DISTRIBUTION SOLUTIONS GROUP, INC.
10-Ks and 10-Qs
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
(Mark One)
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ý
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Quarterly Report under Section 13 OR 15(d) of the Securities Exchange Act of 1934
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For quarterly period ended
March 31, 2015
or
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¨
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Transition Report under Section 13 OR 15(d) of the Securities Exchange Act of 1934
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For the transition period from to
Commission file Number: 0-10546
(Exact name of registrant as specified in its charter)
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Delaware
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36-2229304
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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8770 W. Bryn Mawr Avenue, Suite 900, Chicago, Illinois
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60631
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(Address of principal executive offices)
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(Zip Code)
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(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
ý
No
¨
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). Yes
ý
No
¨
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.
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Large accelerated filer
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¨
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Accelerated filer
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ý
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Non-accelerated filer
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¨
(Do not check if a smaller reporting company)
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Smaller reporting company
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¨
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
¨
No
ý
The number of shares outstanding of the registrant’s common stock, $1 par value, as of
April 15, 2015
was
8,708,469
.
TABLE OF CONTENTS
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Page #
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2
“Safe Harbor” Statement under the Securities Litigation Reform Act of 1995:
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:
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•
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the effect of general economic and market conditions;
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•
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the ability to generate sufficient cash to fund our operating requirements;
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•
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the ability to meet the covenant requirements of our line of credit;
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•
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the market price of our common stock may decline;
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•
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inventory obsolescence;
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•
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work stoppages and other disruptions at transportation centers or shipping ports;
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•
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changing customer demand and product mixes;
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•
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increases in energy and commodity prices;
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•
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decreases in demand from oil & gas customers due to lower oil prices;
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•
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disruptions of our information and communication systems;
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•
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cyber attacks or other information security breaches;
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•
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failure to recruit, integrate and retain a talented workforce including productive sales representatives;
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•
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the inability of management to successfully implement strategic initiatives;
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failure to manage change within the organization;
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•
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highly competitive market;
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•
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changes that affect governmental and other tax-supported entities;
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•
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violations of environmental protection or other governmental regulations;
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•
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negative changes related to tax matters; and
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•
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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, 2014.
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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.
3
Lawson Products, Inc.
(Dollars in thousands, except share data)
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March 31, 2015
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December 31, 2014
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ASSETS
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(Unaudited)
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||||
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Current assets:
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Cash and cash equivalents
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$
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1,990
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$
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4,207
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Restricted cash
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800
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800
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Accounts receivable, less allowance for doubtful accounts
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33,068
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31,546
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Inventories
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44,241
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44,517
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Miscellaneous receivables and prepaid expenses
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4,020
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5,433
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Total current assets
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84,119
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86,503
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Property, plant and equipment, net
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39,684
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41,588
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Cash value of life insurance
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9,349
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9,188
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Deferred income taxes
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51
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51
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Other assets
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491
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510
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Total assets
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$
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133,694
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$
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137,840
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LIABILITIES AND STOCKHOLDERS’ EQUITY
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Current liabilities:
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Accounts payable
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$
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12,099
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$
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7,867
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Accrued expenses and other liabilities
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24,910
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30,861
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Total current liabilities
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37,009
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38,728
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Security bonus plan
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15,403
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15,857
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Financing lease obligation
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9,203
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9,414
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Deferred compensation
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5,037
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5,102
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Deferred rent liability
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4,246
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4,361
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Other liabilities
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2,526
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2,523
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Total liabilities
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73,424
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75,985
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Stockholders’ equity:
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Preferred stock, $1 par value:
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Authorized - 500,000 shares, Issued and outstanding — None
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—
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—
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Common stock, $1 par value:
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Authorized - 35,000,000 shares
Issued - 8,722,352 and 8,720,350 shares, respectively Outstanding - 8,708,469 and 8,706,467 shares, respectively |
8,722
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8,720
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Capital in excess of par value
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8,973
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8,701
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Retained earnings
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41,904
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43,275
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Treasury stock – 13,883 shares
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(236
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(267
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)
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Accumulated other comprehensive income
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907
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1,426
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Total stockholders’ equity
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60,270
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61,855
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Total liabilities and stockholders’ equity
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$
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133,694
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$
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137,840
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See notes to condensed consolidated financial statements.
4
Lawson Products, Inc.
(Dollars in thousands, except per share data)
(Unaudited)
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Three Months Ended March 31,
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2015
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2014
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Net sales
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$
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69,904
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$
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69,204
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Cost of goods sold
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27,021
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27,926
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Gross profit
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42,883
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41,278
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Operating expenses:
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Selling expenses
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24,401
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21,280
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General and administrative expenses
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19,429
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21,797
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Total SG&A
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43,830
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43,077
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Impairment loss
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—
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2,914
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Operating expenses
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43,830
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45,991
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Operating loss
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(947
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)
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(4,713
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)
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Interest expense
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(136
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(244
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)
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Other expenses, net
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(233
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)
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(148
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Loss from continuing operations before income taxes
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(1,316
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)
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(5,105
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)
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Income tax expense (benefit)
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55
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(783
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)
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Loss from continuing operations
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(1,371
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)
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(4,322
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)
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Income and gain from discontinued operations, net of income taxes
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—
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1,367
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Net loss
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$
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(1,371
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)
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$
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(2,955
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)
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Basic and diluted income (loss) per share of common stock:
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Continuing operations
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$
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(0.16
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)
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$
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(0.50
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)
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Discontinued operations
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—
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0.16
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Net loss per share
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$
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(0.16
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)
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$
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(0.34
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)
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Basic and diluted weighted average shares outstanding
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8,706
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8,659
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Comprehensive loss
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Net loss
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$
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(1,371
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)
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$
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(2,955
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)
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Other comprehensive loss, net of tax
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|||||||
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Adjustment for foreign currency translation
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(519
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)
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(245
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)
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Net comprehensive loss
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$
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(1,890
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)
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$
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(3,200
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)
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See notes to condensed consolidated financial statements.
5
Lawson Products, Inc.
(Dollars in thousands)
(Unaudited)
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Three Months Ended March 31,
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2015
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2014
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|||||
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Operating activities:
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|||||||
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Net loss
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$
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(1,371
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)
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$
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(2,955
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)
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Less income and gain from discontinued operations
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—
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(1,367
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)
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|||
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Loss from continuing operations
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(1,371
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)
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(4,322
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)
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Adjustments to reconcile loss from continuing operations to net cash used in operating activities:
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|||||||
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Depreciation and amortization
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2,096
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2,295
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Stock-based compensation
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(747
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)
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1,125
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Impairment loss
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—
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2,914
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Changes in operating assets and liabilities:
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|||||||
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Accounts receivable
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(1,994
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)
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(3,030
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)
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Inventories
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(68
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)
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2,255
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|||
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Prepaid expenses and other assets
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1,137
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(1,484
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)
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|||
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Accounts payable and other liabilities
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(1,071
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)
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(7,110
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)
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Other
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179
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250
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Net cash used in operating activities
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$
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(1,839
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)
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$
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(7,107
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)
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Investing activities:
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|||||||
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Additions to property, plant and equipment
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$
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(352
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)
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$
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(335
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)
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Proceeds from sale of equipment
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3
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—
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Proceeds related to sale of business, net
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—
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12,125
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Net cash (used in) provided by investing activities
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$
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(349
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)
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$
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11,790
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Financing activities:
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|||||||
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Net payments on revolving line of credit
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$
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—
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$
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(4,443
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)
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Net cash used in financing activities
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$
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—
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$
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(4,443
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)
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Discontinued operations:
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|||||||
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Operating cash flows
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$
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(29
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)
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$
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50
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Net cash (used in) provided by discontinued operations
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$
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(29
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)
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$
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50
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Increase (decrease) in cash and cash equivalents
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(2,217
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)
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290
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|||
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Cash and cash equivalents at beginning of period
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4,207
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698
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Cash and cash equivalents at end of period
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$
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1,990
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$
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988
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See notes to condensed consolidated financial statements.
6
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, 2014
. 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 month period ended
March 31, 2015
are not necessarily indicative of the results that may be expected for the year ending
December 31, 2015
. Certain reclassifications have been made to the Condensed Consolidated Balance Sheet for December 31, 2014 to conform to current period presentation.
The Company operates in one reportable segment; the Maintenance, Repair and Operations ("MRO") segment as a distributor of products and services to the industrial, commercial, institutional, and governmental maintenance, repair and operations marketplace.
The effect of restricted stock awards, market stock units and future stock option exercises equivalent to approximately
184,000
and
117,000
shares for the three months ended
March 31, 2015
and
2014
, respectively, would have been anti-dilutive and therefore were excluded from the computation of diluted earnings per share.
There have been no material changes in the Company's significant accounting policies during the three months ended
March 31, 2015
as compared to the significant accounting policies described in our Annual Report on Form 10-K for the year ended
December 31, 2014
.
The Company has agreed to maintain
$0.8 million
in a money market account as collateral for an outside party that is providing certain commercial card processing services for the Company. The Company is restricted from withdrawing this balance without the prior consent of the outside party during the term of the agreement.
Inventories, consisting primarily of purchased goods which are offered for resale, were as follows:
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(Dollars in thousands)
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||||||
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March 31, 2015
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December 31, 2014
|
|||||
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Inventories, gross
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$
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49,917
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$
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50,063
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Reserve for obsolete and excess inventory
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(5,676
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)
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(5,546
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)
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Inventories, net
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$
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44,241
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$
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44,517
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7
In 2012, the Company entered into a Loan and Security Agreement (“Loan Agreement”) which expires in August 2017. Due to the lock box arrangement and a subjective acceleration clause contained in the borrowing agreement, any outstanding borrowings under the revolving line of credit is classified as a current liability. The Loan Agreement consists of a
$40.0 million
revolving line of credit facility, which includes a
$10.0 million
sub-facility for letters of credit. In December 2013, the Company entered into a Second Amendment to Loan and Security Agreement ("Second Amendment") which revised certain terms of the original Loan Agreement.
Credit available under the Loan Agreement is based upon:
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a)
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80%
of the face amount of the Company’s eligible accounts receivable, generally less than
60
days past due, and
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b)
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the lesser of
50%
of the lower of cost or market value of the Company’s eligible inventory, generally inventory expected to be sold within
18 months
, or
$20.0 million
.
|
The applicable interest rates for borrowings are at the Prime rate or, if the Company elects, the LIBOR rate plus
1.50%
to
1.85%
based on the Company’s debt to EBITDA ratio. The Loan Agreement is secured by a first priority perfected security interest in substantially all existing assets of the Company. Dividends are restricted to amounts not to exceed
$7.0
million annually.
At
March 31, 2015
, the Company had
no
borrowings under its revolving line of credit facility and additional borrowing availability of
$33.4 million
. The Company paid interest of
$0.1 million
and
$0.3 million
for the three months ended
March 31, 2015
and
2014
, respectively. The weighted average interest rate was
3.25%
for the three months ended
March 31, 2015
.
In addition to other customary representations, warranties and covenants, we are required to meet a minimum trailing twelve month EBITDA to fixed charges ratio, as defined in the Loan Agreement, and a minimum quarterly tangible net worth level as defined in the Second Amendment. On
March 31, 2015
, we were in compliance with all financial covenants as detailed below:
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Quarterly Financial Covenants
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Requirement
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Actual
|
||
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EBITDA to fixed charges ratio
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1.10 : 1.00
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2.37 : 1.00
|
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Minimum tangible net worth
|
$45.0 million
|
$52.8 million
|
||
Changes in the Company’s reserve for severance as of
March 31, 2015
and
2014
were as follows:
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|
(Dollars in thousands)
|
||||||
|
|
Three Months Ended March 31,
|
||||||
|
|
2015
|
2014
|
|||||
|
Balance at beginning of period
|
$
|
311
|
|
$
|
1,769
|
|
|
|
Charged to earnings
|
571
|
|
728
|
|
|||
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Payments
|
(216
|
)
|
(754
|
)
|
|||
|
Balance at end of period
|
$
|
666
|
|
$
|
1,743
|
|
|
8
The Company recorded a stock-based compensation benefit of
$0.5 million
in the first quarter of 2015 reflecting a decline in the price of the Company's common stock during the period. A
$1.1 million
expense was recorded in the first quarter of 2014 as the price of the Company's common stock increased during that period. A summary of stock based awards issued during the
three months ended March 31, 2015
follows:
Stock Performance Rights ("SPRs")
The Company issued
380,000
SPRs to a key employee with an average exercise price of
$28.40
per share that vest ratably on January 12, 2016, 2017 and 2018, and have a termination date of January 12, 2022. The Company also issued
29,373
SPRs to key employees with an exercise price of
$25.16
per share that cliff vest on December 31, 2017 and have a termination date of December 31, 2022.
Market Stock Units ("MSUs")
The Company issued
30,633
MSUs to key employees with a vesting date of December 31, 2017. MSU's are exchangeable for the Company's common shares at the end of the vesting period. The number of shares of common stock that will be issued upon vesting, ranging from
zero
to
45,951
, will be determined based upon the trailing thirty-day average closing price of the Company's common stock on December 31, 2017.
Stock Options
The Company issued
40,000
nonqualified stock options to a key employee with a weighted average exercise price of
$28.40
. The stock options vest ratably on January 12, 2016, 2017 and 2018, and have a term of
7
years.
Primarily due to the cumulative losses that the Company has incurred over the past three years, the Company determined that it was more likely than not that it will not be able to utilize its deferred tax assets to offset future taxable income. Therefore, substantially all deferred tax assets are subject to a tax valuation allowance until the Company can establish that the recoverability of its deferred tax assets is more likely than not to be realized. Although the Company is in a full tax valuation allowance position, a tax expense of
$0.1 million
was recorded in continuing operations for the
three months ended March 31, 2015
, primarily due to state taxes and reserves for uncertain tax positions. The tax benefit of
$0.8 million
for the three months ended March 31, 2014 was due to the allocation of income taxes between continuing and discontinued operations partly offset by state taxes and reserves for uncertain tax positions.
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
March 31, 2015
, the Company is subject to U.S. Federal income tax examinations for the years 2011 through 2013 and income tax examinations from various other jurisdictions for the years 2006 through 2013. The Company is also currently under examination by the Canada Revenue Authority ("CRA") for the years 2006 through 2010. The CRA examination was completed during May 2013 and resulted in proposed adjustments which amount to
$1.3 million
of additional tax for the 2008 and 2009 tax years. The Company is not in agreement with these adjustments and filed a request with Competent Authority programs in both the U.S. and Canada in October, 2013. The Competent Authority program assists taxpayers with respect to matters covered in the mutual agreement procedure provisions of tax treaties. Management has not recorded a reserve and is confident that the Company will prevail in this matter. The Company is unable to establish an estimated time frame in which this issue will be resolved through Competent Authority.
Earnings from the Company’s foreign subsidiaries are considered to be indefinitely reinvested. A distribution of these non-U.S. earnings in the form of dividends or otherwise would subject the Company to both U.S. Federal and state income taxes, as adjusted for foreign tax credits.
In the first quarter of 2014 the Company committed to a plan to sell its Reno distribution center. As part of the review of the potential impact of a sale, the Company determined that the full carrying amount of the asset was not recoverable. Therefore, the Company recorded a
$2.9 million
non-cash impairment charge. In the second quarter of 2014, the Company completed the sale of the distribution center and entered into a 10-year agreement to leaseback approximately one-half of the facility that we had been utilizing.
9
On February 14, 2014, the Company completed the sale of substantially all of the assets of Automatic Screw Machine Products Company, Inc. ("ASMP"), a wholly-owned subsidiary, to Nelson Stud Welding, Inc. (“Buyer”), an indirect subsidiary of Doncasters Group Limited, for a purchase price of
$12.5 million
. In addition, the Buyer agreed to lease the real property located in Decatur, Alabama currently used by ASMP. The Company classified ASMP's operating results as discontinued operations.
The following table details the components of income from discontinued operations:
|
(Dollars in thousands, except per share data)
|
||||||||
|
Three Months Ended March 31,
|
||||||||
|
2015
|
2014
|
|||||||
|
Net sales
|
$
|
—
|
|
$
|
2,462
|
|
||
|
Pre-tax income from discontinued operations
|
$
|
—
|
|
$
|
346
|
|
||
|
Income tax expense
|
—
|
|
(133
|
)
|
||||
|
Income from discontinued operations
|
$
|
—
|
|
$
|
213
|
|
||
|
Pre-tax gain on sale of ASMP
|
$
|
—
|
|
$
|
1,877
|
|
||
|
Income tax expense
|
—
|
|
(723
|
)
|
||||
|
Net gain on sale of ASMP
|
$
|
—
|
|
$
|
1,154
|
|
||
|
Income from discontinued operations, net of taxes
|
$
|
—
|
|
$
|
1,367
|
|
||
|
Basic and diluted income per share
|
$
|
—
|
|
$
|
0.16
|
|
||
In 2012, the Company identified that a site it owns in Decatur, Alabama contains hazardous substances in the soil and groundwater as a result of historical operations prior to the Company's ownership. The Company has retained an environmental consulting firm to further investigate the contamination including the measurement and monitoring of the site. In August 2013, the site was enrolled in Alabama's voluntary cleanup program. On October 30, 2014, the Company received estimates from its environmental consulting firm with three potential remediation solutions. The estimates include a range of viable remedial approaches, but agreement with Alabama’s voluntary cleanup program has not yet been reached. The first solution includes limited excavation and removal of the contaminated soil along with monitoring for a period up to
10
years. The second solution includes the first solution plus the installation of a groundwater extraction system. The third scenario includes the first and second solutions plus treatment injections to reduce the degradation time. The estimated expenditures over a 10-year period under the three scenarios range from
$0.3 million
to
$1.4 million
, of which up to
$0.3 million
may be capitalized. As the Company has determined that a loss is probable, however no scenario is more likely than the other at this time, a liability in the amount of
$0.3 million
was established in 2014. As of March 31, 2015, approximately
$0.3 million
remains accrued for remediation in other long-term liabilities on the accompanying consolidated balance sheet.
10
Overview
The MRO industry is highly fragmented. We compete for business with several national distributors as well as a large number of regional and local distributors. The MRO business is significantly influenced by the overall strength of the manufacturing sector of the U.S. economy. One measure used to evaluate the strength of the industrial products market is the PMI index published by the Institute for Supply Management, which is considered by many economists to be a reliable near-term economic barometer. A measure above 50 generally indicates expansion of the manufacturing sector while a measure below 50 generally represents contraction. While the monthly PMI decreased throughout the quarter, the average monthly PMI was
52.6
in the
first quarter of 2015
compared to
52.7
in the
first quarter of 2014
indicating continued growth in the U.S. manufacturing economy.
Our sales are also affected by the number of sales representatives and the amount of sales which each representative can generate, which we measure as average sales per day per sales representative. In 2013, we began to focus on increasing the number of sales representatives. We ended the first quarter of 2015 with
917
sales representatives, an increase of
81
over the prior year quarter. We plan to continue to increase our sales force to approximately 1,000 by the end of 2015. While we anticipate future sales growth from our expanded sales force, we also anticipate a short-term decrease in average sales per day per sales representative, as new representatives build up customer relationships in their territories.
In the first quarter of 2015, we held a North American sales meeting that provided our sales representatives with product and sales training, improved their awareness of the Company's strategies and allowed them to network with their peers to share best practices. The investment in the sales meeting, including the cost of the 4-day event along with the lower sales volume during that period is viewed as a long-term investment in our sales team. The timing of the event also impacted our hiring of new sales representatives as the sales management team was unavailable for on-boarding and training activities. For the first quarter of 2015, our operating loss was
$0.9 million
, which included
$1.9 million
related to the cost of the North American sales meeting and the short-term impact on sales compared to a loss of
$4.7 million
a year ago which included a
$2.9 million
impairment loss. Although our North American sales meeting is not an annual event, we do plan to hold meetings in the future as we value their long-term impact on our organization.
11
Quarter ended
March 31, 2015
compared to quarter ended
March 31, 2014
|
|
2015
|
2014
|
|||||||||||
|
($ in thousands)
|
Amount
|
% of
Net Sales
|
Amount
|
% of
Net Sales
|
|||||||||
|
Net sales
|
$
|
69,904
|
|
100.0
|
%
|
$
|
69,204
|
|
100.0
|
%
|
|||
|
Cost of goods sold
|
27,021
|
|
38.7
|
%
|
27,926
|
|
40.4
|
%
|
|||||
|
Gross profit
|
42,883
|
|
61.3
|
%
|
41,278
|
|
59.6
|
%
|
|||||
|
Operating expenses:
|
|||||||||||||
|
Selling expenses
|
24,401
|
|
34.9
|
%
|
21,280
|
|
30.7
|
%
|
|||||
|
General and administrative expenses
|
19,429
|
|
27.8
|
%
|
21,797
|
|
31.5
|
%
|
|||||
|
Total SG&A
|
43,830
|
|
62.7
|
%
|
43,077
|
|
62.2
|
%
|
|||||
|
Impairment loss
|
—
|
|
—
|
%
|
2,914
|
|
4.2
|
%
|
|||||
|
Operating expenses
|
43,830
|
|
62.7
|
%
|
45,991
|
|
66.4
|
%
|
|||||
|
Operating loss
|
(947
|
)
|
(1.4
|
)%
|
(4,713
|
)
|
(6.8
|
)%
|
|||||
|
Interest and other expenses, net
|
(369
|
)
|
(0.5
|
)%
|
(392
|
)
|
(0.6
|
)%
|
|||||
|
Loss from continuing operations before income taxes
|
(1,316
|
)
|
(1.9
|
)%
|
(5,105
|
)
|
(7.4
|
)%
|
|||||
|
Income tax expense (benefit)
|
55
|
|
0.1
|
%
|
(783
|
)
|
(1.2
|
)%
|
|||||
|
Loss from continuing operations
|
$
|
(1,371
|
)
|
(2.0
|
)%
|
$
|
(4,322
|
)
|
(6.2
|
)%
|
|||
Net Sales
Net sales for the
first quarter of 2015
increased
1.0%
to
$69.9 million
from
$69.2 million
in the
first quarter of 2014
. Excluding the Canadian exchange rate impact of
$0.8 million
, net sales
increased
2.2%
over the prior year quarter. Average daily sales increased to
$1.110 million
in the
first quarter of 2015
compared to
$1.098 million
in the prior year quarter. The chart below illustrates the correlation between the number of active sales representatives and our average daily sales.
While sales increased over the prior year, average daily sales per sales representative in the first quarter of 2015 were negatively impacted by the decrease in the Canadian exchange rate, weak demand from our oil & gas segment, lost productivity from our sales representatives during the North American sales meeting, and lower productivity from newly hired sales reps as they build out their territories.
12
Gross Profit
Gross profit
increased
3.9%
in the
first quarter of 2015
to
$42.9 million
from
$41.3 million
in the prior year quarter and increased as a percent of net sales to
61.3%
from
59.6%
a year ago, due primarily to lower purchasing costs that led to higher product margins along with improved distribution efficiencies.
Selling Expenses
Selling expenses consist of compensation paid to our sales representatives and related expenses to support our sales efforts. Selling expenses
increased
$3.1 million
to
$24.4 million
in the
first quarter of 2015
from
$21.3 million
in the prior year quarter. Selling expenses in the first quarter of 2015 included
$1.9 million
related to the national sales meeting which was not held in 2014. Excluding the cost of the North American sales meeting, selling expenses increased
$1.2 million
or
5.8%
and increased as a percent of sales to
32.2%
compared to
30.7%
in the
first quarter of 2014
, primarily due to compensation of newly hired sales reps and higher health insurance costs.
General and Administrative Expenses
General and administrative expenses consist of expenses to operate our distribution network and overhead expenses to manage the business. General and administrative expenses
decreased
to
$19.4 million
in the
first quarter of 2015
from
$21.8 million
in the prior year quarter. The decrease was primarily driven by lower stock-based compensation of
$1.7 million
as the price of our stock decreased during the first quarter of 2015 compared to an increase in our stock price in the prior year period. We also realized decreases across most expense categories as a result of continuous cost control management.
Impairment Loss
In the first quarter of 2014 we committed to a plan to sell our Reno distribution center. As part of the review of the potential impact of a sale, we determined that the full carrying amount of the asset was not recoverable. Therefore, we recorded a
$2.9 million
non-cash impairment charge to reduce the carrying cost of the facility to its fair market value.
Interest and Other Expenses, Net
Interest and other expenses, net remained constant at
$0.4 million
in the first quarters of both 2015 and 2014. Interest expense was
$0.1 million
lower in 2015 compared to 2014, reflecting a decrease in average borrowings under our Loan Agreement. This was offset by an increase in currency exchange losses of
$0.1 million
.
Income Tax Expense (Benefit)
Primarily due to historical cumulative losses, substantially all of our deferred tax assets are subject to a tax valuation allowance. Although we are in a full tax valuation allowance position, an income tax expense of
$0.1 million
was recorded in the first quarter of 2015 due to state taxes and reserves for uncertain tax positions. An income tax benefit of
$0.8 million
was recorded in the first quarter of 2014, primarily related to the allocation of income taxes between continuing and discontinued operations.
Loss from Continuing Operations
We reported a loss from continuing operations of
$1.4 million
in the
first quarter of 2015
compared to a loss from continuing operations of
$4.3 million
in the
first quarter of 2014
.
13
Liquidity and Capital Resources
Cash and cash equivalents were
$2.0 million
on
March 31, 2015
compared to
$4.2 million
on
December 31, 2014
. Net cash used in continuing operations of
$1.8 million
and
$7.1 million
for the
three months ended March 31, 2015
and 2014, respectively, were primarily used to fund increases in working capital.
Capital expenditures, primarily for improvements to our distribution centers and information technology, were
$0.4 million
in the first three months of 2015 compared to
$0.3 million
in the first three months of 2014. In the first quarter of 2014, we received
$12.1 million
of net proceeds related to the sale of our Automatic Screw Machine Products Company, Inc. ("ASMP") subsidiary.
On March 31, 2015, we had
no
borrowings on our revolving line of credit. We were able to paydown our revolving line of credit by
$4.4 million
in the first quarter of 2014, primarily due to proceeds received from the sale of ASMP. No dividends were paid to shareholders in the first three months of 2015 or 2014. Dividends are currently restricted under the Loan Agreement to amounts not to exceed $7.0 million annually.
Loan Agreement
In addition to other customary representations, warranties and covenants, we are required to meet a minimum trailing twelve month EBITDA to fixed charges ratio, as defined in the Loan Agreement, and a minimum quarterly tangible net worth level as defined in the Second Amendment. On
March 31, 2015
, we were in compliance with all financial covenants as detailed below:
|
Quarterly Financial Covenants
|
Requirement
|
Actual
|
||
|
EBITDA to fixed charges ratio
|
1.10 : 1.00
|
2.37 : 1.00
|
||
|
Minimum tangible net worth
|
$45.0 million
|
$52.8 million
|
||
While we met the minimum financial covenant levels for the quarter ended
March 31, 2015
, failure to meet these covenant requirements in future quarters could lead to higher financing costs, increased restrictions, or reduce or eliminate our ability to borrow funds and could have a material adverse effect on our business, financial condition and results of operations.
At
March 31, 2015
, we had
no
outstanding borrowings under the revolving line of credit of our Loan Agreement and we had additional borrowing availability of
$33.4 million
. We believe cash provided by operations and funds available under our Loan Agreement are sufficient to fund our operating requirements, strategic initiatives and capital improvements throughout the remainder of
2015
.
14
There have been no material changes in market risk at
March 31, 2015
from that reported in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2014
.
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
March 31, 2015
that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
15
OTHER INFORMATION
ITEMS 1, 1A, 2, 3, 4 and 5 of Part II are inapplicable and have been omitted from this report.
|
Exhibit #
|
|
|
31.1
|
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
31.2
|
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
32
|
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
101.INS
|
XBRL Instance Document
|
|
101.SCH
|
XBRL Taxonomy Extension Schema Document
|
|
101.CAL
|
XBRL Taxonomy Extension Calculation Linkbase Document
|
|
101.DEF
|
XBRL Taxonomy Extension Definition Linkbase Document
|
|
101.LAB
|
XBRL Taxonomy Extension Label Linkbase Document
|
|
101.PRE
|
XBRL Taxonomy Extension Presentation Linkbase Document
|
16
SIGNATURES
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.
|
|
LAWSON PRODUCTS, INC.
|
||
|
|
(Registrant)
|
||
|
Dated:
|
April 30, 2015
|
|
/s/ Michael G. DeCata
|
|
|
Michael G. DeCata
|
||
|
|
President and Chief Executive Officer
|
||
|
|
(principal executive officer)
|
||
|
Dated:
|
April 30, 2015
|
|
/s/ Ronald J. Knutson
|
|
|
Ronald J. Knutson
|
||
|
|
Executive Vice President and Chief Financial Officer
|
||
|
|
(principal financial and accounting officer)
|
||
17
TABLE OF CONTENTS
Part I - Financial InformationItem 1 - Financial StatementsNote 1 Basis Of Presentation and Summary Of Significant Accounting PoliciesNote 2 Restricted CashNote 3 InventoriesNote 4 Loan AgreementNote 5 Severance ReserveNote 6 Stock-based CompensationNote 7 Income TaxesNote 8 Impairment LossNote 9 Discontinued OperationsNote 10 Contingent LiabilitiesItem 2. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPart IIItem 6. Exhibits