Lawson Products, Inc. — Form 10-Q summary
Period: Quarter and six months ended June 30, 2011. The supplied filing is for Lawson Products, Inc.; this differs from the company name in the request metadata. Financial amounts below are in millions of dollars unless otherwise noted.
Business context
Lawson operated two segments: Maintenance, Repair and Operations (MRO), which distributes products and services, and Original Equipment Marketplace (OEM), which manufactures, sells and distributes component parts. Results are presented on a continuing-operations basis unless stated otherwise. Rutland Tool & Supply and Assembly Component Systems had been sold, and their results are classified as discontinued operations.
Key financial results
| Metric | Three months ended June 30, 2011 | Six months ended June 30, 2011 |
|---|---|---|
| Net sales | $84.2; up 4.8% year over year | $166.7; up 7.4% |
| Gross profit / margin | $48.3 / 57.4%, versus $48.8 / 60.8% | $98.2 / 58.9%, versus $95.1 / 61.3% |
| Operating income / margin | $1.6 / 1.9%, versus $2.8 / 3.5% | $5.3 / 3.2%, versus $7.2 / 4.7% |
| Continuing-operations income | $1.1; diluted EPS $0.13 | $3.1; diluted EPS $0.36 |
| Net income, including discontinued operations | $1.1, versus $1.7 | $3.1, versus $4.0 |
| Operating cash flow, continuing operations | Not provided for quarter | $(7.1), versus $(4.5) |
For the first half, MRO sales were $159.9 million, up 7.5%, while OEM sales were $6.9 million, up 5.7%. Q2 MRO sales rose 5.0%; OEM sales were essentially flat. MRO gross margin declined to 60.6% for the first half (63.3% prior year), while OEM gross margin improved to 19.0% (14.7%).
At June 30, cash and cash equivalents were $22.7 million, down from $40.6 million at December 31, 2010. Current assets were $122.3 million and current liabilities $45.0 million. The balance sheet reports no borrowings; the company had a $55 million revolving credit line and reported covenant compliance. First-half capital expenditures were $7.7 million, including $5.6 million for ERP. Dividends paid were $2.0 million.
Changes and drivers
- Sales grew, led by MRO national, government and automotive customers; management cited higher average daily orders and order size. Growth excluding Canadian exchange-rate effects was 4.1% in Q2 and 6.7% for the half.
- Gross margin contracted, especially in MRO, as the company pursued larger, lower-margin customers. Management said this strategy was intended to support sales growth, customer retention and longer-term margin-dollar expansion. National and government accounts rose to 18.2% of first-half sales from 14.8%.
- SG&A increased 3.6% for the first half to $91.7 million, but declined as a share of sales to 55.0% from 57.0%. ERP implementation costs were $4.3 million in the half and $2.4 million in Q2; excluding ERP, G&A declined year over year.
- First-half continuing-operations income fell from $3.7 million to $3.1 million. The 2010 comparison included a $1.7 million gain on sale of a distribution center and a $0.6 million legal-settlement benefit; excluding those items, 2010 diluted continuing-operations EPS was $0.30 versus $0.36 in 2011.
Outlook, risks and other matters
- Management expected 2011 capital expenditures of $12–$15 million. Total ERP implementation cost, including capital and expense, was estimated at $25–$28 million; $20.1 million had been incurred through June 30, 2011.
- Management believed cash, future operating cash flows and the revolving credit facility would fund operating needs, capital spending, ERP implementation and other obligations for the next 12 months. First-half operating cash use and higher working capital needs are relevant to that assessment.
- Risk factors include economic and market conditions, inventory obsolescence, transportation or shipping disruptions, changing demand and product mix, commodity costs, information-system disruptions, execution and workforce risks, tax changes, and controlling-stockholder influence. The filing identifies Dr. Port as holding sole voting power over 45% of shares through a proxy extending to June 2012; potential family share sales could affect the stock price, particularly given historically low trading volume.
- The company reported interest associated primarily with unclaimed-property settlements in first-half 2011 other expense. Federal tax examinations for 2009 and examinations in other jurisdictions for 2005–2010 were ongoing. The company also disclosed $0.8 million of legal services through June 30 provided to the Chairman in connection with litigation involving partnerships in which he had been a partner; the company was not a party to that lawsuit.
- Management stated disclosure controls were effective and that there was no material change in internal control over financial reporting during the quarter. The filing says interim results are not necessarily indicative of full-year results and provides no earnings or revenue forecast.
Facts investors should verify
- Confirm the issuer identity: the filing is for Lawson Products, Inc., not the company named in the request metadata.
- Review whether the planned lower-margin customer mix is delivering the anticipated retention and margin-dollar benefits as gross margins remain lower.
- Track ERP spending against the $25–$28 million total estimate and assess implementation costs, execution and expected benefits.
- Assess working-capital conversion and liquidity in light of negative first-half operating cash flow, cash decline and planned capital expenditures.
- Review the controlling-stockholder voting arrangement, potential share sales, tax examinations and unclaimed-property matters.