Distribution Solutions Group - 10-Q quarterly report FY2011 Q2

 

(Exact name of registrant as specified in its charter)

(847) 827-9666
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yesþ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

The number of shares outstanding of the registrant’s common stock, $1 par value, as of July 15, 2011 was 8,565,517.

 

 

This Quarterly Report on Form 10-Q contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties. The terms “may,” “should,” “could,” “anticipate,” “believe,” “continues,” “estimate,” “expect,” “intend,” “objective,” “plan,” “potential,” “project” and similar expressions are intended to identify forward-looking statements. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. These statements are based on management’s current expectations, intentions or beliefs and are subject to a number of factors, assumptions and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. Factors that could cause or contribute to such differences or that might otherwise impact the business include:

all other factors discussed in the Company’s “Risk Factors” set forth in its Annual Report on Form 10-K for the year ended December 31, 2010 and in this Quarterly Report on Form 10-Q.

The Company undertakes no obligation to update any such factors or to publicly announce the results of any revisions to any forward-looking statements contained herein whether as a result of new information, future events or otherwise.

See notes to condensed consolidated financial statements.

See notes to condensed consolidated financial statements.

See notes to condensed consolidated financial statements.

The accompanying unaudited condensed consolidated financial statements of Lawson Products, Inc. (the “Company”) have been prepared in accordance with generally accepted accounting principles for interim financial information, the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not contain all disclosures required by generally accepted accounting principles. Reference should be made to the Company’s Annual Report on Form 10-K for the year ended December 31, 2010. In the opinion of the Company, all normal recurring adjustments have been made, that are necessary to present fairly the results of operations for the interim periods. Operating results for the three and six month periods ended June 30, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011.

The condensed consolidated financial statements have been reclassified for all prior periods presented to reflect current discontinued operations treatment (see Note 2 — Discontinued Operations). Unless noted otherwise, discussions in the Notes to Condensed Consolidated Financial Statements pertain to continuing operations. Certain other reclassifications have been made to prior period amounts to conform to current period presentation. Such reclassifications have no effect on net income as previously reported.

There have been no material changes in our significant accounting policies during the six months ended June 30, 2011 as compared to the significant accounting policies described in our Annual Report on Form 10-K for the year ended December 31, 2010. The Company has determined that there were no subsequent events to recognize or disclose in these financial statements.

In December 2010, the Company sold substantially all of the assets of Rutland Tool & Supply Company, Inc. (“Rutland”). Accordingly, Rutland’s results of operations have been reflected in discontinued operations. Rutland’s net sales, which were previously included in the Company’s Maintenance Repair and Operations (“MRO”) segment, were $7.9 million and $15.6 million for the three and six month periods ended June 30, 2010, respectively.

In August 2010, the Company sold substantially all of the assets of Assembly Component Systems, Inc. (“ACS”) and as a result, ACS’s results of operations have been reflected in discontinued operations. ACS’s net sales, which were previously included in the Company’s Original Equipment Marketplace (“OEM”) segment, were $13.4 million and $25.9 million for the three and six month periods ended June 30, 2010, respectively.

Components of inventories were as follows:

The table below shows the changes in the Company’s reserve for severance and related payments, included in accrued expenses and other liabilities on the Condensed Consolidated Balance Sheets as of June 30, 2011 and 2010:

In the first six months of 2010, the Company received cash proceeds of $2.0 million from the sale of its Dallas, Texas distribution center, resulting in a gain of $1.7 million.

During the six month period ended June 30, 2010, the Company recorded a $0.6 million benefit related to proceeds received from legal remedies related to the actions of several former sales agents and Share Corporation alleging, among other things, breach of contract and interference with customer relationships.

The Company and its subsidiaries are subject to U.S. Federal income tax as well as income tax of multiple state and foreign jurisdictions. As of June 30, 2011, the Company is subject to U.S. Federal income tax examinations for the year 2009 and income tax examinations from various other jurisdictions for the years 2005 through 2010.

Components of comprehensive income for the three and six months ended June 30, 2011 and 2010 are as follows:

Note 9 — Related Party Transaction

The Company’s Chairman of the Board, Dr. Port, was a partner in two partnerships that had an interest in Lawson’s common stock. During 2010, litigation was initiated against Dr. Port, requesting that the partnerships be changed to allow the partners to have more control over their respective shares. The suit named Dr. Port as a defendant based on his role in the partnerships and as a Director of the Company. The Company was not a party to the lawsuit.

On March 17, 2011 the litigation was settled with assets distributed under the terms of a settlement agreement and all parties agreed to release Dr. Port, individually and as a Director of the Company, from any and all claims related to the litigation. Through June 30, 2011, the Company had incurred $0.8 million for legal services provided to Dr. Port in relation to this litigation of which $0.1 million was incurred during the six months ended June 30, 2011.

The Company has two operating segments: MRO and OEM. The Company’s MRO segment is a distributor of products and services to the industrial, commercial, institutional, and governmental Maintenance, Repair and Operations marketplace. The Company’s OEM segment manufactures, sells and distributes production and specialized component parts to the Original Equipment Marketplace. The Company’s two reportable segments are distinguished by the nature of products distributed and sold, types of customers and manner of servicing them. The Company evaluates performance and allocates resources to reportable segments primarily based on operating income.

The following table presents summary financial information for the Company’s reportable segments:

The following table presents a summary of our financial performance for the three months ended June 30, 2011 and 2010:

Net sales for the second quarter of 2011 increased 4.8% to $84.2 million, from $80.3 million in the second quarter of 2010. Excluding the Canadian exchange rate impact, net sales increased 4.1% for the quarter.

MRO net sales increased 5.0% in the second quarter of 2011, to $80.6 million from $76.8 million in the prior year period, primarily reflecting continued growth within our national, governmental and automotive sectors of our business, partially offset by a moderation in our other sectors. MRO average daily sales increased to $1.260 million in the second quarter of 2011 compared to $1.200 million in the second quarter of 2010, driven by an increase in average daily orders and average order size.

OEM net sales of $3.5 million in the second quarter of 2011 were relatively unchanged compared to the prior year quarter.

Gross profit decreased $0.5 million in the second quarter of 2011, to $48.3 million from $48.8 million in the prior year period. MRO gross profit as a percent of net MRO sales decreased to 59.1% in the second quarter of 2011, compared to 62.8% achieved in the second quarter of 2010. The decline reflects the strategic decision to pursue larger customers with slightly lower margins to better balance our account portfolio that should deliver sustained top-line growth, increased customer retention and margin dollar expansion over time. On a combined basis, national and government accounts represent approximately 17.8% of net sales for the quarter versus approximately 16.2% in the prior year quarter.

OEM gross profit increased $0.1 million and increased as a percent of OEM sales to 18.3% in the second quarter of 2011 from 15.9% in the second quarter of 2010, driven primarily by higher margin customers.

SG&A expenses increased 3.3% to $46.2 million in the second quarter of 2011 from $44.8 million in 2010. As a percent of net sales, SG&A improved by 0.9 percentage points to 54.9% in the second quarter of 2011 compared to 55.8% in the second quarter of 2010.

Total selling expenses increased from $20.7 million in the second quarter of 2010 to $21.3 million in the second quarter of 2011 and decreased as a percent of net sales to 25.3% in 2011 from 25.8% in 2010. The decrease, as a percent of sales, reflects the changes of the district sales managers transitioning to full-time employees during 2010, the planned shift toward higher volume lower margin national customers that pay a lower commission and lower insurance costs.

Excluding total selling expenses, G&A expenses increased $0.9 million. The increase was primarily driven by $2.4 million of ERP implementation expenses partially offset by decreased stock based compensation expense of $0.6 million and lower incentive compensation. Excluding ERP, G&A expenses decreased $0.9 million or 3.9% for the quarter.

Severance expense in the second quarter of 2011 was $0.5 million compared to $1.2 million in the second quarter of 2010. Severance expense in both 2011 and 2010 related to the elimination of certain positions associated with the realignment of various operating responsibilities.

Income tax expense of $0.5 million was recorded based on pre-tax income of $1.6 million for the three months ended June 30, 2011, resulting in an effective tax rate of 31.3%. For the three months ended June 30, 2010, income tax expense was $1.1 million based on pre-tax income of $2.6 million, resulting in an effective tax rate of 43.5%. The 2011 tax rate decreased from 2010 primarily due to the effect of valuation expenses recorded in 2010.

We reported income from continuing operations of $1.1 million or $0.13 per diluted share in the second quarter of 2011. Income from continuing operations for the second quarter of 2010 was $1.5 million or $0.17 per diluted share.

The following table presents a summary of our financial performance for the six months ended June 30, 2011 and 2010:

Net sales for the first six months of 2011 increased 7.4% to $166.7 million, from $155.2 million in the first six months of 2010. Excluding the Canadian exchange rate impact, net sales increased 6.7% over the prior year period.

MRO net sales increased 7.5% in the first six months of 2011, to $159.9 million from $148.7 million in the prior year period, primarily reflecting continued growth within our national, governmental and automotive sectors of our business. MRO average daily sales increased to $1.259 million in the first six months of 2011 compared to $1.171 million in the first six months of 2010, driven by improvements in average orders per day and average order size.

OEM net sales increased 5.7% in the first six months of 2011, to $6.9 million from $6.5 million in the prior year period, driven by strength in our aerospace customer base and new customer growth.

Gross profit increased $3.1 million in the first six months of 2011, to $98.2 million from $95.1 million in the prior year period. MRO gross profit as a percent of net MRO sales decreased to 60.6% in the first six months of 2011, compared to 63.3% achieved in the prior year period, primarily due to the shift toward acquiring new customers at lower margins which should increase retention and allow for margin dollar expansion over time. On a combined basis, national and government accounts represent approximately 18.2% of net sales for the first six months of 2011 versus approximately 14.8% in the prior year period.

OEM gross profit increased $0.3 million and increased as a percent of OEM sales to 19.0% in the first six months of 2011 from 14.7% in the first six months of 2010. The improvement as a percent of sales was primarily driven by higher margin new business growth.

SG&A expenses increased $3.2 million or 3.6% to $91.7 million in the first six months of 2011 from $88.5 million in 2010. As a percent of net sales, SG&A improved by 2.0 percentage points to 55.0% in the first six months of 2011 compared to 57.0% in the prior year period.

Total selling expenses increased to $41.6 million in the first six months of 2011 from $40.5 million in the first six months of 2010 and decreased as a percent of net sales to 24.9% in 2011 from 26.1% in 2010. The decrease, as a percent of sales, reflects the changes of the district sales managers transitioning to full-time employees during 2010, the planned shift toward higher volume lower margin national customers that pay a lower commission and lower insurance costs.

Excluding total selling expenses, G&A expenses increased $2.1 million or 4.3%. The increase was primarily driven by ERP implementation expenses of $4.3 million partially offset by lower incentive compensation. Excluding ERP, G&A expenses decreased $1.6 million or 3.4%.

Severance expense was $1.2 million in the first six months of 2011 compared to $1.7 million in the first six months of 2010. Severance expense in both 2011 and 2010 was primarily due to the elimination of certain positions supporting distribution services related to divested businesses or associated with the realignment of various operating responsibilities.

During the first six months of 2010 we recorded a gain on sale of assets of $1.7 million related to the sale of our Dallas, Texas distribution center.

In the first six months of 2010, we recorded a $0.6 million benefit related to proceeds received from legal remedies related to the actions of several former sales agents and Share Corporation alleging, among other things, breach of contract and interference with customer relationships.

Other expense, net of $0.5 million in the first six months of 2011 relates primarily to interest assessed on unclaimed property settlements.

Income tax expense of $1.7 million was recorded based on pre-tax income of $4.8 million for the six months ended June 30, 2011, resulting in an effective tax rate of 35.1%. For the six months ended June 30, 2010, income tax expense was $3.3 million resulting in an effective tax rate of 46.8%. The 2011 tax rate decreased from 2010 primarily due to the effect of valuation expenses recorded in 2010.

We reported income from continuing operations of $3.1 million or $0.36 per diluted share in the first six months of 2011. Income from continuing operations for the prior year period, which included the gain from the sale of the Dallas distribution center and a favorable legal settlement, was $3.7 million or $0.44 per diluted share. Excluding these items, income from continuing operations per diluted share in 2010 was $0.30.

Cash and cash equivalents were $22.7 million on June 30, 2011 compared to $40.6 million on December 31, 2010. Net cash used in operating activities was $7.1 million for the first six months of 2011 compared to $4.5 million for the first six months of 2010. The increase in cash used in operations was driven by increases in working capital during the first half of the year. Accounts receivable and inventories increased primarily to support business expansion while reductions in accrued expenses are primarily related to annual compensation plans which are traditionally made during the first half of the year.

Capital expenditures were $7.7 million for the first six months of 2011 compared to $3.6 million for the first six months of 2010. Capital expenditures related to the ERP implementation were $5.6 million for the first six months of 2011. Overall, we anticipate the total cost of the ERP implementation, including both capital and expense, will range from $25.0 million to $28.0 million of which $20.1 million has been incurred during 2010 and the first six months of 2011. We anticipate that total capital expenditures for 2011 will be $12.0 to $15.0 million.

The net outlay related to the sale of businesses in the first six months of 2011 consisted of a payment of approximately $0.9 million due to the final value of Rutland’s working capital that was sold in the fourth quarter of 2010, partially offset by $0.5 million received as payment on the note receivable from the sale of ACS in the third quarter of 2010. Cash flows from investing activities in the first half of 2010 benefited from the receipt of $2.0 million from the sale of our Dallas, Texas distribution center.

Net cash used in financing activities included dividend payments of $2.0 million and $1.5 million for the first six months of 2011 and 2010, respectively. In the first six months of 2010 we received $5.2 million in net borrowings on our revolving credit line compared to no net borrowings on our revolving line of credit in 2011.

At June 30, 2011 we were in compliance with all covenants related to our revolving line of credit as detailed below:

We believe that cash on hand, cash provided by future operations and our $55.0 million revolving line of credit will be sufficient to fund our operating requirements, capital expenditures, ERP implementation and other commitments and obligations in the next twelve months.

There have been no material changes in market risk at June 30, 2011 from that reported in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.

Under the supervision and with the participation of our senior management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this report (the “Evaluation Date”). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded as of the Evaluation Date that our disclosure controls and procedures were effective such that (i) the information relating to Lawson, including our consolidated subsidiaries, required to be disclosed in our SEC reports is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) include, without limitation, controls and procedures designed to ensure that information required to be disclosed is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

There was no change in the Company’s internal control over financial reporting during the quarter ended June 30, 2011 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

ITEMS 1, 2, 3 and 5 of Part II are inapplicable and have been omitted from this report.

There have been no material changes in the Company’s risk factors at June 30, 2011 from that reported in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010 with the exception of the following risk factor which has been updated to reflect the current risk.

At June 30, 2011, members of the Port family collectively beneficially owned approximately 49% of the outstanding shares of our common stock. In March 2011, in connection with the settlement of litigation between certain members of the Port family, Dr. Port received a proxy to vote the shares held by the members of the Port family until June 2012. As a result, Dr. Port has sole voting power of over 45% of the Company’s outstanding shares, which effectively permits him to control stockholder votes concerning the election of directors, by-law amendments, possible mergers, corporate control contests and other significant corporate transactions. The interests of Dr. Port may differ from those of other stockholders.

In addition, in filings with the Securities and Exchange Commission certain members of the Port family have indicated that they may sell their shares. Given the low historic trading volume of our common stock, such sales could reduce the market price of our common stock.

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.