Business context and reporting period
Important identity mismatch: The supplied filing is Lawson Products, Inc.’s Form 10-Q, not a filing for Distribution Solutions Group, Inc. It covers the quarter and nine months ended September 30, 2013.
Lawson reported one continuing segment, Maintenance, Repair and Operations (MRO), distributing products and services to industrial, commercial, institutional and government customers. Its Original Equipment Manufacturers subsidiary, ASMP, was classified as discontinued operations.
Financial performance
| Metric | Third quarter 2013 | Third quarter 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net sales | $68.2 million | $67.9 million | $203.8 million | $209.1 million |
| Gross profit / margin | $41.2 million / 60.4% | $42.5 million / 62.6% | $121.7 million / 59.7% | $118.5 million / 56.7% |
| Operating income (loss) | $0.9 million | $(1.7) million | $(2.9) million | $(47.3) million |
| Income (loss) from continuing operations | $0.2 million | $(1.6) million | $(3.4) million | $(65.3) million |
| Net income (loss) | $0.6 million | $(1.3) million | $(2.2) million | $(64.3) million |
| Net income (loss) per share | $0.07 | $(0.15) | $(0.26) | $(7.49) |
For the nine months, continuing-operations operating cash flow was negative $1.3 million, versus negative $11.3 million in 2012. Capital expenditures were $1.9 million, compared with $16.3 million; continuing-operations financing provided $2.2 million, primarily from revolver borrowings. Cash and cash equivalents were $0.4 million at September 30, 2013, plus $0.8 million of restricted cash.
At quarter-end, revolving credit borrowings were $18.3 million, with $17.5 million of additional availability under the $40 million facility. The company separately reported a $10.4 million financing lease obligation. Total liabilities were $95.1 million and stockholders’ equity was $69.0 million. The revolver’s weighted-average interest rate through the first nine months was 3.0%.
Material changes versus prior periods
- Third-quarter sales rose slightly year over year, but excluding foreign exchange effects increased 1.0%; average daily sales per representative declined 1.2%. Nine-month sales fell 2.5% (2.3% excluding currency), reflecting fewer representatives earlier in the year and lower government sales.
- Third-quarter gross margin fell to 60.4% from 62.6%, partly because the prior-year quarter benefited from sales of discontinued products. Nine-month margin improved to 59.7% from 56.7%, mainly due to lower outbound freight and inventory-reserve costs; 2012 included a $3.9 million product-discontinuation charge.
- Cost reductions improved SG&A: nine-month SG&A declined to $123.6 million from $131.5 million. The 2012 comparison also included $8.2 million of severance, a $28.3 million noncash goodwill impairment, and a $2.1 million gain on property sales.
- Lawson added 11 net sales representatives in the third quarter, reaching 784. Management targeted more than 800 active representatives by year-end 2013 and planned continued expansion in 2014.
Outlook, risks and unusual items
- Management said expanded sales coverage may support future growth, but expected a short-term reduction in average sales per representative as new hires build customer relationships. It also warned gross margin could remain under pressure from national-account mix and competition.
- The September 2013 loan amendment set minimum defined EBITDA of $2.0 million for the September quarter, $3.0 million for December 2013, and $3.5 million for each of the first two quarters of 2014. Defined EBITDA was $4.0 million for the September quarter, in compliance. Management expected future minimums to be reduced in light of the anticipated ASMP sale. A covenant failure could increase financing costs, restrict borrowing or reduce facility availability.
- On October 11, 2013, Lawson agreed to sell substantially all ASMP assets for $12.5 million in cash, subject to working-capital adjustments, assumption of certain liabilities, customary closing conditions and CFIUS clearance. Closing was expected in the fourth quarter. ASMP generated $4.7 million of third-quarter sales and $0.7 million of pretax income.
- Lawson reported a $1.2 million liability for an IRS worker-classification dispute, against a proposed adjustment of $9.5 million including penalties; the company intended to contest the matter. It also disclosed contamination at an ASMP-owned Alabama site excluded from the sale; remediation costs could not yet be reasonably estimated, and no reserve was recorded.
- Substantially all deferred tax assets remained subject to a valuation allowance because of cumulative losses. A Canadian tax audit proposal sought to increase taxable income by C$3.4 million for 2008–2009; Lawson said it planned to contest the proposal.
- Management believed operating cash, borrowing availability and anticipated ASMP sale proceeds would fund requirements through the remainder of 2013. Risks cited included cash generation, covenant compliance, sales-force retention and execution, economic conditions, inventory obsolescence, operating disruptions, commodity costs and tax or environmental outcomes. Management reported disclosure controls effective and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Confirm the issuer: this document identifies Lawson Products, Inc., not Distribution Solutions Group, Inc.
- Check whether the ASMP sale closed, its final proceeds and adjustments, and the effect on covenant requirements and liquidity.
- Monitor covenant EBITDA performance, borrowing availability, working-capital needs and cash generation.
- Assess whether sales-force growth converts to higher sales and whether gross-margin pressure persists.
- Follow developments in the IRS employment-tax matter, the Canadian tax examination and the Alabama environmental investigation, including any changes to recorded liabilities or estimates.