Filing identity and period
The supplied filing is Lawson Products, Inc.’s unaudited Form 10-Q for the quarter and six months ended June 30, 2012; it does not identify Distribution Solutions Group, Inc. Investors should verify that this is the intended filing. Unless stated otherwise, dollar amounts below are in millions.
Financial performance and liquidity
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net sales | $74.3 | $84.2 | $150.3 | $166.7 |
| Gross profit / margin | $36.8 / 49.5% | $48.3 / 57.4% | $78.2 / 52.0% | $98.2 / 58.9% |
| Operating income (loss) | $(41.4) | $1.6 | $(44.3) | $5.3 |
| Net income (loss) | $(61.2) | $1.1 | $(63.0) | $3.1 |
| Diluted loss (income) per share | $(7.12) | $0.12 | $(7.34) | $0.36 |
| Cash from continuing operations | Not separately provided | Not separately provided | $(7.1) | $(7.1) |
At June 30, cash was $1.2, revolving-credit borrowings were $14.8, and current assets and current liabilities were $97.9 and $62.5, respectively. The company spent $15.6 on capital expenditures, received $8.8 from property sales, and paid $2.1 in dividends during the first half. Total assets were $177.7, down from $222.7 at year-end 2011; stockholders’ equity was $69.7, down from $134.2.
Material changes and unusual items
- Q2 sales fell 11.7% year over year; first-half sales fell 9.9%. MRO sales declined 13.4% in Q2 and 11.7% for the half, while OEM sales grew 28.0% and 33.0%, respectively.
- MRO gross margin declined to 51.2% in Q2 from 59.1%, and to 53.8% for the half from 60.6%. Management cited lower freight recoveries, inventory reserves, added customer-service labor, and sales mix shifting toward lower-margin national accounts. The company increased its obsolete and excess inventory reserve by $6.5 during the first half.
- The company recorded a noncash $28.3 goodwill impairment, eliminating the remaining goodwill, after operating losses and reduced market capitalization indicated impairment.
- A restructuring eliminated approximately 120 corporate and distribution positions and generated $6.6 of Q2 severance expense. A $2.1 gain was recorded on sales of three Illinois properties; proceeds were $8.8.
- Income tax expense was $19.5 in Q2 and $18.3 for the half despite pretax losses. A $33.5 deferred-tax valuation allowance was recorded because recovery of substantially all deferred tax assets was considered uncertain.
Debt, outlook, and risks
At June 30, the company was out of compliance with the existing facility’s minimum EBITDA covenant (actual $(8.2) versus a $2.0 minimum), but received a waiver for the quarter. It was in compliance with the other stated covenants. On August 8, 2012, it entered a new five-year, $40.0 revolving facility, replacing the $55.0 facility. Availability is subject to borrowing-base limits, and the agreement includes EBITDA and other financial covenants, collateral, and dividend restrictions. Management said operating cash flow and facility availability should fund operating needs, strategic initiatives, and capital improvements through 2012, while warning that covenant failure could restrict or reduce borrowing capacity.
Other disclosed risks include sales-representative retention, implementation of strategic initiatives, economic conditions, inventory obsolescence, customer demand and product mix, commodity costs, system disruptions, and meeting credit covenants. An IRS examination challenges the independent-contractor treatment of Drummond American sales representatives for 2007–2008; the IRS proposed an adjustment of $9.5 including penalties. The company intends to defend its position and had accrued $1.2 as its best estimate of resolution cost; an unfavorable outcome could materially affect results.
Most important facts to verify
- Confirm the registrant identity: this filing is for Lawson Products, Inc., not Distribution Solutions Group, Inc.
- Review the new credit facility’s borrowing-base availability, covenant tests, and subsequent compliance; June 30 covenant noncompliance had required a waiver.
- Assess whether MRO sales and margins stabilize, and whether inventory reserves and customer attrition create further pressure.
- Evaluate deferred-tax-asset recoverability and the potential outcome of the employment-tax examination.
- Track restructuring execution, the McCook distribution-center transition, related capital spending, and liquidity given low cash and negative operating cash flow.