivalents and restricted cash | ( | ||||||||||
| Cash, cash equivalents and restricted cash at beginning of period | |||||||||||
| Cash, cash equivalents and restricted cash at end of period | $ | $ | |||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Restricted cash | |||||||||||
| Cash, cash equivalents and restricted cash | $ | $ | |||||||||
| Supplemental disclosure of cash flow information | |||||||||||
| Net cash paid for income taxes | $ | $ | |||||||||
| Net cash paid for interest | $ | $ | |||||||||
| Additions of property, plant and equipment included in accounts payable | $ | $ | |||||||||
See notes to condensed consolidated financial statements.
8
Notes to Condensed Consolidated Financial Statements
Note 1 — Basis of Presentation and Summary of Significant Accounting Policies
9
Note 2 - Acquisition
On August 31, 2020, the Company acquired Partsmaster from NCH Corporation. Partsmaster is a leading maintenance, MRO solutions provider that serves approximately 16,000 customers with approximately 200 sales representatives. The acquisition was made primarily to expand the Company's sales coverage, expand product lines, add experienced sales representatives, and leverage the Company's infrastructure.
The purchase price was $35.3 million in cash plus the assumption of certain liabilities. The Company paid $2.3 million of the purchase price in cash at closing and paid the remaining $33.0 million in May 2021. The payment obligation was discounted to present value and recognized as an accrued acquisition liability of $32.7 million as of December 31, 2020 in the Company's condensed consolidated balance sheet. Interest expense of $0.3 million was recorded in the nine months ended September 30, 2021. Payment was guaranteed under the Purchase Agreement, and included the issuance of a $33.0 million irrevocable standby letter of credit. The letter of credit was released upon payment of the acquisition liability in May 2021.
The purchase price of the acquisition was allocated to the fair value of Partsmaster’s assets and liabilities on the acquisition date. The fair market value appraisals of the majority of the assets and liabilities was determined by a third party valuation firm using management estimates and assumptions including intangible assets of $5.0 million for customer relationships and $2.8 million for trade names, and their estimated useful lives of 10 and 5 years, respectively. The $15.8 million allocated to goodwill reflects the purchase price less the fair market value of the identifiable net assets. The goodwill is attributable to the workforce of the acquired business and the synergies expected to arise after Lawson's acquisition of Partsmaster. The entire amount of goodwill is expected to be deductible for tax purposes.
The accounting for this acquisition was complete as of June 30, 2021. Partsmaster contributed $13.6 million of revenue and an operating loss of $0.8 million in the third quarter of 2021 and $44.6 million of revenue and $0.4 million of operating income in the first nine months of 2021, compared to $5.4 million of revenue and $0.4 million of operating income in the third quarter 2020 post acquisition.
A summary of the purchase price allocation of the acquisition is as follows (Dollars in thousands):
| Cash paid and payable and liabilities assumed | ||||||||
| Cash paid | $ | |||||||
| Accounts payable and accrued expenses | ||||||||
| Deferred compensation | ||||||||
| Lease obligation | ||||||||
| $ | ||||||||
| Fair value of assets acquired | ||||||||
| Goodwill | $ | |||||||
| Inventories | ||||||||
| Accounts receivable | ||||||||
| Customer relationships | ||||||||
| Trade names | ||||||||
| Property, plant and equipment | ||||||||
| Right of use asset | ||||||||
| Other assets | ||||||||
| $ | ||||||||
The unaudited pro forma revenue and net income for the Company for the three months ended September 30, 2020, assuming the Partsmaster acquisition closed on January 1, 2019, was $101.2 million and $2.0 million, respectively. The unaudited pro forma revenue and net income for the Company for the nine months ended September 30, 2020, assuming the Partsmaster acquisition closed on January 1, 2019, was $298.5 million and $16.3 million, respectively.
The pro forma disclosures include adjustments for amortization of intangible assets, implied interest expense and acquisition costs to reflect results as if the acquisition of Partsmaster had closed on January 1, 2019 rather than on the actual
10
Note 3 - Revenue Recognition
As part of the Company's revenue recognition analysis, it concluded that it has two separate performance obligations, and accordingly, two separate revenue streams: products and services. Under the definition of a contract as defined by Accounting Standards Codification 606, Revenue From Contracts With Customers ("ASC 606"), the Company considers contracts to be created at the time an order to purchase product and services is agreed upon regardless of whether or not there is a written contract.
Performance Obligations
The Company has two operating segments; the Lawson segment and the Bolt Supply segment.
The Lawson segment has two distinct performance obligations from contracts with its customers: a product performance obligation and a service performance obligation. While the Company offers both a product and a service obligation, customers receive one invoice per transaction with no price breakout between these obligations. The Company does not separately price performance obligations.
The Lawson segment generates revenue primarily from the sale of MRO products to its customers. Revenues related to product sales is recognized at the time that control of the product has been transferred to the customer, either at the time the product is shipped or the time the product has been received by the customer. The Company does not commit to long-term contracts to sell customers a certain minimum quantity of products.
The Lawson segment, including the recent Partsmaster acquisition, offers a vendor managed inventory ("VMI") service proposition to its customers. A portion of these services, primarily related to stocking of product and maintenance of the MRO inventory, is provided a short period of time after control of the purchased product has been transferred to the customer. Since some components of VMI service have not been provided at the time the control of the product transfers to the customer, that portion of expected consideration is deferred until the time that those services have been provided.
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| (Dollars in thousands) | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||
| United States | $ | $ | $ | $ | |||||||||||||||||||
| Canada | |||||||||||||||||||||||
| Consolidated total | $ | $ | $ | $ | |||||||||||||||||||
11
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Fastening Systems | % | % | % | % | |||||||||||||||||||
| Cutting Tools and Abrasives | % | % | % | % | |||||||||||||||||||
| Fluid Power | % | % | % | % | |||||||||||||||||||
| Specialty Chemicals | % | % | % | % | |||||||||||||||||||
| Electrical | % | % | % | % | |||||||||||||||||||
| Aftermarket Automotive Supplies | % | % | % | % | |||||||||||||||||||
| Safety | % | % | % | % | |||||||||||||||||||
| Welding and Metal Repair | % | % | % | % | |||||||||||||||||||
| Other | % | % | % | % | |||||||||||||||||||
| Consolidated Total | |||||||||||||||||||||||
Activities as lessor
Prior to acquisition, Partsmaster leased parts washer machines to customers through its Torrents leasing program. The Torrents leasing program comprised a minor portion of the Partsmaster business. The Company will continue the leasing program for the foreseeable future. These leases are classified as operating leases. The leased machines are recognized as fixed assets on the Company's consolidated balance sheet and the leasing revenue is recognized on a straight line basis over the leasing term. The Torrents machine leasing program generated $0.8 million and $2.2 million of revenue in the three and nine months ended September 30, 2021. The carrying value of the Torrents leasing assets as of September 30, 2021 is $1.0 million. The Company has adopted the practical expedient not to separate non-lease components that would be within the scope of ASC 606 from the associated lease components as the relevant criteria under ASC 842 are met.
Note 4 — Restricted Cash
Note 5 — Inventories
| (Dollars in thousands) | |||||||||||
| September 30, 2021 | December 31, 2020 | ||||||||||
| Inventories, gross | $ | $ | |||||||||
| Reserve for obsolete and excess inventory | ( | ( | |||||||||
| Inventories, net | $ | $ | |||||||||
12
Note 6 - Goodwill
Goodwill activity for the first nine months of 2021 is included in the table below:
| (Dollars in Thousands) | ||||||||||||||||||||
| Goodwill By Reportable Segment | ||||||||||||||||||||
| Lawson | Bolt | Total | ||||||||||||||||||
| Beginning balance December 31, 2020 | $ | $ | $ | |||||||||||||||||
| Impact of foreign exchange rates | ||||||||||||||||||||
| Balance at September 30, 2021 | $ | $ | $ | |||||||||||||||||
Note 7 - Intangible Assets
| (Dollars in thousands) | |||||||||||||||||||||||||||||||||||
| September 30, 2021 | December 31, 2020 | ||||||||||||||||||||||||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Net Carrying Value | Gross Carrying Amount | Accumulated Amortization | Net Carrying Value | ||||||||||||||||||||||||||||||
| Trade names | $ | $ | ( | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||
| Customer relationships | ( | ( | |||||||||||||||||||||||||||||||||
| $ | $ | ( | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||
Note 8 - Leases
Activities as Lessee
The Company leases equipment, distribution centers, office space, and branch locations throughout the US and Canada.
Expenses related to leasing activities for the three months ended September 30, 2021 and September 30, 2020 are as follows (Dollars in thousands):
| Three Months Ended September 30, | ||||||||||||||||||||
| Lease Type | Classification | 2021 | 2020 | |||||||||||||||||
| Operating Lease Expense | Operating expenses | $ | $ | |||||||||||||||||
| Financing Lease Amortization | Operating expenses | $ | ||||||||||||||||||
| Financing Lease Interest | Interest expense | |||||||||||||||||||
| Financing Lease Expense | ||||||||||||||||||||
| Net Lease Cost | $ | $ | ||||||||||||||||||
Expenses related to leasing activities for the nine months ended September 30, 2021 and September 30, 2020 are as follows (Dollars in thousands):
13
| Nine Months Ended September 30, | ||||||||||||||||||||
| Lease Type | Classification | 2021 | 2020 | |||||||||||||||||
| Operating Lease Expense | Operating expenses | $ | $ | |||||||||||||||||
| Financing Lease Amortization | Operating expenses | $ | ||||||||||||||||||
| Financing Lease Interest | Interest expense | |||||||||||||||||||
| Financing Lease Expense | ||||||||||||||||||||
| Net Lease Cost | $ | $ | ||||||||||||||||||
Net assets and liabilities related to leasing activities as of September 30, 2021 and December 31, 2020 are as follows (Dollars in thousands):
| Lease Type | September 30, 2021 | December 31, 2020 | ||||||||||||
Total Right Of Use ("ROU") operating lease assets (1) | $ | $ | ||||||||||||
Total ROU financing lease assets (2) | ||||||||||||||
| Total lease assets | $ | $ | ||||||||||||
Total current operating | $ | $ | ||||||||||||
Total current financing | ||||||||||||||
| Total current lease obligations | $ | $ | ||||||||||||
Total long term operating | $ | $ | ||||||||||||
Total long term financing | ||||||||||||||
| Total long term lease obligation | $ | $ | ||||||||||||
(1) Operating lease assets are recorded net of accumulated amortization of $8.7 million and $5.9 million as of September 30, 2021 and December 31, 2020, respectively
(2) Financing lease assets are recorded net of accumulated amortization of $0.6 million and $0.4 million as of September 30, 2021 and December 31, 2020, respectively
Liabilities generated by leasing activities as of September 30, 2021 were as follows (Dollars in thousands):
| Maturity Date of Lease Liabilities | Operating Leases | Financing Leases | Total | |||||||||||||||||
| Year one | $ | $ | $ | |||||||||||||||||
| Year two | ||||||||||||||||||||
| Year three | ||||||||||||||||||||
| Year four | ||||||||||||||||||||
| Year five | ||||||||||||||||||||
| Subsequent years | ||||||||||||||||||||
| Total lease payments | ||||||||||||||||||||
| Less: Interest | ||||||||||||||||||||
| Present value of lease liabilities | $ | $ | $ | |||||||||||||||||
(1) Minimum lease payments exclude payments to landlord for real estate taxes and common area maintenance $0.6 million
14
The weighted average lease terms and interest rates of the leases held by Lawson as of September 30, 2021 are as follows:
| Lease Type | Weighted Average Term in Years | Weighted Average Interest Rate | ||||||||||||
| Operating Leases | ||||||||||||||
| Financing Leases | ||||||||||||||
The cash outflows of the leasing activity for the three months ending September 30, 2021 are as follows (Dollars in thousands):
| Cash Flow Source | Classification | Amount | ||||||||||||
| Operating cash flows from operating leases | Operating activities | $ | ||||||||||||
| Operating cash flows from financing leases | Operating activities | |||||||||||||
| Financing cash flows from financing leases | Financing activities | |||||||||||||
In March 2021 the Company signed a three year extension for their lease at the McCook distribution center ("McCook"). The lease extension created a right of use asset of $5.3 million and a lease liability of $5.3 million.
Refer to Note 3 - Revenue Recognition for a discussion on Lawson activities as lessor.
Note 9 — Revolving Credit Facility
The Revolving Credit Facility matures on October 11, 2024 and provides $100.0 million of revolving commitments. Net of outstanding letters of credit, the Company had $87.4 million of borrowing availability under the Revolving Credit Facility as of September 30, 2021 and $66.0 million as of December 31, 2020. Weighted average interest rates for the nine months ended September 30, 2021 and September 30, 2020 were 2.88 % and 2.64 %, respectively.
Fees are reported as interest expense and include customary charges relating to letters of credit and an unused commitment fee ranging from 0.15 % to 0.30 %, depending on the Total Net Leverage Ratio as defined in the Credit Agreement. Fees for both the nine months ended September 30, 2021 and September 30, 2020 were $0.1
In connection with the Revolving Credit Facility originated in 2019, deferred financing costs of $0.6 million were incurred. Deferred financing costs are amortized over the life of the debt instrument and reported as interest expense. As of September 30, 2021 and December 31, 2020 deferred financing costs net of accumulated amortization were $0.3 million and $0.4 million, respectively, and are included in Other assets.
Borrowings are designed as alternate base rate loans, Canadian prime rate loans, Eurodollar loans, and Canadian dollar offered rate loans. Interest rates vary by the type of borrowing and Total Net Leverage Ratio as defined in the Credit Agreement of the most recent fiscal quarter.
The Revolving Credit Facility includes customary financial covenants representations and warranties. The Company was in compliance with all financial covenants as of September 30, 2021.
Note 10 - Accrued Acquisition Liability
15
Note 11 - Stock Repurchase Program
Note 12 - Severance Reserve
Changes in the Company’s reserve for severance included in Accrued expenses and other liabilities, as of September 30, 2021 and 2020 were as follows:
| (Dollars in thousands) | |||||||||||
| Nine Months Ended September 30, | |||||||||||
| 2021 | 2020 | ||||||||||
| Balance at beginning of period | $ | $ | |||||||||
| Charged to earnings | |||||||||||
| Payments | ( | ( | |||||||||
| Balance at end of period | $ | $ | |||||||||
Note 13 - Stock-Based Compensation
The Company recorded stock-based compensation benefit of $1.2 million and expense of $4.7 million for the three months ending September 30, 2021 and 2020, respectively, and expense of $1.4 million and benefit of $2.8 million for the nine months ending September 30, 2021 and 2020, respectively. A portion of stock-based compensation is related to the change in the market value of the Company's common stock. Stock-based compensation liability of $14.0 million as of September 30, 2021 and $14.4 million as of December 31, 2020 is included in Accrued expenses and other liabilities.
A summary of stock-based awards issued during the nine months ended September 30, 2021 follows:
Restricted Stock Units ("RSUs")
The Company issued 7,862 RSUs to key employees that cliff vest on December 31, 2023. The Company issued 2,000 RSUs to one key employee that vest ratably through June 15, 2023 and 5,000 RSUs to one key employee that cliff vest on April 15, 2024. Additionally the Company issued 28,600 RSUs to various employees that vest ratably through May 16, 2024. The Company issued 6,995 RSUs to certain members of the Company's Board of Directors with a vesting date of May 11, 2022. Each RSU is exchangeable for one share of the Company's common stock at the end of the vesting period.
Market Stock Units ("MSUs")
The Company issued 19,688 MSUs to key employees that cliff vest on December 31, 2023. MSUs are exchangeable for the Company's common stock at the end of the vesting period. The number of shares of common stock that will be issued upon vesting, ranging from zero to 29,532 shares, will be determined based upon the trailing sixty-day average closing price of the Company's common stock on December 31, 2023.
Performance Awards ("PAs")
The Company issued 15,723 PAs to key employees that cliff vest on December 31, 2023. PAs are exchangeable for shares of the Company's common stock ranging from zero to 23,585 shares, or the equivalent amount in cash, based upon the achievement of certain financial performance metrics.
16
Note 14 — Income Taxes
The Company recorded income tax expense of $2.7 million, a 21.1 % effective tax rate for the nine months ended September 30, 2021. The effective tax rate approximates the U.S. statutory tax rate as state taxes and other permanent items are offset by the reversal of uncertain tax positions. Income tax expense of $6.0 million, a 28.7 % effective tax rate was recorded for the nine months ended September 30, 2020. The effective tax rate is higher than the U.S. statutory rate due primarily to state taxes, recording of reserves for uncertain tax positions, and an inclusion for Global Intangible Low Tax Income.
The Company and its subsidiaries are subject to U.S. Federal income tax, as well as income tax of multiple state and foreign jurisdictions. As of September 30, 2021, the Company is subject to U.S. Federal income tax examinations for the years 2017 through 2019 and income tax examinations from various other jurisdictions for the years 2014 through 2019.
Note 15 — Contingent Liabilities
In 2012, it was determined a Company owned site in Decatur, Alabama, contained hazardous substances in the soil and groundwater as a result of historical operations prior to the Company's ownership. The Company retained an environmental consulting firm to further investigate the contamination, prepare a remediation plan, and enroll the site in the Alabama Department of Environmental Management (“ADEM") voluntary cleanup program.
The remediation plan, approved by ADEM in 2018, consists of chemical injections throughout the affected area and subsequent monitoring. The injection process was completed in the first quarter of 2019 and monitoring is ongoing pending certification by ADEM. At September 30, 2021 estimated costs for future monitoring are not significant and have been fully accrued. The Company does not expect to capitalize any amounts related to the remediation plan.
Note 16 — Related Party Transaction
17
Note 17 – Segment Information
The Company's operating segments, Lawson and Bolt, also represent its reportable segments because of differences in the businesses' financial characteristics and the methods they employ to deliver product to customers. The results of the Company's operating segments are reviewed by the Company’s chief operating decision maker responsible for reviewing operating performance and allocating resources. The Lawson segment primarily relies on its large network of sales representatives to visit the customer at the customers' location and produce sales orders for product that is then shipped to the customer and it also provides VMI services. The Bolt segment primarily sells product to customers when the customers visit one of Bolt's 14 branch locations and the product is delivered to the customers at the point of sale. The Bolt segment total assets include the value of the acquired intangibles and the related amortization within its operating income.
Financial information for the Company's reportable segments follows:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Revenue | |||||||||||||||||||||||
| Lawson | $ | $ | $ | $ | |||||||||||||||||||
| Bolt Supply | |||||||||||||||||||||||
| Consolidated total | $ | $ | $ | $ | |||||||||||||||||||
| Gross profit | |||||||||||||||||||||||
| Lawson | $ | $ | $ | $ | |||||||||||||||||||
| Bolt Supply | |||||||||||||||||||||||
| Consolidated total | $ | $ | $ | $ | |||||||||||||||||||
| Operating income | |||||||||||||||||||||||
| Lawson | $ | $ | $ | $ | |||||||||||||||||||
| Bolt Supply | |||||||||||||||||||||||
| Consolidated total | |||||||||||||||||||||||
| Interest expense | ( | ( | ( | ( | |||||||||||||||||||
| Other income (expense), net | ( | ||||||||||||||||||||||
| Income before income taxes | $ | $ | $ | $ | |||||||||||||||||||
Note 18 - COVID-19 Risks and Uncertainties
There is substantial uncertainty as to the effect the COVID-19 pandemic will have on the future results of the Company. Various events related to COVID-19 may impact revenue, product sourcing, sales functions, and customers' ability to pay timely.
The government of the State of Illinois defines Lawson Products as an essential business. A change in this status could result in the temporary closure of our business if the COVID-19 pandemic worsens, and government restrictions are reimposed to require business shutdowns. The COVID-19 pandemic could result in a temporary closure of any or all of our office space, distribution facilities, or Bolt branch locations, as well as disruptions to our supply chain and interactions with our suppliers and customers. The pandemic may have a material adverse impact on future financial results, liquidity, and overall performance of the Company. It is reasonably possible that estimates made in the financial statements may be materially and adversely impacted as a result of these conditions, including delay in payment of receivables, impairment losses related to goodwill and other long-lived assets, and inability to utilize deferred tax assets.
On March 27, 2020, Congress enacted the Coronavirus Aid, Relief, and Economic Security ("CARES") Act to provide certain relief as a result of the COVID-19 outbreak. The Company has elected to defer the employer side social security payments in accordance with the CARES Act. The total amount deferred is $3.5 million, with $1.7 million expected to be paid in the fourth quarter of 2021 and the remainder in 2022. The Company will continue to evaluate how the provisions of the CARES Act will impact its financial position, results of operations and cash flows.
18
19
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Partsmaster Acquisition
In August 2020, we acquired Partsmaster, a leading Maintenance, Repair and Operations ("MRO") distributor from NCH Corporation, with approximately 200 sales representatives and approximately 16,000 customers throughout the United States and Canada. The purchase price of the acquisition was $35.3 million in cash and the assumption of certain liabilities. We paid $2.3 million at the time of the acquisition and paid the remaining $33.0 million in May 2021. Partsmaster contributed $13.6 million of revenue and an operating loss of $0.8 million in the third quarter of 2021 and $44.6 million of revenue and $0.4 million of operating income in the first nine months of 2021.
Additional information related to the Partsmaster acquisition is provided in Note 2 - Acquisition in the notes to the condensed consolidated financial statements.
COVID-19 Pandemic
There is substantial uncertainty as to the effect the COVID-19 pandemic will have on the future results of the Company. Various events related to COVID-19 may impact revenue, product sourcing, sales functions, and customers' ability to pay timely.
The government of the State of Illinois continues to define Lawson Products as an essential business. A change in this status could result in the temporary closure of our business. The COVID-19 pandemic could result in a temporary closure of any or all of our office space, distribution facilities, or Bolt branch locations, as well as disruptions to our supply chain and interactions with customers. The pandemic may have a material adverse impact on future financial results, liquidity, and overall performance of the Company. It is possible that estimates made in the financial statements may be materially and adversely impacted as a result of COVID's future path, including delay in payment of receivables, impairment losses related to goodwill and other long-lived assets, and inability to utilize deferred tax assets.
On March 27, 2020, Congress enacted the Coronavirus Aid, Relief, and Economic Security ("CARES") Act to provide certain relief as a result of the COVID-19 outbreak. The Company has elected to defer the employer side social security payments in accordance with the CARES Act. The total amount deferred is $3.5 million, with $1.7 million expected to be paid in 2021 and the remainder in 2022. The Company will continue to evaluate how the provisions of the CARES Act will impact its financial position, results of operations and cash flows.
The onset of the COVID-19 pandemic occurred in March 2020. This resulted in widespread closures of businesses, decreased travel and other substantial restrictions on economic activity beginning in the first quarter of 2020. The most severe restrictions were effective in the second quarter of 2020, particularly the month of April. These restrictions began to be relaxed subsequent to April 2020, which led to an improved business climate and increased economic activity throughout the remainder of the year. The relaxed restrictions continued in the first nine months of 2021, which led to increased business activity and contributed to improved operating results compared to the first nine months of 2020.
We will continue to closely monitor the overall economic and operating environment and we will take appropriate actions to protect the safety of our employees, customers and suppliers. While we believe that COVID-19 and supply chain disruptions continue to negatively impact our sales and cost control measures, our ability to effectively service our customers have continued to generate positive cash flow that has enabled us to maintain a strong financial position. We plan to continue to respond to pandemic developments in a prompt and disciplined manner with an emphasis on maintaining our strong financial position.
Sales Drivers
The MRO distribution industry is highly fragmented. We compete for business with several national distributors as well as a large number of regional and local distributors. The MRO business is significantly impacted by the overall strength of the manufacturing sector of the U.S. economy which was significantly affected by the COVID-19 pandemic. One measure used to evaluate the strength of the industrial products market is the PMI index published by the Institute for Supply Management, which is considered by many economists to be a reliable near-term economic barometer of the manufacturing sector. A measure
20
above 50 generally indicates expansion of the manufacturing sector while a measure below 50 generally represents contraction. The average monthly PMI was 60.2 in the third quarter of 2021 compared to 55.2 in the third quarter of 2020.
Our sales are also influenced by the number of sales representatives and their productivity. Our average sales rep headcount for the third quarter of 2021 was 1,076 sales representatives, inclusive of the Partsmaster sales representatives. This is compared to the average sales rep headcount of 993 sales reps in the third quarter of 2020, which only included Partsmaster sales reps for the one-month post-acquisition period of the month of September 2020. Lawson segment sales representative productivity, measured as sales per rep per day and including Partsmaster sales reps, increased 8.2% to $1.352 in the third quarter of 2021 compared to $1.249 in the prior year quarter. Partsmaster contributed $13.6 million in sales in the third quarter of 2021 compared to $5.4 million in sales in the third quarter of 2020 for one-month post-acquisition. Excluding the impact of Partsmaster, sales rep productivity measured as average sales per rep per day increased 19.9% compared to the year ago quarter, primarily driven by the improved business conditions and fewer pandemic-related restrictions in the third quarter of 2021 compared to the year ago quarter. This was partially offset by the negative impacts of supply chain issues that have affected the broader economy throughout this year. We have instituted various price increases during 2021 in response to rising supplier, transportation and labor costs. We plan to continue concentrating our efforts on increasing the productivity of our sales representatives.
Supply Chain Disruptions
Along with the broader economy, we are experiencing additional pressure in our supply chain, labor shortages and inflation. This results in challenges in acquiring and receiving inventory in a timely fashion, fulfilling customer orders and increased product costs. Further discussion in included within the financial discussion of the Management's Discussion and Analysis of Financial Condition and Results of Operations.
Non-GAAP Financial Measure - Adjusted Non-GAAP Operating Income
We believe that certain non-GAAP financial measures provides additional meaningful comparisons between current results and results in prior operating periods. We believe that these non-GAAP financial measures can help identify underlying trends of the business because they provide a comparison of historical information that excludes certain infrequently occurring, seasonal or non-operational items that impact the overall comparability. These non-GAAP financial measures should be viewed in addition to, and not as an alternative for, our reported results prepared in accordance with GAAP.
Adjusted operating income is defined by us as GAAP operating income excluding stock-based compensation, severance expenses, acquisition costs, and other non-recurring items in the period in which these items are incurred. Operating income was $4.6 million for the third quarter of 2021 compared to $2.0 million for the third quarter of 2020. Excluding stock-based compensation, severance expense, acquisition costs and other non-recurring items, adjusted non-GAAP operating income was $7.3 million in the third quarter of 2021 compared to $7.7 million in the third quarter of 2020 and $21.4 million for the first nine months of 2021 compared to $20.5 million for the prior year period.
The decrease in adjusted non-GAAP operating income in the third quarter 2021 compared to the prior year quarter was driven by increased supplier costs, higher selling expenses due to higher sales, and restored salary and compensation costs compared to the prior year quarter. The increase in adjusted non-GAAP operating income for the nine months ended September 2021 compared to the prior year period is driven by increased sales year to date in 2021 compared to the prior year as the overall business environment improved and pandemic-related restrictions were relaxed in the first nine months of 2021 compared to the prior year. Additionally, the inclusion of Partsmaster for the full year contributed $1.2 million of adjusted non-GAAP operating income in the first nine months of 2021 compared to $0.4 million of adjusted non-GAAP operating income contributed in the one-month post-acquisition period of September 2020. This was partially offset by the negative impacts of supply chain issues impacting the Company and the broader economy.
21
| Reconciliation of GAAP Operating Income to Adjusted Non-GAAP Operating Income (Unaudited) | ||||||||||||||||||||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
| (Dollars in Thousands) | 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||||
| Operating income as reported by GAAP | $ | 4,620 | $ | 2,001 | $ | 12,812 | $ | 21,208 | ||||||||||||||||||
Stock based compensation (1) | (1,171) | 4,746 | 1,403 | (2,767) | ||||||||||||||||||||||
Inventory reserves (2) | 425 | — | 1,750 | — | ||||||||||||||||||||||
| Severance expense and employee acquisition costs | 241 | 961 | 846 | 2,075 | ||||||||||||||||||||||
Costs related to potential acquisitions (3) | 3,222 | — | 4,576 | — | ||||||||||||||||||||||
| Adjusted non-GAAP operating income | $ | 7,337 | $ | 7,708 | $ | 21,387 | $ | 20,516 | ||||||||||||||||||
(1) Expense for stock-based compensation, of which a portion varies with the Company's stock price
(2) Expense for Partsmaster inventory rationalization plan and write-down of personal protective equipment (PPE) to net
realizable value
(3) Including costs related to the evaluation of the LKCM proposal disclosed in a Schedule 13D amendment filed on
May 17, 2021
22
Three months ended September 30, 2021 compared to three months ended September 30, 2020
| 2021 | 2020 | ||||||||||||||||||||||
| (Dollars in thousands) | Amount | % of Net Sales | Amount | % of Net Sales | |||||||||||||||||||
| Revenue | $ | 105,570 | 100.0 | % | $ | 90,277 | 100.0 | % | |||||||||||||||
| Cost of goods sold | 49,524 | 46.9 | % | 43,052 | 47.7 | % | |||||||||||||||||
| Gross profit | 56,046 | 53.1 | % | 47,225 | 52.3 | % | |||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Selling expenses | 24,908 | 23.6 | % | 19,155 | 21.2 | % | |||||||||||||||||
| General and administrative expenses | 26,518 | 25.1 | % | 26,069 | 28.9 | % | |||||||||||||||||
| Total operating expenses | 51,426 | 48.7 | % | 45,224 | 50.1 | % | |||||||||||||||||
| Operating income | 4,620 | 4.4 | % | 2,001 | 2.2 | % | |||||||||||||||||
| Interest expense | (119) | (0.1) | % | (142) | (0.2) | % | |||||||||||||||||
| Other income (expenses), net | (209) | (0.2) | % | 615 | 0.7 | % | |||||||||||||||||
Income before income taxes | 4,292 | 4.1 | % | 2,474 | 2.7 | % | |||||||||||||||||
| Income tax expense | 636 | 0.6 | % | 736 | 0.8 | % | |||||||||||||||||
| Net income | $ | 3,656 | 3.5 | % | $ | 1,738 | 1.9 | % | |||||||||||||||
Revenue and Gross Profits
| Three Months Ended September 30, | Increase | ||||||||||||||||||||||
| (Dollars in thousands) | 2021 | 2020 | Amount | % | |||||||||||||||||||
| Revenue | |||||||||||||||||||||||
| Lawson | $ | 93,686 | $ | 79,806 | $ | 13,880 | 17.4% | ||||||||||||||||
| Bolt Supply | 11,884 | 10,471 | 1,413 | 13.5% | |||||||||||||||||||
| Consolidated | $ | 105,570 | $ | 90,277 | $ | 15,293 | 16.9% | ||||||||||||||||
| Gross profit | |||||||||||||||||||||||
| Lawson | $ | 51,127 | $ | 43,038 | $ | 8,089 | 18.8% | ||||||||||||||||
| Bolt Supply | 4,919 | 4,187 | 732 | 17.5% | |||||||||||||||||||
| Consolidated | $ | 56,046 | $ | 47,225 | $ | 8,821 | 18.7% | ||||||||||||||||
| Gross profit margin | |||||||||||||||||||||||
| Lawson | 54.6 | % | 53.9 | % | |||||||||||||||||||
| Bolt Supply | 41.4 | % | 40.0 | % | |||||||||||||||||||
| Consolidated | 53.1 | % | 52.3 | % | |||||||||||||||||||
23
Revenue
Total sales increased 16.9% to $105.6 million in the third quarter of 2021 compared to $90.3 million in the third quarter of 2020. The increase was primarily driven by the inclusion of $13.6 million of Partsmaster sales in 2021 compared to $5.4 million of Partsmaster sales in the third quarter 2020 one-month post-acquisition period and improved business conditions from a year ago. Overall, business conditions improved in the third quarter of 2021 compared to the third quarter of 2020, which led to greater business activity and increased sales. Excluding the impact of the Partsmaster acquisition, sales grew 8.4% over the third quarter of 2020. Bolt Supply sales improved 13.5% compared to the prior year quarter. Excluding the impact of foreign currency, total sales increased 15.7% in the third quarter of 2021. Both the third quarter of 2021 and 2020 had 64 selling days.
Gross Profit
Reported gross profit increased $8.8 million to $56.0 million in the third quarter of 2021 compared to $47.2 million in the prior year quarter primarily as a result of increased sales. Partsmaster contributed $8.3 million to reported gross profit in the third quarter of 2021 before the classification of certain service-related costs in gross profit compared to $3.6 million in the one-month post-acquisition period in 2020. Consolidated gross profit as a percent of sales was 53.1% in the third quarter of 2021 compared to 52.3% in the prior year quarter. Gross margin percentage for the third quarter 2021 was impacted by the sustained supply chain constraints affecting the broader economy, which resulted in product shortages and increased supplier, transportation and labor costs. The organic Lawson MRO gross margin, defined as margin generated by Lawson MRO excluding Partsmaster, as a percent of sales was 58.7% in the third quarter of 2021 compared to 58.8% a year ago quarter before the classification of certain service-related costs in gross profit. Actions taken on pricing, product sourcing and labor allocation offset increased freight and inflation pressure.
Selling, General and Administrative Expenses
| Three Months Ended September 30, | Increase | ||||||||||||||||||||||
| (Dollars in thousands) | 2021 | 2020 | Amount | % | |||||||||||||||||||
| Selling expenses | |||||||||||||||||||||||
| Lawson | $ | 23,922 | $ | 18,373 | $ | 5,549 | 30.2% | ||||||||||||||||
| Bolt Supply | 986 | 782 | 204 | 26.1% | |||||||||||||||||||
| Consolidated | $ | 24,908 | $ | 19,155 | $ | 5,753 | 30.0% | ||||||||||||||||
| General and administrative expenses | |||||||||||||||||||||||
| Lawson | $ | 23,717 | $ | 23,553 | $ | 164 | 0.7% | ||||||||||||||||
| Bolt Supply | 2,801 | 2,516 | 285 | 11.3% | |||||||||||||||||||
| Consolidated | $ | 26,518 | $ | 26,069 | $ | 449 | 1.7% | ||||||||||||||||
Selling expenses consist of compensation and support for our sales representatives. Selling expenses increased to $24.9 million in the third quarter of 2021 compared to $19.2 million in the prior year quarter. The increase in selling expense is primarily driven by increased sales, along with the inclusion of $5.6 million in selling expense in the third quarter of 2021 from the Partsmaster business compared to $1.7 million of selling expense from Partsmaster in the one-month post-acquisition period of September 2020. As a percent of sales, selling expenses increased to 23.6% from 21.2% in the third quarter of 2020 driven by the reinstatement of normalized selling activities including sales rep travel not incurred during the pandemic and higher Partsmaster selling expenses as a percent of sales.
General and administrative expenses consist of expenses to operate our distribution network and overhead expenses to manage the business. General and administrative expenses increased to $26.5 million in the third quarter of 2021 from $26.1 million in the prior year quarter. The increased General and administrative expense was driven by the inclusion of Partsmaster general and administrative expenses of $3.5 million compared to $1.5 million included from the one-month post-acquisition period of September 2020, offset by a stock-based compensation benefit from the third quarter 2021 of $1.2 million compared to expense of $4.7 million for the third quarter 2020. Costs of $3.2 million related to the evaluation of the LKCM proposal disclosed in a Schedule 13D amendment filed on May 17, 2021 are also in general and administrative expenses for the quarter.
Interest Expense
Interest expense was $0.1 million in the third quarter of 2021, in line with the prior year quarter.
24
Other Income, Net
Other income, net decreased $0.8 million in the third quarter of 2021 over the prior year quarter primarily due to Canadian currency exchange rate effect.
Income Tax Expense
Income tax expense was $0.6 million, resulting in a 14.8% effective tax rate for the three months ended September 30, 2021 compared to an income tax expense of $0.7 million and an effective tax rate of 29.7% for the three months ended September 30, 2020. The tax rate is higher than the statutory rate due mainly to discrete items recorded in the quarter.
25
Nine months ended September 30, 2021 compared to September 30, 2020
| 2021 | 2020 | ||||||||||||||||||||||
| (Dollars in thousands) | Amount | % of Net Sales | Amount | % of Net Sales | |||||||||||||||||||
| Revenue | $ | 315,666 | 100.0 | % | $ | 253,458 | 100.0 | % | |||||||||||||||
| Cost of goods sold | 150,440 | 47.7 | % | 118,999 | 47.0 | % | |||||||||||||||||
| Gross profit | 165,226 | 52.3 | % | 134,459 | 53.0 | % | |||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Selling expenses | 72,945 | 23.1 | % | 55,445 | 21.9 | % | |||||||||||||||||
| General and administrative expenses | 79,469 | 25.2 | % | 57,806 | 22.8 | % | |||||||||||||||||
| Total operating expenses | 152,414 | 48.2 | % | 113,251 | 44.6 | % | |||||||||||||||||
| Operating income | 12,812 | 4.1 | % | 21,208 | 8.4 | % | |||||||||||||||||
| Interest expense | (710) | (0.2) | % | (329) | (0.1) | % | |||||||||||||||||
| Other income (expense), net | 802 | 0.2 | % | 15 | (0.1) | % | |||||||||||||||||
Income before income taxes | 12,904 | 4.1 | % | 20,894 | 8.2 | % | |||||||||||||||||
| Income tax expense | 2,717 | 0.9 | % | 6,004 | 2.3 | % | |||||||||||||||||
| Net income | $ | 10,187 | 3.2 | % | $ | 14,890 | 5.9 | % | |||||||||||||||
Revenue and Gross Profit
| Nine Months Ended September 30, | Increase/(Decrease) | ||||||||||||||||||||||
| (Dollars in thousands) | 2021 | 2020 | Amount | % | |||||||||||||||||||
| Revenue | |||||||||||||||||||||||
| Lawson | $ | 281,877 | $ | 224,511 | $ | 57,366 | 25.6% | ||||||||||||||||
| Bolt Supply | 33,789 | 28,947 | 4,842 | 16.7% | |||||||||||||||||||
| Consolidated | $ | 315,666 | $ | 253,458 | $ | 62,208 | 24.5% | ||||||||||||||||
| Gross profit | |||||||||||||||||||||||
| Lawson | $ | 151,436 | $ | 123,031 | $ | 28,405 | 23.1% | ||||||||||||||||
| Bolt Supply | 13,790 | 11,428 | 2,362 | 20.7% | |||||||||||||||||||
| Consolidated | $ | 165,226 | $ | 134,459 | $ | 30,767 | 22.9% | ||||||||||||||||
| Gross profit margin | |||||||||||||||||||||||
| Lawson | 53.7 | % | 54.8 | % | |||||||||||||||||||
| Bolt Supply | 40.8 | % | 39.5 | % | |||||||||||||||||||
| Consolidated | 52.3 | % | 53.0 | % | |||||||||||||||||||
Revenue
Revenue for the nine months ended September 30, 2021 increased 24.5% to $315.7 million from $253.5 million for the nine months ended September 30, 2020. Business conditions continued to improve in the first nine months of 2021 over 2020, which led to greater business activity and increased sales. Partsmaster contributed $44.6 million in sales in the first nine months of 2021 compared to $5.4 million in September 2020 one-month post-acquisition. Excluding the impact of the Partsmaster acquisition, sales grew 9.3% in the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020. On a year-to-date basis, Bolt sales have increased 16.7% as business conditions improved in western Canada. Excluding the impact of foreign currency, total sales increased 23.2% in the first nine months of 2021. There is one less selling day in the nine month period 2021 compared to 2020.
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Gross Profit
Gross profit increased to $165.2 million in the first nine months of 2021 compared to $134.5 million in the first nine months of 2020, primarily driven by increased sales and the inclusion of the Partsmaster acquisition for the full year, partially offset by the negative impacts of sustained supply chain constraints affecting the broader economy. Consolidated gross profit as a percent of sales was 52.3% compared to 53.0% a year ago. The organic Lawson MRO segment gross profit before the classification of certain service-related costs in gross profit as a percent of sales was 58.1% in the first nine months of 2021 compared to 59.8% a year ago. The decrease was primarily related to increased freight and supply chain costs, increased reserves established for which the costs exceed the selling price on PPE items as well as changes in product and customer sales mix.
Selling, General and Administrative Expenses
| Nine Months Ended September 30, | Decrease | ||||||||||||||||||||||
| (Dollars in thousands) | 2021 | 2020 | Amount | % | |||||||||||||||||||
| Selling expenses | |||||||||||||||||||||||
| Lawson | $ | 70,006 | $ | 53,222 | $ | 16,784 | 31.5% | ||||||||||||||||
| Bolt Supply | 2,939 | 2,223 | 716 | 32.2% | |||||||||||||||||||
| Consolidated | $ | 72,945 | $ | 55,445 | $ | 17,500 | 31.6% | ||||||||||||||||
| General and administrative expenses | |||||||||||||||||||||||
| Lawson | $ | 71,242 | $ | 50,816 | $ | 20,426 | 40.2% | ||||||||||||||||
| Bolt Supply | 8,227 | 6,990 | 1,237 | 17.7% | |||||||||||||||||||
| Consolidated | $ | 79,469 | $ | 57,806 | $ | 21,663 | 37.5% | ||||||||||||||||
Selling expenses increased to $72.9 million for the first nine months of 2021 compared to $55.4 million in the same period a year ago and, as a percent of sales, increased to 23.1% in the first nine months of 2021 from 21.9% a year ago. The increase in selling expense is primarily related to increased sales compensation from higher sales, and the inclusion of $16.9 million of selling expenses from the Partsmaster business compared to $1.7 million in the post-acquisition period in 2020.
General and administrative expenses increased to $79.5 million in the first nine months of 2021 from $57.8 million in the prior year period. This was primarily driven by the inclusion of $10.7 million of general and administrative expenses from the Partsmaster business for the first nine months of 2021 compared to the inclusion of $1.5 million of general and administrative expenses in the one-month post-acquisition period of September 2020, an increase in stock-based compensation expense of $4.2, and restored expenses over 2020 on normalized sales. Costs of $4.6 million related to the evaluation of the LKCM proposal disclosed in a Schedule 13D amendment filed on May 17, 2021 are included in general and administrative expense in 2021.
Interest Expense
Interest expenses increased $0.4 million in the first nine months of 2021, due primarily to interest on the accrued acquisition liability.
Other Income (Expense), Net
Other income (expense), net increased $0.8 million in the first nine months of 2021, primarily due to Canadian currency exchange rate effect.
Income Tax Expense
Income tax expenses were $2.7 million resulting in a 21.1% effective tax rate for the first nine months of 2021 compared to income tax expense of $6.0 million and a 28.7% effective tax rate for the first nine months of 2020.
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Liquidity and Capital Resources
Available cash and cash equivalents were $7.5 million on September 30, 2021 compared to $28.4 million on December 31, 2020. The decrease in available cash is primarily due to the payment of the acquisition liability related to the purchase of Partsmaster for $33.0 million in May 2021.
Net cash provided by operations for the nine months ended September 30, 2021 was $6.2 million, primarily driven by reported operating earnings and partially offset by increased net working capital from increases in accounts receivable related to higher sales and increased inventories associated with the global supply chain disruptions.
Capital expenditures were $5.7 million and $1.3 million for the nine month period ended September 30, 2021 and 2020, respectively, primarily for improvements to our distribution centers and information technology.
Cash provided by financing activities was $10.7 million for the first nine months of 2021, primarily due to a net drawdown of $10.9 million of our Revolving Credit Facility partially driven by the final Partsmaster payment.
In 2019, our Board of Directors authorized a program in which we may repurchase up to $7.5 million of our common stock from time to time in open market transactions, privately negotiated transactions or by other methods. We did not repurchase any shares of stock in the first nine months of 2021 under this plan.
The Company anticipates that outstanding stock performance rights with a value of $8.4 million at September 30, 2021 will be paid out within the next twelve months prior to expiration.
Revolving Credit Facility
On September 30, 2021, we had $10.9 million in outstanding borrowings and $87.4 million of borrowing availability remaining, net of outstanding letters of credit, under our Revolving Credit Facility.
Along with certain standard terms and conditions of our Credit Agreement governing our Revolving Credit Facility, we are able to borrow up to 3.25 times our EBITDA, as defined, and maintain a minimum fixed charge ratio, as defined, of 1.15. As of September 30, 2021, we were in compliance with all financial covenants.
While we were in compliance with our financial covenants included in our Credit Agreement for the quarter ended September 30, 2021, failure to meet the covenant requirements of the Credit Agreement in future quarters could lead to higher financing costs, increased restrictions, or reduce or eliminate our ability to borrow funds and could have a material adverse effect on our business, financial condition and results of operations.
We believe cash provided by operations and funds available under our Credit Agreement are sufficient to fund our operating requirements, strategic initiatives and capital improvements, although we cannot provide assurance that events beyond our control will not have a material adverse impact on our liquidity.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 3 of Part I has been omitted from this report.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Under the supervision and with the participation of our senior management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this report (the “Evaluation Date”). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded as of the Evaluation Date that our disclosure controls and procedures were effective such that the information relating to Lawson, including our consolidated subsidiaries, required to be disclosed in our SEC reports (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) includes, without limitation, controls and procedures designed to ensure that information required to be disclosed is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter ended September 30, 2021 that materially affected or are reasonably likely to materially offset our internal control over financial reporting. We substantially completed the integration of the internal control procedures of Partsmaster into our existing internal control structure.
PART II
OTHER INFORMATION
ITEMS 1, 1A, 3, 4 and 5 of Part II are inapplicable and have been omitted from this report.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None
ITEM 6. EXHIBITS
| Exhibit # | ||||||||
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| 101 | The following financial statements from the Quarterly Report on Form 10-Q for the quarter ended September 30, 2021, formatted in Inline XBRL: (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statement of Income and Comprehensive Income, (iii) Condensed Consolidated Statements of Stockholders’ Equity, (iv) Condensed Consolidated Statements of Cash Flows, and (v) Notes to Condensed Consolidated Financial Statements. | |||||||
| 104 | The cover page from the Quarterly Report on Form 10-Q for the quarter ended September 30, 2021, formatted in Inline XBRL | |||||||
| 101.INS | XBRL Instance Document | |||||||
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| 101.SCH | XBRL Taxonomy Extension Schema Document | |||||||
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |||||||
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | |||||||
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document | |||||||
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | |||||||
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| LAWSON PRODUCTS, INC. | |||||||||||
| (Registrant) | |||||||||||
| Dated: | October 28, 2021 | /s/ Michael G. DeCata | |||||||||
| Michael G. DeCata President and Chief Executive Officer (principal executive officer) | |||||||||||
| Dated: | October 28, 2021 | /s/ Ronald J. Knutson | |||||||||
| Ronald J. Knutson Executive Vice President, Chief Financial Officer and Treasurer (principal financial officer) | |||||||||||
| Dated: | October 28, 2021 | /s/ David Lambert | |||||||||
| David Lambert Vice President, Controller and Chief Accounting Officer (principal accounting officer) | |||||||||||
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