Michael DeCata - President and CEO Ron Knutson - EVP and CFO.

Kevin Steinke - Barrington Research Ryan Cieslak - KeyBanc Capital Markets Brad Hathaway - Far View Capital.

Good morning, ladies and gentlemen, and welcome to the Lawson Products' Fourth Quarter 2017 Earnings Call. This call will be hosted by Michael DeCata, Lawson Products’ President and Chief Executive Officer; and Ron Knutson, Lawson's Chief Financial Officer. They will open the call with an overview of fourth quarter results.

There will then be time for questions and answers. This call is being audio simulcast on the Internet via Lawson Products Investors Relations page on the company’s Web site, lawsonproducts.com. A replay of the webcast will be available on the Web site through March 31, 2018.

During this call, the company will be providing an update on business as well as covering relevant financial and operational information.

I’d like to point out that statements on this call and in the press release contain forward-looking statements concerning goals, beliefs, expectations, strategies, plans, future operating results, and underlying assumptions that are subject to risks and uncertainties that could cause actual results to differ materially from those described.

In addition, statements made during this call are based on the company’s view as of today. The company anticipates that future developments may cause those views to change. Please consider the information presented in that light.

The company may at some point elect to update forward-looking statements made today, but specifically disclaims any obligation to do so. I would now like to turn the call over to Lawson Products’ CEO, Mike DeCata..

Good morning and thank you for joining the call. This morning, I will comment on the quarter and our overall progress. Ron Knutson, our CFO, will provide a detailed review of our financial results, and then we’ll take questions. We’re very pleased with our progress during the fourth quarter and for the full year.

After five years at the helm of this organization, I can say that our overall business has performed very well and is improving. Our sales were up across the board and an increase of 6.1% average daily sales over the fourth quarter of 2016 on an organic basis. Every region grew and 77% of our districts grew.

Our strategic accounts were up 43% for the quarter on an ADS basis and 46% for the year, something that we’ve been very focused on over the past few years.

As well, we closed our largest acquisition to-date and have immediately seen benefits from the transaction not only in terms of contribution to margin dollars but also the potential to expand in Western Canada. Including sales from Bolt Supply, our sales grew at 17.8% on an ADS basis for the quarter.

From an operational standpoint, early in the year, we successfully consolidated our distribution network while not missing a beat with our customers and recognizing sizable gains on the sale of our former facility. Finally, we posted operating income in 2017 of just under $10 million versus a loss of 1.5 million a year ago.

So this was definitely our best year in the last five. And if market conditions remain as today, I believe we’re well positioned for a very good top line and bottom line in 2018.

From an operating income perspective, Ron will dissect this further, but excluding some nonrecurring one-time items, our flow through for the quarter on an organic business fell right in line with the range that we had previously communicated, 25% to 30%.

While not all of the strengthening of the business is showing up in the quarterly numbers yet, I’d like to comment on why I feel the company continues to get stronger. First, we continue to achieve broad-based growth across the company. As I mentioned a moment ago, every one of our regions achieved growth.

Every product category achieved growth and our Canadian business also grew on an organic basis. Additionally, our seasoned reps realized consistent growth each quarter. This resulted in an improvement in overall sales rep productivity and an improvement in our cost of sales to revenue ratio.

Second, we continue to expand our customer base, in particular new strategic account locations to the conversion process which I’ve mentioned on previous calls. Third, from an operations perspective, our line count continues to grow at the distribution centers.

We consolidated a distribution center in 2017 while at the same time driving improved labor productivity over 2% and driving down our total DC costs as a percent of sales. On an organic basis, our fill rates continue to improve while we improved our inventory turns.

And fourth, our acquisition strategy is working to drive increased sales and profitability to the company. Let me expand on our update of this Bolt Supply acquisition made in the fourth quarter. Bolt Supply House acquisition was announced on October 3, 2017. The team has transitioned very well and without issues.

The Bolt leadership team along with the Lawson team has jumped in as if they’ve been working together for years. It is truly a testament to teamwork and the shared vision. As a reminder, Bolt was a $43 million Canadian company with low double-digit EBITDA.

The Bolt team is developing growth strategies and together we’ve made great progress toward enabling the Calgary DC to service Lawson and Kent customers with Western Canada inventory. We expect this to be in place by early summer of 2018.

Beyond our commitment to add new branch locations to the existing footprint, the Calgary DC will enable us to deliver product within the one to three-day window which our customers have come to expect from our service-intensive VMI model.

Additionally, our previous four acquisitions prior to Bolt are now well integrated into the MRO side of our business. We continue to pursue our acquisition strategy and fill the pipeline with future acquisitions. Let me comment for a moment on how we differentiate ourselves from our competitors.

We continue to strive to deliver a superior value proposition. There are multiple components to the Lawson value proposition. They can be divided into three categories.

First, sales reps visit our customers on average every eight days sharing best practices, putting away and counting inventory, placing orders and providing technical support to our customers. We refer to this as service-intensive vendor managed inventory. Second, we pride ourselves on ease of doing business.

This extends beyond the activities of our 983 sales reps. It includes our invoices, our accounts receivable team, our quotes department, the customer service team, the specials team who are charged with finding one-off items for customers, our customer service people and our pick and pack teammates in distribution centers.

We continue to have minimal back orders and line service levels at approximately 99%. And third, 60% of our products is private label and optimized for the maintenance mechanic. Our private label products consist of premium products that outperform nationally branded products. We also train our sales reps to demonstrate these products.

For example, our Regency drill bit and reamer set that greatly improves the process of drilling through narrow gauge metals, we often need to teach customers what a reamer does. But when we do, they immediately understand the value to this technology and design.

In our view, operational excellence is achieved through superior performance in every aspect of our relationship with the customer. The combination of ease of doing business, service-intensive vendor managed inventory and optimized products is a differentiated combination which our customers value.

During 2017, our customers rewarded us for this value proposition. Overall, our strategy for growth in 2018 is unchanged. We will continue to gradually add sales reps in underserved territories.

We will also continue to increase sales rep productivity through the use of previously discussed tools such as Microsoft Teams, mobile apps, new product assortments and training. We will continue to pursue acquisitions. All are showing encouraging signs for 2018.

With the gains we’ve made today combined with all of our ongoing initiatives to drive the business, we’re confident that we will continue to grow in 2018 and we anticipate considerable progress toward improving EBITDA dollars and percent.

While the fourth quarter had several one-time components to it that make simple comparisons a bit challenging, Ron will quantify some of these one-time components in a moment. Another topic that Ron will discuss in more detail is the reestablishment of our deferred tax assets.

While this is primarily an accounting benefit, it sends a very significant signal regarding the underlying financial strength of the company and the confidence that we have in our future earnings. Now let me turn it over to Ron for more insight into the fourth quarter financial results..

Thank you, Mike, and good morning, everyone. As Mike indicated, we finished the year strong with a solid sales increase in the fourth quarter and more than doubled our adjusted operating income. Our fourth quarter results also reflect the full quarter of the Bolt Supply House.

As I go through our financial update, I’ll comment on both the organic business and the combined results. We do have some noise in our Q4 results ranging from taxes to now consolidating in Bolt Supply to some accrual catch-ups. I’ll comment on these in a moment. First, I want to address the positive tax benefit that we recorded in the quarter.

During the quarter, we were required under GAAP to reestablish the majority of our U.S. net deferred taxes that were previously written off in 2012.

While this does not provide a cash benefit to loss in 2017, this is significant for us as it’s a clear indication that our financial performance has improved to a level that it is now more likely than not that our future taxable income will be sufficient for these assets to be realized.

The fourth quarter realized a net benefit of 21.2 million from reestablishing our net deferred tax assets, net of the reduction of the federal income tax rate from 35% to 21% as a result of the Tax Cuts and Jobs Act. Here are some Q4 operational highlights. First, sales finished at 80.6 million for the quarter.

Average daily sales were up 17.8% versus the year-ago quarter and up 10.1% from the third quarter. Excluding the impact of The Bolt Supply acquisition, average daily sales increased 6.1% over a year ago. Second, our adjusted operating income for the quarter was 1.2 million compared to 539,000 a year ago.

The quarter benefitted from Bolt Supply in the amount of 556,000. However, this was offset by some additional nonrecurring expenses for the quarter that I’ll comment on shortly. And third, our total gross margin percentage was 58.3%. Excluding Bolt, our gross margin percentage was 59.9% compared to 60.2% a year-ago quarter.

Let me now share some of the details. As I just mentioned, we finished the quarter with sales of 80.6 million on 61 selling days, one more than a year-ago quarter but two fewer days than Q3. As compared to a year ago, our fourth quarter sales benefitted from the following. First, Bolt Supply generated sales of 8 million in U.S. dollars for the quarter.

Second, the actions we’ve taken to drive growth are getting results.

This includes converting new locations for our existing strategic relationships, improving the on-boarding process of new reps, driving more accountability to the field management, providing reps with forms to support products and technical questions, continuing to invest in technology and rewarding reps who achieve significant growth.

Third, sales to our oil and gas segment were up 1.6 million versus a year-ago quarter. And fourth, a general improvement in the MRO marketplace. As Mike mentioned, the 6.1% organic sales increase was widespread throughout the business with our regional and large national sectors of the business increasing and all product categories realizing gains.

On an organic ADS basis, U.S. sales were up 4.9% while our Canada sales, excluding Bolt, were up over 10% in local currency fueled by both organic growth and our previous 2016 acquisitions. From a Lawson segment standpoint, strategic accounts average daily sales were up 43% over a year ago and now represent approximately 16% of our organic volume.

We also realized solid ADS growth of 4.9% in our Lawson core business, fueled by an 8.3% improvement in sales per rep per day. From a sequential average daily sales basis, the Lawson segment October sales were 1.184 million, November was 1.228 million and December finished at 1.162 million.

As Mike mentioned, we ended the quarter with slightly less than 1,000 Lawson Kent sales reps and 24 territory managers in The Bolt Supply business. As we’ve said in the past, adding sales reps and rep turnover negatively impacts our earnings in the short term due to the upfront investments.

However, it will ultimately help drive our total revenues and allow us to further leverage our infrastructure. We will continue to focus on our sales team during 2018 both in terms of rep hiring and rep productivity. We will balance those efforts with our priorities to drive the highest return to the company. Gross margins came in at expected levels.

Excluding Bolt Supply, our organic gross margin was 59.9%. The slight decrease in Lawson’s gross margin percentage was primarily driven by a continued shift towards strategic customers who typically have lower gross margin percentages. There continues to be a lot of focus in the marketplace around pricing and margin pressures.

Consistent with previous quarters when we look at our pricing to the same customers for the same product from a year ago, our pricing has not declined. Our customers understand the value of this service and premium products that we provide and understand that there is a premium for our offering.

Furthermore, they recognize the difference between cost and price. Ours is the lowest cost solution as it ultimately saves them time and money. As discussed in the past, our plan to increase strategic customer relationships and to pursue more greenfield sales territories will put downward pressure on our gross margin percentage.

However, these initiatives will increase our gross margin dollars. And as anticipated, The Bolt Supply business with gross margins closer to 40% brought down our weighted average margin percentage for the quarter. Selling, general and administrative expenses were 46.8 million for the fourth quarter compared to 45.5 million a year-ago quarter.

The increase was primarily driven by consolidating in Bolt Supply in the amount of 2.9 million. Excluding Bolt Supply, total operating expenses were down 1.6 million. We continue to drive down operating expenses as a percent of sales creating an opportunity for further leveraging of the business.

Additionally, the company incurred approximately 1.4 million of costs, what I referred to as noise earlier, that negatively impacted our comparisons against the year-ago.

This includes items such as a nonrecurring 2016 insurance benefit, carryover of required sick pay accruals, acquisition costs, catch-up of sales performance incentives and the amortization of Bolt Supply intangibles related to the purchase.

Excluding these items, along with the impact of the shift towards strategic customers, our Lawson EBITDA leverage was at the high end of our previously stated 25% to 30%. This gives us the confidence that we can leverage our existing operating infrastructure as we grow sales. Operating income was 243,000 for the quarter.

Adjusted non-GAAP operating income taking into account stock-based compensation, severance and acquisition costs was 1.2 million for the quarter compared to 539,000 a year ago.

Net income for the quarter was 20.2 million or $2.21 per diluted share driven heavily by our tax benefit compared to a loss of 4.6 million or $0.53 per diluted share in the year-ago quarter. The net tax benefit previously mentioned created $2.32 of earnings per diluted share.

From a balance sheet perspective, we ended the quarter with 14.5 million of borrowings primarily created from The Bolt Supply acquisition. For the quarter, CapEx was 317,000.

We expect our CapEx for the full year of 2018 to be in the range of 2.5 million to 3.5 million primarily in maintenance capital for our distribution network, the build out of the Calgary distribution center and continued technology enhancements to improve our customer-facing processes.

Before I comment on 2018, let me put in applause for our new Investor Relations Web site. Over the past quarter, we’ve made significant enhancements that provide more relevant information and it is much easier to navigate. Let me now comment on a few items as we look into 2018.

First, we are optimistic about 2018 given our sales over the past few quarters, other economic indicators in our space, our recent Bolt Supply acquisition and actions we are taking to drive organic growth. Second, we will continue with our current strategy to expand our sales force while also focusing on existing rep productivity and acquisitions.

And third, we will continue to leverage our existing infrastructure to drive adjusted EBITDA. As demonstrated over the past few quarters, we firmly believe that we are well positioned to leverage our existing operating cost to drive additional profitability. I’ll now turn it over to the operator for questions..

Thank you. We will now begin our question-and-answer session. [Operator Instructions]. Our first question is from Kevin Steinke with Barrington Research. Please proceed with your questions..

Good morning, Mike and Ron..

Good morning, Kevin..

Good morning, Kevin..

I wanted to follow up a little bit on the discussion of the incremental operating margin, as you noted, at the high end of the range of the 25% to 30% for the historical Lawson business. You also called out some one-time cost in the quarter. It seems like most of those won’t reoccur.

I guess one thing that will continue into 2018 is amortization related to Bolt Supply House.

So I’m just wondering what the amount of that was or how much we can expect to continue in 2018 in terms of amortization and how that affects the flow through for the total business in terms of incremental operating margin, including Bolt?.

Sure, Kevin. This is Ron. Good morning. Let me comment on some of the those items that impacted us for the quarter and as you pointed out, one of those items is certainly the amortization of the intangible assets that were related to The Bolt Supply acquisition.

From a quarterly basis standpoint this past quarter, it was a couple hundred thousand dollars. Now that gets added back when calculating EBITDA because it’s included in the amortization and that’s a pretty solid number for the quarter, so about 800,000 on an annual basis.

And some of the other items that I mentioned, that one in particular will be recurring, although not really negatively impacting our EBITDA. The other items for the most part, you’re correct, would be nonrecurring as we move throughout 2018.

We may continue to see a little bit of a shift in some of the margins from our strategic accounts which typically have lower overall net margins to the organization. But putting that aside, depending upon the growth in that segment or in that piece of our business, the other items should be – we’re not anticipating they would reoccur in 2018..

Okay, all right. That’s helpful. So following up on the discussion of the strategic accounts as well, obviously very strong growth in 2017, I think you said up 46% for the full year. I think that’s benefitted from the rebound in your oil and gas customers.

What should we expect for the trend in strategic account growth as we go throughout 2018? Obviously more difficult comps but a continued focus on conversion it sounds like.

So if you could just discuss some of those factors, that would be helpful?.

Sure, Kevin. This is Mike. Good morning. Our process continues.

The conversion process is really just a systematic way of identifying a bunch of strategic accounts not all of them all at the same time and then in a very deliberate and systematic way with our corporate marketing people, our corporate strategic accounts people and then all of the field people identifying existing strategic accounts where we have locations that we’re not serving.

So as an example of that, last year we added about 400 new locations within existing strategic accounts that were part of this conversion process.

Now I will quickly say that when we pick up any new customer, whether it’s a strategic account or a local account, the way that process usually works is you start winning the business, you start winning the relationship, but it’s a rather long process to infuse all of our new products, sometimes new bins and cabinets and start really winning the business on sort of a steady state basis.

We refer to it as a long tail but it’s really a long initial ramp up. We’re going to see more of that this year. We like this process. It’s working for us. It’s just another reflection of our systematic orientation or process orientation in the company now applied to strategic accounts.

So we’re very much committed to continuing that process more broadly. Now to your point, oil and gas certainly a couple of specific strategic accounts had a very large impact. And that was a little harder to gauge.

When we look at the index of oil wells drilled but not complete, fields not complete, the various companies that we service, pressure pumping division for example of various companies, that’s all about fracking.

And so there’s a little encouragement there, albeit very difficult comps because it was such a significant step up between '16 and '17 that in particular the comps will be very challenging but that applies only a few customers that we continue to push and there’s still opportunity there..

Okay, yes, that makes sense. It seems apparent that the organic growth rate would moderate a bit in 2018 just given the more difficult comps but obviously then you’re getting the benefit from Bolt.

So I guess is that a fair way to think about it?.

It is. And Ron can comment as well. It is. But look, we continue to refine our operating processes, our process orientation, Lean Six Sigma, so we are doing everything we can to continue to push and pick up new customers and pick up share of wallet.

Yes, of course the comps will be more challenging but the company is more robust than it has ever been and that enables us to push very hard even against hard comps, or though we don’t see any downturn whatsoever in the market, everybody sees and we do too and real optimism across all market segments everywhere.

But look, we’re trying to win share of wallet and pick up new customers regardless of any of that..

I’ll tag onto that a little bit just relative because the question will probably be asked as to how the first part of 2018 has started. And to Mike’s point, we are up against tougher comps in 2017.

However, I would say that the first call it six weeks of '18 have gotten off to a solid start in our average daily sales are currently ahead kind of in the mid-single digit range ahead of where we were last year and also incrementally up over Q4. So we feel pretty good about the start of 2018 as well..

Okay, that’s great. And maybe just a couple – let me follow up on Bolt Supply a little bit here. You talked about the distribution center initiative.

Did you mention if you’ve gotten into planning in terms of expanding Bolt Supply with new branches maybe in different geographic markets?.

Kevin, this is Mike. Yes, we have. We are committed to opportunistically adding branches in underserved areas. We’re making great progress, optimistic that we’ll have some branch expansion this year.

And of course the other part of the Bolt Supply process is building out and utilizing the distribution center in Calgary to further augment Lawson and Ken-related product in addition to the Bolt product, which enables us to serve our Western Canada customers in a one to three-day sort of a cycle time when you match that with the VMI model that’s sort of similar to what we do everywhere else in the world.

But that’s going to have a fairly significant impact on our ability to service more Western Canada customers with the service-intensive model that we’re used to. I apologize, running a little bit of a cold here. So yes, we’re feeling good about branch expansion and distribution center expansion for Bolt..

Okay, great. Maybe just a few last housekeeping questions here.

Did you call out how much of impact of restoring incentive accruals had in the fourth quarter in terms of year-over-year G&A comparison?.

Kevin, we didn’t call that out specifically but I would say is included in the 1.4 million in my prepared remarks were some additional incentives that we had set aside for our sales organization based upon their growth throughout 2017 and in particular in Q4 as well..

All right. And then it looks like you also are now including acquisition-related costs as an add-back to get to the adjusted operating income number that did change the year-ago fourth quarter just a bit.

Were there any other meaningful acquisition-related costs in the earlier quarters of 2016 or the earlier quarters of 2017 that would impact that full year adjusted operating income number on a historical basis?.

No, Kevin. It was more significant in the fourth quarter just given the activities related to Bolt Supply. But for the full year it was essentially flat because of the acquisitions that we were doing in 2016 as well..

Okay.

And just lastly, do you have the number of business days by quarter that will be in 2018?.

Sure. Let me – bear with me one quick second. So I know in the first quarter will be up against 63 workdays and there were 64 in Q1 of 2017. I’ll come back to that question. Let me pull those days and I’ll come back to it for you, Kevin..

All right, no problem. Thanks for taking the questions..

Thanks, Kevin..

Our next question is from Steve Barger with KeyBanc Capital Markets. Please proceed with your questions..

Good morning, guys. This is Ryan on for Steve..

Good morning, Ryan..

First question is, if you strip out Bolt, can you tell us what free cash flow was for the core business in the quarter and what was total free cash flow overall in 4Q?.

Ryan, when we really look at it, within one of the footnotes within our press release, we show the adjusted operating income 1.196 million. Of that, about 560,000 was Bolt related. So that gets us down to an operating income on the Lawson side of the business closer to about 600,000.

What I would say is, is that our CapEx for the quarter was relatively low. So on the MRO side of the business for Q4, it was pretty much of a push from a free cash flow standpoint. We got a little bit of a benefit which is pretty typical.

Our net between the borrowings and our cash position at the end of the year was about $10 million versus our net borrowing at the end of Q3 was about $13 million. So we typically pick up some positive cash flow just on pay down of receivables and so forth which is pretty typical in the fourth quarter.

But as we look forward into 2018 I guess the other piece of that answer is that we expect to see some pretty significant reductions in the $14 million of debt that we ended the year with. So as we look into 2018, certainly significant free cash flow to be able to pay down a big piece of that debt..

Okay.

And then with revenue picking up in the legacy business, are you seeing input cost increase and how are you thinking about price increases right now?.

We aren’t seeing anything out of the ordinary. We’ve mentioned this before. There are a handful of suppliers, the industry knows them well, that religiously pass along price increases and they do and we are able to pass them along. Structurally, we feel like our pricing is right. So our primary drive is not to increase prices.

We’re always adjusting and making sure that everything makes sense in the competitive environment. But we haven’t seen any change in the competitive environment. As we get bigger though, we are able to manage our cost of goods and supply chain more effectively and suppliers more and more recognize that.

They value us as a channel to market as well it helps us on the cost side and our productivity. And we really haven’t seen any structural changes one way or the other either on the price side or the cost side. And by the way I will say just as an aside, I found it a little interesting.

If you look at our GDP over the last – about five and a half years, it has varied in a very narrow way into every quarter for about five and a half years. And we don’t really see that changing much..

Okay. Just a couple more for me. Last quarter I believe you cited distribution center productivity improvements as one of the drivers for gross profit margin.

Was that the case this quarter? Were you able to find more efficiencies? And then with The Bolt Supply in your portfolio now, do you see room for improvement in their distribution center?.

I can comment a little bit on some of it. We’re always – Lean Six Sigma is one of these processes where you’re always looking to take non-productive work out, non-value-added work out. We did get a bit of labor productivity in the distribution centers but it’s modest. The heavy lifting is behind us.

Now it’s about continuous incremental improvement and we will always focus on that, whether it’s packaging, it’s inbound or outbound freight, it’s labor productivity, it’s a hundred of little things. But they are the kind of little things that all really great distribution companies do all the time. And kind of that’s where we are now.

The distribution centers are steady state and now it’s about continuous incremental improvement and that’s the kind of improvement we saw this past quarter as well..

Okay.

And then do you think that 58% to 59% gross profit margin is a good run rate going forward now?.

Ryan, so we came in at 58.3% for the fourth quarter on a weighted basis between Bolt Supply and the Lawson business. And that’s a pretty good range for us to be in. Bolt came in at the gross margins where we had expected as well as the Lawson side of the business being at 59.9. I think both Mike and I have commented on this.

That number can move around a little bit, the percentage can move around a little bit just given our customer mix and the product mix.

So we’re not overly concerned on the Lawson side if that number comes down a little bit as long as we’re creating more gross margin dollars which is really what our target is, in particular if we can grow our strategic account group as well similar to this last year..

Okay. And then just one more for me. I typically model the company off of sales per rep per day.

As the company evolves and thinking about The Bolt Supply acquisition and adding branches, do you think that’s still an appropriate way to model the company?.

Yes, so the table that we included in the press release, we try to keep that fairly clean so the sales per rep per day information in that historical trend represent the Lawson’s side of the business.

We do think that that’s a fair approach, although certainly the average daily sales number is a big component of what generates would be a big piece of the input on the model as well. It’s a little tough on the sales per rep per day depending upon how many new reps that we’re adding, because that’s an all-in weighted number.

So internally what we really look at is what’s the productivity of veteran reps, those that have been with us for three to three and a half years and then also how are the newer reps performing. So that number can get a little distorted from quarter-to-quarter depending upon the number of new hires that we bring on..

Okay. All right. Thanks for the time, guys..

Sure. Thanks, Ron..

[Operator Instructions]. Our next question is from Brad Hathaway with Far View Capital. Please proceed with your questions..

Hi, guys..

Hi, Brad..

How’s it going? I was encouraged to hear the comment about increasing EBITDA margins and increasing EBITDA dollars in 2018. I guess over the midterm, is the kind of target still to get this above 10% EBITDA margin as kind of the combined business? I know that Bolt was kind of low-double digits as well..

Yes, Brad, it is. We feel like as we continue to hold costs, G&A costs and we invest wisely in sales, sales accelerating, GDP margins are holding, yes, over the – hopefully not long term but creeping up on it pretty nicely. Certainly that is our expectation. I will say that it’s a touchstone.

Once we get to the previously stated 10% milestone, we will continue to push. And it’s the reason we’ve said all along with the capacity that we have in our distribution centers, with our continuing focus on G&A costs reductions and just holding costs, the more we grow, a lot can fall to the bottom line.

It’s part of the reason we keep talking about this 25% to 30% flow through kind of a thing. But yes, we are very much committed to that number and feel like we’re going to make good progress..

Okay.

And is there anything that is abnormal that you look at in 2018 that might kind of change the normal profitability step up?.

I would say no..

I would say no. I think as we look into the early quarters of 2018, I mentioned earlier that we have 63 selling days in the first quarter versus 64 – it will be 64 on a comparable basis versus Q1 of 2017, so we’ll be down a day in the first quarter and that day actually holds for the entire year. Next year is a 251-day year versus 252.

And then typically in the first quarter we typically see some higher payroll taxes and so forth. But as you look at the full year, we’re not seeing anything unusual coming through from an expense standpoint.

And in fact, I would say we have some 2017 expenses that we feel are nonrecurring that from a comparable standpoint will benefit that comparison as we go into 2018..

Great. And I understand obviously there’s quarterly variability in the business based on the days. I was more curious about the year and that’s very helpful. Thank you.

And then I guess on the acquisition pipeline, how optimistic are you about that pipeline in 2018 and kind of talking about – if that’s going to be similar to the core MRO business or more similar to Bolt kind of where you see that pipeline falling?.

Brad, we continue to build that pipeline. We’ve had ongoing conversations with folks for quite a while. People that we’ve reached out to and then of course the more of these we’ve done, more people are now reaching back out to us or independent folks just contacting us and asking if we’d be interested.

There are opportunities that are very near to what we do, people that are direct competitors with the same kind of value proposition, albeit mostly smaller. And then there are kind of near adjacencies. Bolt is a very near adjacency. If you remember, more than 50% -- a little bit more than 50% was fasteners at Bolt.

So they’re very similar, but with 13 branches that was slight different also. So there are opportunities on both fronts. People that are almost identical to us but smaller and people that are very near to us. So we continue to pursue a broad range of these opportunities.

Of course as you know, it’s a little hard to predict with any one of them you get pulled into the boat. But yes, we are filling the pipeline with a bunch of them..

Great. Excellent. Hopefully, we’ll see some come to fruition. Obviously it’s unclear when both parties will be able to sign on the dotted line, but --.

Yes. If I could just interrupt. One thing that I should have mentioned, our acquisition strategy is both focused on the U.S. and Canada. Even internally some of our folks ask if it’s a Canada-only strategy which it is not. It’s an opportunistic strategy.

We love Canada and our Canadian teammates, but we are very actively pursuing U.S.-based acquisitions as well even though the first few opportunistic ones have come through Canada..

Fantastic. Well, congrats on continued good progress and I look forward to seeing how 2018 develops..

Thank you, Brad..

Thanks, Brad..

[Operator Instructions]. We have a follow-up question from Kevin Steinke with Barrington Research. Please proceed..

Hi. Just on the rep count and hiring plans, the rep count did tick down very slightly in 2017 as you focused on the productivity of existing reps.

How are you thinking about hiring as we go throughout 2018 and growth in the rep count?.

Kevin, thank you. We will continue to add reps, albeit at a moderate pace. There’s a balance between adding reps in underserved territories and as we build – as we add customers, as we penetrate existing customers, it takes more time. So our long-term and 2018 commitment is to gradually continue to add reps.

What you’re seeing is a really sharp focus on helping reps get into that first trajectory so they succeed in their territories which enables them to succeed in the next quarter, then the next year and three and four, five years down the road. So we continue to hire. What you’re seeing is the result of performance management.

Where if it’s not going to work out, we tend to part ways with an incoming rep. But as far as our strategy and our plan, unchanged. We’ll continue to see a drive to add more reps at a moderate pace in '18 and likely beyond..

Okay.

And then with the deferred tax asset now recognized, should we expect kind of a more normalized tax rate in 2018? Any comment on what to expect on that front?.

Yes, Kevin. So just as a side note, I think Mike mentioned this. I did as well. It’s significant to put that asset back on our balance sheet. It clearly is an indicator of our confidence moving forward and the financial ability.

GAAP doesn’t allow you to put that back on the balance sheet if it’s not more likely than not, but those assets will not be realized. So we feel really good that we’re at that point now where we can reestablish those deferred tax assets.

Relative to the rate going forward, so it does put us in a position where we will be recording tax expense on a more routine basis.

And given the changes in the tax laws, our all-in tax rate as we move forward is going to be closer to 27% to 28% and that’s a combination of the new rate at 21%, our Canadian business which is a little bit higher than that and then certainly a state component as well. We do continue to have some net operating losses, however.

So from a cash flow perspective, we’ll be able to utilize those throughout 2018. But we will have some expense that will actually come through the P&L now on a go-forward basis..

All right, that’s very helpful.

And just lastly, when would you expect the 10-K to be filed?.

So our intentions are to file that later today..

Okay, sounds great. Thanks for taking the follow up..

Kevin, just a follow up to your previous question. So on number of days on the quarters were at – this is 2018, 63 in the first quarter, 64 in the second quarter, 63 in the third quarter and 61 in the fourth quarter. And all the quarters are consistent with '17 with the exception of the first quarter which is 63 versus 64 days..

All right, perfect. Thanks..

Sure. No problem..

Thanks, Kevin..

Ladies and gentlemen, we have reached the end of our question-and-answer session. I would like to turn the call back over to Mike DeCata for closing remarks..

Great. Thank you very much. Thank you to everyone for joining the call and for following Lawson Products. The fourth quarter continued our growth trend and makes six consecutive quarters of improving sales on a year-over-year basis.

We’re optimistic that our previous investments and actions will have a positive impact on both the top line in 2018, and especially the bottom line. We feel confident in our 25% to 30% flow through which we have previously communicated. Yesterday, we finished a meeting with our sales leadership team.

We laid out several programs that we believe will promote our value proposition and increase sales. Lastly, I’d like to thank our dedicated teammates. They work hard every day to serve our customers and to enable our customers to succeed. 2018 is going to be a very good year for Lawson Products. Thank you again and have a great day..