DSG(DSGR) - 2020 Q3 - Quarterly Report

PART I - FINANCIAL INFORMATION This section provides the company's unaudited condensed consolidated financial statements and management's discussion and analysis for the period ended September 30, 2020 Financial Statements This section presents the unaudited condensed consolidated financial statements, including balance sheets, income statements, and cash flows, reflecting the Partsmaster acquisition and COVID-19 impacts Condensed Consolidated Balance Sheets The balance sheet shows total assets increased to $251.3 million and liabilities to $130.0 million by September 30, 2020, largely due to the Partsmaster acquisition Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | Sep 30, 2020 (Unaudited) | Dec 31, 2019 | | :--- | :--- | :--- | | Total Assets | $251,269 | $204,429 | | Cash and cash equivalents | $17,193 | $5,495 | | Inventories, net | $62,218 | $55,905 | | Goodwill | $36,428 | $20,923 | | Intangible assets, net | $18,727 | $12,335 | | Total Liabilities | $130,015 | $96,428 | | Accrued acquisition liability | $32,476 | $— | | Accounts payable | $22,466 | $13,789 | | Total Stockholders' Equity | $121,254 | $108,001 | Condensed Consolidated Statements of Income and Comprehensive Income Q3 2020 revenue decreased to $90.3 million with net income at $1.7 million, while nine-month net income increased to $14.9 million despite lower revenue Q3 2020 vs Q3 2019 Performance (in thousands, except per share data) | Metric | Q3 2020 | Q3 2019 | | :--- | :--- | :--- | | Total revenue | $90,277 | $94,779 | | Gross profit | $47,225 | $50,574 | | Operating income | $2,001 | $6,446 | | Net income | $1,738 | $4,774 | | Diluted EPS | $0.19 | $0.51 | Nine Months 2020 vs 2019 Performance (in thousands, except per share data) | Metric | Nine Months 2020 | Nine Months 2019 | | :--- | :--- | :--- | | Total revenue | $253,458 | $282,219 | | Gross profit | $134,459 | $150,540 | | Operating income | $21,208 | $13,613 | | Net income | $14,890 | $10,227 | | Diluted EPS | $1.60 | $1.09 | Condensed Consolidated Statements of Cash Flows Net cash from operating activities significantly improved to $20.0 million for the nine months ended September 30, 2020, leading to an $11.7 million increase in cash Cash Flow Summary for Nine Months Ended Sep 30 (in thousands) | Cash Flow Activity | 2020 | 2019 | | :--- | :--- | :--- | | Net cash provided by operating activities | $20,023 | $8,041 | | Net cash used in investing activities | $(3,611) | $(1,392) | | Net cash used in financing activities | $(4,640) | $(10,165) | | Increase (decrease) in cash | $11,698 | $(3,257) | | Cash at end of period | $17,995 | $9,426 | Notes to Condensed Consolidated Financial Statements These notes detail accounting policies, the $35.3 million Partsmaster acquisition, segment revenue recognition, credit facility compliance, and the operational impacts of the COVID-19 pandemic - On August 31, 2020, the Company acquired Partsmaster for $35.3 million, paying $2.3 million in cash at closing with the remaining $33.0 million due in May 2021. The acquisition is intended to expand sales coverage and product lines[34][35] - The Partsmaster acquisition added $16.0 million in goodwill, $5.0 million in customer relationships (10-year life), and $2.8 million in trade names (5-year life). Partsmaster contributed $5.4 million in revenue in Q3 2020 post-acquisition[36][38] - The Company operates two segments: the Lawson segment, which uses a sales representative network for vendor-managed inventory (VMI) services, and the Bolt Supply segment, which sells through 14 branch locations in Western Canada[32][87] - The COVID-19 pandemic has caused lost revenue, supply chain limitations, and reduced customer demand. The company has taken mitigation steps, including deferring social security payments under the CARES Act and utilizing the Canadian Emergency Wage Subsidy (CEWS) program[89][90] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the financial impacts of the Partsmaster acquisition and COVID-19, noting a Q3 sales decrease but a nine-month operating income increase due to cost controls and strong liquidity Results of Operations - Q3 2020 vs. Q3 2019 Q3 2020 total sales decreased 4.7% to $90.3 million due to COVID-19, with operating income falling to $2.0 million impacted by lower sales and increased G&A expenses Q3 2020 vs Q3 2019 Segment Revenue (in thousands) | Segment | Q3 2020 | Q3 2019 | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Lawson | $79,806 | $83,461 | $(3,655) | (4.4)% | | Bolt Supply | $10,471 | $11,318 | $(847) | (7.5)% | | Consolidated | $90,277 | $94,779 | $(4,502) | (4.7)% | - Sales productivity (sales per rep per day) decreased 4.6% to $1,249, primarily due to the negative impacts of COVID-19[112] - General and administrative expenses increased by $3.2 million (14.0%), driven by a $2.4 million increase in stock-based compensation, $1.5 million in Partsmaster expenses, and $0.5 million in acquisition costs[123] Reconciliation of GAAP to Non-GAAP Adjusted Operating Income - Q3 (in thousands) | Metric | Q3 2020 | Q3 2019 | | :--- | :--- | :--- | | Operating income (GAAP) | $2,001 | $6,446 | | Stock based compensation | $4,746 | $2,374 | | Severance expense | $488 | $30 | | Acquisition costs | $473 | $— | | Adjusted non-GAAP operating income | $7,708 | $8,850 | Results of Operations - Nine Months 2020 vs. Nine Months 2019 Nine-month revenue decreased 10.2% to $253.5 million, yet operating income increased to $21.2 million primarily due to a $14.3 million reduction in general and administrative expenses Nine Months 2020 vs 2019 Revenue (in thousands) | Segment | Nine Months 2020 | Nine Months 2019 | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Lawson | $224,511 | $250,895 | $(26,384) | (10.5)% | | Bolt Supply | $28,947 | $31,324 | $(2,377) | (7.6)% | | Consolidated | $253,458 | $282,219 | $(28,761) | (10.2)% | - General and administrative expenses decreased by $14.3 million, primarily due to a $10.4 million decrease in stock-based compensation expense. Cost control measures related to COVID-19 also contributed[134] Reconciliation of GAAP to Non-GAAP Adjusted Operating Income - Nine Months (in thousands) | Metric | Nine Months 2020 | Nine Months 2019 | | :--- | :--- | :--- | | Operating income (GAAP) | $21,208 | $13,613 | | Stock based compensation | $(2,767) | $7,621 | | Severance expense | $1,520 | $1,542 | | Acquisition costs | $555 | $— | | Adjusted non-GAAP operating income | $20,516 | $22,776 | Liquidity and Capital Resources The company maintains strong liquidity with $17.2 million cash and $66.0 million credit facility availability, sufficient to fund operations and the upcoming $33.0 million Partsmaster acquisition payment - As of September 30, 2020, the company had $17.2 million in cash and cash equivalents and $66.0 million of borrowing availability under its credit facility[140][143] - A payment of $33.0 million for the Partsmaster acquisition is due in May 2021. This is secured by a letter of credit and is recorded as a $32.5 million current liability on the balance sheet[147] - In Q1 2020, the company repurchased 47,504 shares for its public buyback program. No shares were repurchased under this program in Q2 or Q3[142] - The company was in compliance with all debt covenants as of September 30, 2020, including an EBITDA to fixed charges ratio of 4.73 (vs. 1.15 required) and a total net leverage ratio of 0.71 (vs. 3.25 required)[68][144] Quantitative and Qualitative Disclosure About Market Risk This section is inapplicable and has been omitted from the report - Item 3 of Part I is inapplicable and has been omitted from this report[149] Controls and Procedures Management concluded disclosure controls were effective as of September 30, 2020, excluding the recently acquired Partsmaster's internal controls, with no material changes during the quarter - The CEO and CFO concluded that disclosure controls and procedures were effective as of the evaluation date[150] - Management excluded the internal controls of the newly acquired Partsmaster from its assessment of internal control effectiveness for the quarter, as the acquisition occurred on August 31, 2020[151] PART II - OTHER INFORMATION This section addresses other information, including updated risk factors related to the COVID-19 pandemic, details on equity security sales, and a list of filed exhibits Risk Factors This section updates risk factors, primarily highlighting new significant risks associated with the COVID-19 pandemic, including revenue loss, supply chain disruptions, and potential asset impairment - The COVID-19 pandemic is identified as a significant new risk factor[155] - Key pandemic-related risks include lost revenue, supply chain disruptions, reduced customer demand, and limitations on the sales force's ability to visit customers[156][158] - The pandemic could negatively impact future financial performance, potentially leading to impairment losses on goodwill and other intangible assets[161] Unregistered Sales of Equity Securities and Use of Proceeds During Q3 2020, the company repurchased 12,077 shares to satisfy employee tax withholding, with approximately $4.5 million remaining for future repurchases under the authorized program Share Repurchases for Q3 2020 | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | July 2020 | 357 | $31.25 | | August 2020 | 11,720 | $36.22 | | September 2020 | — | — | | Total | 12,077 | | - The shares repurchased during the quarter were for satisfying employee tax withholding obligations, not part of the public buyback plan[164] - Approximately $4.5 million remains authorized for future repurchases under the company's stock repurchase program[164][165] Exhibits This section lists filed exhibits, including financial statements in Inline XBRL format and certifications from the CEO and CFO - Filed exhibits include financial statements in Inline XBRL format[167] - Certifications by the CEO and CFO pursuant to Section 302 of the Sarbanes-Oxley Act are included as exhibits[168] Signatures The report is duly signed and authorized by the President and CEO, and the Executive Vice President and CFO, on October 29, 2020 - The report was signed on October 29, 2020, by the company's principal executive officer and principal financial officer[171]