Filing identity and reporting period
The supplied filing is Lawson Products, Inc.’s unaudited Form 10-Q for the quarter ended September 30, 2014—not a filing identified in its text as being for Distribution Solutions Group, Inc. The company reported one segment: Maintenance, Repair and Operations (MRO) distribution.
Financial results
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net sales | $74.1 million | $68.2 million | $215.4 million | $203.8 million |
| Gross profit / margin | $44.5 million / 60.1% | $41.2 million / 60.4% | $129.6 million / 60.2% | $121.7 million / 59.7% |
| Operating income (loss) | $0.7 million | $0.9 million | $(2.8) million | $(2.9) million |
| Continuing income (loss) | $0.5 million | $0.2 million | $(3.1) million | $(3.4) million |
| Net income (loss) | $0.5 million | $0.6 million | $(1.7) million | $(2.2) million |
| Net income (loss) per diluted share | $0.05 | $0.07 | $(0.20) | $(0.26) |
Q3 sales rose 8.6%; management cited growth in national accounts and Kent Automotive, a larger sales force, and improved productivity among established representatives. Average daily sales per representative fell 4.6% year over year as new hires developed their territories. Q3 gross margin declined 0.3 percentage points, primarily due to lower freight recoveries and a greater mix of lower-margin national accounts. Nine-month gross margin improved 0.5 points, with lower outbound freight and distribution-center efficiencies cited.
Cash flow, balance sheet and liquidity
- For the first nine months, continuing operations used $2.1 million of cash, versus $1.3 million in the prior-year period. Cash from investing activities was $19.1 million, including $12.1 million of net proceeds from the ASMP sale and $8.3 million from the Reno property sale. The company used $16.1 million to repay its revolving credit balance.
- Cash and cash equivalents were $1.1 million at September 30, 2014, and restricted cash was $0.8 million. The company had no revolver borrowings, $1.6 million in letters of credit, and $33.1 million of additional borrowing availability under its $40 million facility.
- Total assets were $137.7 million and total liabilities were $73.2 million. The filing reports a $9.6 million financing lease obligation. Operating cash use included a $6.0 million increase in accounts receivable and payments against accounts payable and other liabilities.
- The company was in compliance with its financial covenants: actual EBITDA-to-fixed-charges ratio was 2.73:1 against a 1.10:1 minimum; tangible net worth was $56.7 million against a $45.0 million minimum.
Material changes and management outlook
- Lawson completed the sale of substantially all ASMP assets in February 2014 for a stated purchase price of $12.5 million, subject to working-capital adjustments and assumption of certain liabilities. Nine-month discontinued-operations income was $1.4 million, including a $1.2 million after-tax gain on sale.
- The Reno, Nevada distribution-center sale resulted in a $3.0 million noncash impairment charge. Lawson leased back about half the building for 10 years, with approximately $4.6 million of base rent over the lease term, plus operating expenses and real estate taxes.
- Management said it added 88 net sales representatives in the first nine months, reaching 894, and planned to increase the sales force by approximately 15% by year-end 2014 compared with year-end 2013. It expected near-term pressure on sales per representative as new hires built customer relationships.
- Management believed operating cash flow and available credit would be sufficient for operating needs, strategic initiatives, and capital improvements through the remainder of 2014. No specific revenue or earnings guidance was provided.
- Q3 general and administrative expenses included $0.7 million in proceeds from a legal settlement, which reduced reported expense. Incentive compensation and new sales-representative costs affected expenses.
Risks, contingencies and other notable items
- Substantially all deferred tax assets were subject to a valuation allowance because of cumulative losses. The company was undergoing tax examinations, including a Canadian Revenue Agency matter involving proposed adjustments of about C$3.4 million for 2008 and 2009; management recorded no reserve and said it expected to prevail.
- A Decatur, Alabama site had soil and groundwater contamination attributed to historical operations before Lawson’s ownership. The company said available information was insufficient to estimate remediation costs and had not recorded a reserve.
- Disclosed risks include economic and market conditions, recruiting and retaining sales representatives, generating cash and meeting credit covenants, inventory obsolescence, system disruptions and cyberattacks, commodity and energy prices, regulatory compliance, and execution of strategic initiatives.
- The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Confirm the intended issuer: the filing names Lawson Products, Inc., while the request metadata names Distribution Solutions Group, Inc.
- Review subsequent filings for progress against the sales-force expansion plan and the effect of new hires on sales productivity and margins.
- Check cash generation, receivables and working-capital trends, credit availability, and continued covenant compliance.
- Monitor the environmental matter and Canadian tax examination for developments, potential reserves, or financial impact.
- Assess the sustainability of results excluding the Reno impairment and the one-time legal-settlement proceeds.