Business context and reporting period
This is Lawson Products, Inc.’s unaudited Form 10-Q for the three months ended March 31, 2014, not a filing naming Distribution Solutions Group, Inc. as registrant. Lawson operated in one reportable segment, Maintenance, Repair and Operations (MRO), following the sale of substantially all assets of subsidiary ASMP on February 14, 2014. Prior-year results were reclassified for discontinued operations.
Financial performance and liquidity
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Net sales | $69.2 million | $67.2 million |
| Gross profit / margin | $41.3 million / 59.6% | $39.8 million / 59.2% |
| SG&A | $43.1 million | $43.3 million |
| Operating loss | $4.7 million | $3.5 million |
| Continuing-operations loss | $4.3 million | $3.6 million |
| Net loss | $3.0 million | $3.2 million |
| Operating cash flow from continuing operations | $(7.1) million | $(2.2) million |
Sales rose 3.0% (3.9% excluding a $0.6 million Canadian currency impact); average daily sales increased 3.0%. Gross margin improved 0.4 percentage points, primarily on lower outbound freight. SG&A declined as a share of sales, but a $2.9 million non-cash Reno distribution-center impairment contributed to the higher operating loss. Discontinued operations contributed $1.4 million, including a $1.2 million after-tax gain on the ASMP sale; this helped reduce the reported net loss.
Cash and cash equivalents were $1.0 million at March 31, 2014, versus $0.7 million at year-end; an additional $0.8 million was restricted. The company received $12.1 million net proceeds from the ASMP sale and used $4.4 million to repay its revolver. Revolver borrowings were $11.6 million, with $22.9 million available; the facility expires in August 2017. The company reported compliance with covenants: EBITDA-to-fixed-charges ratio of 2.41:1 against 1.10:1 required, and tangible net worth of $54.5 million against a $45.0 million minimum. Total liabilities were $83.9 million and stockholders’ equity was $62.9 million at quarter-end.
Changes, outlook, and risks
- Lawson added 30 net sales representatives in the quarter, bringing the total to 836. Management planned to expand the sales force by approximately 15%–20% in 2014, while expecting near-term pressure on sales per representative as new hires build territories. Average sales per representative declined 4.2% year over year.
- Management said cash from operations and borrowing availability should be sufficient for operating requirements, strategic initiatives, and capital improvements through the rest of 2014. No specific earnings or revenue guidance was provided.
- Future covenant noncompliance could raise financing costs, restrict borrowing, or impair access to credit. Other stated risks include economic and customer-demand conditions, recruiting and retaining sales staff, inventory obsolescence, systems disruption and cyber incidents, commodity and energy costs, and execution of strategic initiatives.
- The company recorded no reserve for a proposed $3.4 million Canadian tax adjustment covering 2008–2009; it disputed the adjustment and was pursuing competent-authority review. It also had not recorded a reserve for potential remediation at a contaminated Decatur, Alabama site because the extent and cost could not yet be reasonably estimated.
- The Reno distribution center was classified as held for sale at an estimated realizable value of $8.4 million after the impairment charge. Substantially all ASMP assets were sold for a stated purchase price of $12.5 million, subject to working-capital adjustments and assumption of certain liabilities.
Important facts for investors to verify
- Confirm the intended issuer: the supplied filing is for Lawson Products, Inc., despite the request metadata naming Distribution Solutions Group, Inc.
- Track the final ASMP sale proceeds and any closing working-capital adjustments, and distinguish continuing MRO results from discontinued operations.
- Monitor cash generation, revolver availability, and covenant headroom, especially given the $7.1 million continuing-operations cash outflow.
- Check progress and valuation for the Reno property sale, and any developments in the Canadian tax examination or Decatur environmental review.