Business context and reporting period
This is Lawson Products, Inc.’s unaudited Form 10-Q for the three months ended March 31, 2015. The filing identifies the business as a single-segment distributor serving the maintenance, repair and operations (MRO) market. The request metadata names Distribution Solutions Group, Inc.; that does not match the registrant named in this filing and should be verified.
Key financial results and liquidity
| Metric | Q1 2015 | Q1 2014 or prior date |
|---|---|---|
| Net sales | $69.9 million | $69.2 million |
| Gross profit and margin | $42.9 million; 61.3% | $41.3 million; 59.6% |
| Operating loss | $0.9 million | $4.7 million |
| Loss from continuing operations | $1.4 million | $4.3 million |
| Net loss; diluted loss per share | $1.4 million; $0.16 | $3.0 million; $0.34 |
| Net cash used in operating activities | $1.8 million | $7.1 million |
| Cash and cash equivalents at quarter end | $2.0 million | $4.2 million at December 31, 2014 |
| Revolver borrowings / availability | None / $33.4 million | Not stated here for the comparable date |
Quarter-end total assets were $133.7 million, total liabilities $73.4 million, and stockholders’ equity $60.3 million. The balance sheet also included a $9.2 million financing lease obligation. Operating cash use was attributed primarily to working-capital needs; capital expenditures were $0.4 million. The filing reports $0.8 million of restricted cash, pledged for card-processing services.
Material changes versus the prior period
Sales rose 1.0% year over year, or 2.2% excluding a $0.8 million adverse Canadian exchange-rate impact. Average daily sales increased to $1.110 million from $1.098 million. Gross margin improved, which management attributed mainly to lower purchasing costs and improved distribution efficiencies. Selling costs increased $3.1 million, including $1.9 million for a North American sales meeting; excluding that event, selling expenses increased $1.2 million, or 5.8%. General and administrative costs fell to $19.4 million from $21.8 million, largely due to lower stock-based compensation and cost controls.
The prior-year quarter included a $2.9 million noncash impairment charge and $1.4 million of income from discontinued operations, including the gain on the 2014 sale of ASMP. Neither item contributed to Q1 2015 results. The 2015 quarter’s lower reported net loss therefore reflects both improved continuing-operations performance and these prior-year comparability items.
Outlook, risks, contingencies and unusual items
Management plans to expand the sales force from 917 representatives at quarter end to approximately 1,000 by year end. It expects the larger team to support future sales growth but anticipates near-term pressure on average sales per representative as new hires develop their territories. Management also said the sales meeting reduced productivity during the quarter and delayed some hiring and onboarding.
Management stated that cash from operations and available borrowing capacity should be sufficient for operating requirements, strategic initiatives and capital improvements through the remainder of 2015. This is an expectation, not a guarantee. The company was in compliance with its loan covenants: EBITDA-to-fixed-charges ratio of 2.37:1 against a 1.10:1 minimum, and tangible net worth of $52.8 million against a $45.0 million minimum. Future covenant noncompliance could increase financing costs, restrict borrowing or materially affect the business.
Risks highlighted include economic and manufacturing conditions, weaker oil and gas demand amid lower oil prices, changing customer demand, inventory obsolescence, competition, sales-force recruitment and retention, technology or cybersecurity disruptions, and the ability to generate cash and meet credit covenants. Substantially all deferred tax assets remain subject to a valuation allowance because of cumulative losses. A Canadian tax examination has proposed $1.3 million of additional tax for 2008–2009; the company disputes the adjustment, has recorded no reserve, and cannot estimate when it will be resolved. Environmental remediation at a Decatur, Alabama site is estimated at $0.3 million to $1.4 million over ten years; $0.3 million remains accrued, and no remediation scenario was considered more likely than another.
The filing states that disclosure controls were effective and that there were no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Confirm that Lawson Products, Inc., rather than Distribution Solutions Group, Inc., is the intended issuer for this summary.
- Track sales growth and productivity per representative, including the impact of new hires, the sales meeting and Canadian currency movements.
- Monitor operating cash use, working-capital requirements, cash levels and actual availability under the revolving credit facility.
- Assess covenant headroom and the effect of any future deterioration in earnings or liquidity.
- Follow the disputed Canadian tax assessment and the final scope and cost of environmental remediation.