Business context and reporting period
Lawson Products, Inc. filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2011. The filing identifies Lawson Products, not Distribution Solutions Group, Inc.; investors should verify the company identity against the intended filing. Lawson reports two segments: Maintenance, Repair and Operations (MRO) and Original Equipment Manufacturer (OEM). Results are presented for continuing operations unless noted; Rutland Tool & Supply was classified as discontinued operations after its 2010 sale.
Financial results and liquidity
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net sales | $75.4 million | $81.6 million | $242.1 million | $236.8 million |
| Gross profit / margin | $42.5 million / 56.5% | $49.9 million / 61.2% | $140.8 million / 58.2% | $145.1 million / 61.3% |
| Operating income (loss) | ($3.1) million | $8.5 million | $2.3 million | $15.7 million |
| Continuing-operations income (loss) | ($2.2) million | $5.8 million | $1.0 million | $9.5 million |
| Net income (loss) | ($2.2) million | $3.4 million | $0.9 million | $7.4 million |
| Diluted earnings (loss) per share | ($0.25) | $0.40 | $0.11 | $0.87 |
For the first nine months, continuing-operations operating cash flow was negative $8.4 million, capital expenditures were $8.9 million, and dividends paid were $3.1 million. Cash declined to $19.3 million at September 30 from $40.6 million at December 31, 2010. Total assets were $219.0 million and stockholders’ equity was $140.3 million. No borrowings were outstanding on the revolving credit line at quarter-end. The amended facility provides $55 million of capacity, with a $20 million accordion feature, through October 1, 2016.
Material changes versus prior periods
- Q3 sales fell 7.6% year over year; nine-month sales rose 2.3%. Q3 MRO sales declined 8.3%, while nine-month MRO sales increased 2.1%. OEM sales increased 7.5% in Q3 and 6.4% for the nine months.
- Q3 MRO sales and fulfillment were disrupted by the ERP conversion, including two lost selling days, order-processing and replenishment issues, lower fill rates, and untimely shipments. Management reported a gradual recovery in September.
- Gross margin weakened, primarily because vendor cost increases were not passed through during the ERP conversion, outbound freight costs rose, and sales mix shifted toward larger, lower-margin customers. OEM margins improved with higher-margin customer and new-business mix.
- SG&A rose 4.0% in Q3 and 3.7% for the nine months. ERP implementation expenses were $2.3 million in Q3 and $4.4 million higher year over year for the nine-month period.
- Prior-year comparisons included unusual benefits: a $3.5 million Q3 legal-settlement benefit ( $4.1 million for the nine months) and a $1.7 million gain on sale of a distribution center in the nine-month period. The 2010 nine-month period also included proceeds from the sale of ACS.
Outlook, risks and unusual items
Management expected 2011 capital expenditures of approximately $12 million and stated that cash, future operating cash flow, and the credit line should fund requirements for the next twelve months. The company had invested $23.4 million, including capital and expense, in the ERP implementation through the filing date. No earnings or revenue guidance was provided.
A significant contingency is an IRS employment-tax examination of Drummond American’s treatment of sales agents as independent contractors for 2007–2008. The company said the IRS may seek adjustments, penalties, and interest; the outcome and a reasonable estimate could not be determined, and an unfavorable result could materially affect the business and financial results. Other disclosed risks include economic conditions, inventory obsolescence, customer demand and product mix, commodity costs, transport disruptions, information-system disruptions, execution of strategic initiatives, workforce retention, taxation, and influence of a controlling stockholder. Management reported disclosure controls effective and no material change in risk factors from prior filings.
Important facts for investors to verify
- Confirm that this Lawson Products filing, rather than a Distribution Solutions Group filing, is the intended document.
- Assess whether MRO fulfillment and sales recovered after the ERP conversion and whether related costs, customer impacts, and margin pressure persisted.
- Monitor operating cash flow, receivables and working-capital needs, cash levels, and capital spending against management’s outlook.
- Review the status and potential financial exposure of the Drummond IRS examination; the filing provides no estimable loss range.
- Separate recurring operating performance from prior-year legal-settlement and asset-sale gains when comparing periods.