Business context and reporting period
This is Lawson Products, Inc.’s Form 10-K for the fiscal year ended December 31, 2012—not a filing under the name Distribution Solutions Group, Inc. The company distributes maintenance, repair and operations (MRO) products and also manufactures specialized components for original equipment manufacturers (OEMs). MRO generated 94.2% of 2012 sales. Unless noted, amounts below are U.S. dollars.
Financial performance and liquidity
| Metric | 2012 | 2011 |
|---|---|---|
| Net sales | $290.5 million | $315.0 million |
| Gross profit / margin | $161.2 million / 55.5% | $179.8 million / 57.1% |
| Operating income (loss) | $(43.1) million | $(5.5) million |
| Continuing-operations net income (loss) | $(62.7) million | $(4.4) million |
| Net income (loss) | $(62.6) million | $(4.6) million |
| Cash from (used in) operations | $(7.3) million | $(22.9) million |
| Capital expenditures | $18.5 million | $11.1 million |
Sales fell 7.8%. MRO sales declined 8.9% to $273.6 million, mainly reflecting reduced sales-force coverage and a $10.1 million decrease in government sales; OEM sales rose 16.2% to $16.9 million. Consolidated gross margin declined 1.6 percentage points, with MRO margin down to 57.5% from 58.9%. Cash and cash equivalents were $1.6 million at year-end, versus $2.1 million. Current assets were $90.3 million and current liabilities $59.8 million.
At year-end, revolving-credit borrowings were $16.1 million. The filing gives differing figures for additional availability: $11.6 million in the liquidity discussion and credit-facility note, but $18.2 million in the risk-factor discussion. The five-year facility has a $40 million maximum commitment, borrowing-base limits, financial covenants and dividend restrictions. Noncurrent liabilities were $42.4 million; stockholders’ equity was $70.7 million, down from $134.2 million.
Fourth-quarter 2012 sales were $68.2 million, versus $72.9 million in fourth-quarter 2011. Fourth-quarter 2012 operating income was $2.5 million and net income was $1.7 million; the quarter included a $1.6 million gain on property sales.
Material changes and unusual items
- The $62.6 million annual net loss included a $28.3 million non-cash impairment that eliminated all reported goodwill and a $33.3 million increase in the deferred-tax valuation allowance. The filing says the allowance reflected uncertainty about using deferred tax assets.
- 2012 also included $8.0 million of severance expense, partly associated with workforce reductions and the former CEO’s retirement, and a $3.7 million gain from selling four properties for $12.3 million.
- Cash use from operations improved from $22.9 million in 2011 to $7.3 million in 2012, aided by collections and lower inventory; the company also spent $18.5 million on capital expenditures, primarily for its McCook facility, headquarters and website.
- Inventory reserves rose to $8.5 million from $5.0 million. Management attributed lower MRO margin partly to inventory reserves, reduced freight recoveries and a higher mix of lower-margin national accounts.
- The board suspended the quarterly common-stock dividend in the third quarter of 2012; declared dividends were $0.24 per share for the year, versus $0.48 in 2011.
Outlook, management commentary and risks
Management said it expected operating cash flow and credit-facility availability to fund 2013 requirements, initiatives and capital improvements. It provided no specific revenue or earnings forecast. Priorities included completing the Addison-to-McCook distribution transition, growing and training the sales force, using the redesigned website launched in early 2013, improving service and inventory productivity, and refining pricing and sourcing. Management cautioned that national-account growth and competition could continue to pressure gross margins.
All U.S. sales representatives became employees on January 1, 2013. The active sales force had declined to approximately 770 from 890 at year-end 2011; management said increased productivity had not offset vacant territories and planned to recruit. Other identified risks include execution and service disruption during facility consolidation, economic weakness, inventory obsolescence, dependence on information systems, employee retention, supplier interruptions, commodity and energy costs, and credit-covenant compliance.
- IRS employment-tax examination: The IRS proposed an adjustment of $9.5 million, including penalties, concerning a subsidiary’s independent-contractor classification for 2007–2008. Lawson disputed the assessment, maintained a $1.2 million liability and said an adverse outcome could be material.
- Environmental matter: Contamination was identified at an ASMP site in Alabama. The company had not accrued remediation costs because the available information was insufficient to estimate them.
- Potential construction liens: Unpaid subcontractors on McCook material-handling work could create potential company exposure estimated at $0–$1.0 million; no amount was accrued because an unfavorable outcome was not considered probable.
- The auditor issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded disclosure controls were effective.
Important facts for investors to verify
- Confirm the issuer identity: the supplied filing is for Lawson Products, Inc., although the request metadata names Distribution Solutions Group, Inc.
- Reconcile reported year-end revolver availability ($11.6 million in the MD&A and credit-facility note versus $18.2 million in a risk factor) and review borrowing-base and covenant headroom.
- Track quarterly covenant performance against the facility’s rising EBITDA thresholds and assess whether the expected 2013 operational improvements materialized.
- Monitor sales-force recruitment and productivity, McCook transition costs and service levels, and the effects of national-account mix on margins.
- Follow developments in the IRS examination, Alabama environmental investigation and potential subcontractor claims, as well as the recoverability of deferred tax assets.