Filing summary
Issuer and period: The supplied filing is Lawson Products, Inc.’s unaudited Form 10-Q for the quarter ended September 30, 2012—not a filing under the name Distribution Solutions Group, Inc. The company distributes maintenance, repair and operations products and services (MRO) and manufactures and distributes original-equipment components (OEM). Dollar amounts below are in millions unless noted.
Financial performance
- Third quarter: Net sales were $72.0, down 4.5% from $75.4 a year earlier. Gross profit was $43.4, or 60.2% of sales, versus $42.5, or 56.5%. Operating loss was $1.35 versus $3.07; net loss was $1.32, or $0.15 per diluted share, versus $2.16, or $0.25 per diluted share.
- First nine months: Net sales were $222.3, down 8.2% from $242.1. Gross profit was $121.5, or 54.7% of sales, versus $140.8, or 58.2%. Operating loss was $45.6 versus operating income of $2.3; net loss was $64.3, or $7.49 per diluted share, versus net income of $0.9, or $0.11 per diluted share.
- Segments: Third-quarter MRO sales fell 5.1% to $67.9, while OEM sales grew 6.3% to $4.1. Nine-month MRO sales fell 9.6% to $209.1; OEM sales rose 23.4% to $13.2.
- Cash flow and liquidity: Continuing-operations operating cash use was $10.3 for the first nine months, compared with $8.4 in 2011. Cash was $0.8 at September 30, down from $2.1 at year-end 2011. Capital expenditures were $16.5. The company drew $19.6 on its new revolving facility and reported $16.8 of additional borrowing availability.
- Debt and balance sheet: The company entered a five-year, $40.0 revolving credit facility in the third quarter, replacing a prior $55.0 facility. Total assets were $182.3 versus $222.7 at December 31, 2011; stockholders’ equity was $68.9 versus $134.2. The filing reports a $10.995 financing lease obligation.
- Margins and unusual charges: Nine-month MRO margin fell to 56.7% from 59.9%, primarily reflecting a $5.4 increase in inventory reserves, lower freight recoveries and a greater national-account mix. Results also included $28.3 of non-cash goodwill impairment, $8.2 of severance expense and an $18.1 income tax expense. The tax charge included a $33.6 increase in the deferred-tax valuation allowance.
Changes, outlook and risks
- Management said third-quarter results improved sequentially from the second quarter, citing workforce reductions, freight recoveries, pricing and product-cost management. Excluding $1.4 of quarterly severance expense, third-quarter operating income would have been approximately $0.1.
- Management attributed much of the MRO sales decline to vacant sales territories; for the first nine months, approximately $20.1 of the $22.3 MRO decline was attributed to more vacancies. Government sales also declined, and management expected limited near-term growth in that channel. Management warned that gross margins could remain under pressure from competition and a rising national-account mix.
- No formal earnings or revenue guidance is provided. Management stated that operating cash and available credit were expected to fund operating needs, strategic initiatives and capital improvements through 2012.
- The credit facility contains quarterly minimum-EBITDA covenants and restricts dividends. The company reported $0.7 of facility-defined EBITDA for the third quarter, in compliance with the $(1.0) minimum. The board suspended the dividend otherwise payable in the fourth quarter of 2012.
- Drummond American received an IRS proposed employment-tax adjustment of $9.5, including penalties, over sales-representative classification. The company disputes the assessment and had accrued $1.2 as its estimated resolution cost; it warned an unfavorable outcome could be material.
- After quarter-end, on October 5, 2012, the company sold its former Des Plaines facility for $3.4, recording an approximately $1.6 gain. Other stated risks include workforce retention, execution of restructuring, economic conditions, inventory obsolescence, credit-facility compliance and working-capital funding.
Important facts for investors to verify
- Confirm issuer identity: the filing is for Lawson Products, Inc., whereas the request metadata names Distribution Solutions Group, Inc.
- Review credit availability, borrowing-base calculations, covenant requirements and liquidity needs, particularly given low cash and increased operating cash use.
- Assess whether sales-territory vacancies and MRO revenue weakness are improving, and whether margin gains can persist amid competition and customer-mix changes.
- Verify the accounting and potential cash effects of the deferred-tax valuation allowance, inventory reserves, restructuring charges and IRS employment-tax dispute.
- Confirm the proceeds and gain from the post-quarter facility sale and the timing and costs associated with the McCook distribution-center transition.