Filing summary
Entity and period: The supplied Form 10-Q is for Lawson Products, Inc. (not Distribution Solutions Group, Inc.) and covers the quarter and six months ended June 30, 2013. Lawson reported its MRO distribution business as its continuing operation; ASMP was classified as discontinued operations following the company’s stated intent to sell it.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net sales | $68.3 million | $69.8 million | $135.5 million | $141.2 million |
| Gross profit / margin | $40.6 million / 59.5% | $35.7 million / 51.2% | $80.4 million / 59.4% | $76.0 million / 53.8% |
| Operating loss | $0.2 million | $42.1 million | $3.7 million | $45.6 million |
| Continuing operations income (loss) | $0.009 million | ($61.5 million) | ($3.6 million) | ($63.7 million) |
| Net income (loss) | $0.4 million | ($61.2 million) | ($2.8 million) | ($63.0 million) |
| Continuing operations diluted EPS | $0.00 | ($7.17) | ($0.42) | ($7.42) |
Q2 sales declined 2.2% year over year; first-half sales declined 4.0%. Management attributed the decrease principally to fewer sales representatives, lower government sales, and one fewer selling day. Gross margin improved substantially, mainly due to lower freight costs and lower inventory reserves; the 2012 comparison included a $3.9 million charge for discontinued products. Management cautioned that national-account growth and competition could pressure future gross margins.
For the first half, cash used in continuing operating activities was $6.7 million, versus $7.8 million in 2012. Capital expenditures were $1.7 million, down from $15.5 million. Cash and cash equivalents were $0.3 million at June 30, 2013, down from $1.6 million at year-end 2012; the company also held $0.4 million of restricted cash. Working-capital increases contributed to operating cash use.
Liquidity, debt, and balance sheet
- Revolving-credit borrowings were $23.3 million at June 30, 2013, with $15.0 million of additional availability under a $40 million facility expiring in August 2017. The weighted-average interest rate for the first half was 3.0%.
- Total assets were $170.7 million and total liabilities were $102.8 million. Inventory was $47.0 million, compared with $44.7 million at December 31, 2012.
- Credit-facility EBITDA, as defined by the agreement, was $2.8 million for the quarter, above the $2.0 million minimum covenant. Future quarterly minimums listed in the filing rise to $3.5 million for September 2013 and $3.0 million for December 2013.
- No dividends were paid in the first half of 2013. The company stated it expected operating cash, facility availability, and anticipated ASMP sale proceeds to fund requirements through the rest of 2013.
Material changes, outlook, and risks
- ASMP sale proposal: On June 14, 2013, Lawson signed a non-binding letter of intent to sell substantially all ASMP assets for $12.5 million in cash, subject to working-capital adjustments and assumption of certain liabilities. The transaction remained subject to due diligence, approvals, lender and governmental consents, and definitive agreements; management expected to finalize it in Q3 2013. ASMP generated $9.5 million in first-half sales and $0.8 million of after-tax income.
- Cost comparisons benefited from 2012 restructuring charges, a $28.3 million goodwill impairment, a $2.1 million property-sale gain, and a $33.5 million deferred-tax valuation-allowance charge. These unusual prior-period items account for much of the improvement in reported losses.
- Substantially all deferred tax assets remained subject to a valuation allowance due to historical losses. The company recorded a $0.7 million tax benefit in continuing operations for the first half of 2013.
- The company disclosed a $9.5 million IRS proposed adjustment concerning the classification of certain sales representatives as independent contractors; it had recorded a $1.2 million liability and intended to contest the matter. An adverse result could materially affect results and financial condition.
- Environmental contamination at an ASMP-owned Alabama site was under investigation; the potential remediation cost was not estimable and no reserve was recorded. The filing also described a Canadian tax audit proposal and stated the company planned to contest it.
- Management warned that failure to meet future credit covenants could increase financing costs, impose restrictions, or limit borrowing. Other stated risks included economic conditions, sales-force retention, inventory obsolescence, operating-system disruptions, and execution of strategic initiatives.
Important facts for investors to verify
- Confirm the issuer: this source filing identifies Lawson Products, Inc., despite the request metadata naming Distribution Solutions Group, Inc.
- Track the ASMP transaction’s completion, final proceeds and adjustments, and the effect of its disposition on liquidity and covenant requirements.
- Monitor sales-force levels, daily sales trends, and whether improved gross margins persist amid competition and a growing national-account mix.
- Assess cash generation, working-capital needs, borrowing availability, and compliance with upcoming EBITDA covenants.
- Follow developments in the IRS employment-tax matter, Canadian tax examination, and ASMP environmental investigation.