Distribution Solutions Group, Inc. annual report, FY2013

Business context and reporting period

The supplied filing is Lawson Products, Inc.’s Form 10-K for the fiscal year ended December 31, 2013—not a filing under the name Distribution Solutions Group, Inc. Lawson distributed maintenance, repair and operations (MRO) products in the U.S. and Canada, primarily through a vendor-managed-inventory sales model. The company reported one continuing operating segment after classifying Automatic Screw Machine Products (ASMP) as discontinued operations.

Financial performance and liquidity

Fourth-quarter 2013 sales were $65.7 million, up from $64.5 million in fourth-quarter 2012. Fourth-quarter continuing operations recorded a $3.6 million loss, including a $2.9 million headquarters sublease charge; net loss was $2.9 million after $0.7 million of discontinued-operations income.

At year-end, cash and cash equivalents were $0.7 million and restricted cash was $0.8 million. The revolving credit balance was $16.1 million, with $17.9 million of additional availability under a $40 million facility. Total assets were $159.9 million, total liabilities $94.0 million, and stockholders’ equity $65.9 million. Operating lease commitments were $12.5 million and financing lease obligations $11.1 million. The company reported compliance with its financial covenants: a 2.30:1.00 EBITDA-to-fixed-charges ratio versus a 1.10:1.00 minimum, and tangible net worth of $57.7 million versus a $45.0 million minimum.

Changes versus prior period

• Sales declined 1.5% year over year; excluding the adverse Canadian currency effect, the decline was 1.2%. Government sales fell $5.2 million.
• Gross margin increased 2.3 percentage points, principally due to lower outbound freight and lower excess-inventory reserves; 2012 included a $3.9 million charge for discontinued products.
• SG&A fell $6.3 million, mainly from lower general and administrative costs, partly offset by higher selling costs, including health insurance and the national sales meeting.
• The much smaller 2013 loss compared with 2012 reflects, among other factors, the absence of 2012’s $28.3 million goodwill impairment and $33.3 million deferred-tax valuation allowance increase. Lawson maintained a valuation allowance against substantially all net deferred tax assets.
• Operating cash flow improved from a use of $8.3 million to generation of $0.6 million. Capital spending fell substantially after completion of major McCook distribution-center investments.

Outlook, commentary, risks and unusual items

Management’s 2014 priorities were sales growth and continued operational improvement. It planned to expand the sales-representative count by approximately 15%–20% by year-end, while warning of near-term training and other costs and lower average sales per representative as new hires build territories. The company also planned to broaden its Lean Six Sigma program and improve order completeness, service levels and backorders. Management expected operating cash flow and available credit to fund 2014 requirements.

• ASMP was sold on February 14, 2014 for a stated cash purchase price of $12.5 million, subject to working-capital adjustments and assumption of certain liabilities. Management expected an approximately $1.6 million pretax gain and used sale proceeds to reduce revolver borrowings.
• A $2.9 million charge was recorded for subleasing part of the Chicago headquarters. The IRS employment-tax matter was settled for $0.8 million, producing a $0.4 million benefit versus the prior reserve.
• Environmental contamination at a Decatur, Alabama property remained under investigation; the company said it could not reasonably estimate remediation costs and had recorded no reserve.
• Canadian tax authorities proposed $1.3 million of additional tax for 2008–2009; Lawson disputed the adjustment and had not recorded a reserve. The filing also identifies economic, inventory-obsolescence, competition, sales-force recruitment, cybersecurity, commodity-cost, and credit-facility covenant risks.
• The filing states that management and the auditor concluded internal control over financial reporting was effective, and the financial-statement audit opinion was unqualified.

Important facts for investors to verify

1. Confirm the issuer identity: the supplied 10-K is for Lawson Products, Inc., despite the request metadata naming Distribution Solutions Group, Inc.
2. Review the post-year-end ASMP sale proceeds, working-capital adjustments, realized gain and resulting debt reduction.
3. Track sales-force expansion, productivity, sales trends and whether margins hold as national accounts grow.
4. Monitor revolver availability, covenant headroom, operating cash generation and the company’s substantial lease and other contractual obligations.
5. Follow the Decatur environmental investigation and the disputed Canadian tax assessment; neither exposure had a recorded reserve in the filing.