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| LAWS > SEC Filings for LAWS > Form 10-K on 26-Feb-2013 | All Recent SEC Filings |
26-Feb-2013
Annual Report
OVERVIEW
Industry
The MRO business is significantly influenced by the overall strength of the manufacturing sector of the U.S. economy. One measure used to determine the strength of the industrial products market is the Purchasing Manufacturers Index ('PMI') published by the Institute for Supply Management. The PMI has declined to an average of 51.7 in 2012 compared to 55.2 in 2011 indicating a slowdown in the growth rate from a year ago. 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.
2012 Activities
Following are some of the highlights of the Company for the year:
• Leadership change - Michael G. DeCata joined Lawson as president and CEO on October 1, 2012 bringing us significant MRO distribution experience. He previously served as president of Chef's Warehouse and has also held senior positions at United Rentals, WW Grainger and General Electric.
• Sales Force Transformation - We developed the plans to transition our U.S. sales team from an independent agent model to an employee based model. Effective January 1, 2013 all of our U.S. based sales representatives became employees of the Company.
• Distribution Network Consolidation - We completed the integration of the operations previously conducted at our Des Plaines and Vernon Hills, Illinois facilities into our new state-of-the-art leased facility in McCook, Illinois. During the first half of 2013 we plan to move all of the distribution operations performed at our Addison, Illinois facility to the McCook facility.
• Website Redesign - We completed the development and testing of our redesigned website. The new website was formally launched in the first quarter of 2013.
• Credit facility - We entered into a new five year $40.0 million credit facility which we intend to use to fund our future operations and business initiatives.
• ERP Stabilization - During 2012 we continued to improve and resolve issues we encountered as a result of the implementation of our ERP system in the second half of 2011 that continued to have an affect on our customer service in 2012.
• Reduced Cost Structure - We reduced our cost structure by eliminating over 100 corporate and distribution positions. We also introduced other cost-cutting measures such as a rationalization of inventory and reduction of controllable costs such as travel, marketing and net outbound freight expenses.
We believe the steps taken in 2012 were necessary to set the Company on a solid course for the future. We will continue to strive to be our customers' first choice for maintenance, repair and operational solutions.
SUMMARY OF FINANCIAL PERFORMANCE
(Dollars in thousands)
Year Ended December 31,
2012 2011 2010
Amount % of Net Sales Amount % of Net Sales Amount % of Net Sales
Net sales
MRO $ 273,562 94.2 % $ 300,399 95.4 % $ 303,138 95.7 %
OEM 16,925 5.8 14,560 4.6 13,642 4.3
Consolidated total $ 290,487 100.0 % $ 314,959 100.0 % $ 316,780 100.0 %
Gross profit
MRO $ 157,418 57.5 % $ 176,872 58.9 % $ 192,544 63.5 %
OEM 3,764 22.2 2,905 20.0 2,282 16.7
Consolidated total 161,182 55.5 179,777 57.1 194,826 61.5
Operating expenses (benefits):
Selling, general and
administrative expenses 171,725 59.2 181,291 57.6 180,021 56.8
Severance expenses 8,021 2.8 1,614 0.5 3,629 1.1
Loss (gain) on sale of assets (3,721 ) (1.3 ) 22 - (1,701 ) (0.5 )
Goodwill impairment 28,306 9.7 - - - -
Other operating expenses - 0.7 (1.3 )
(benefits) - 2,346 (4,050 )
Total operating expenses 204,331 70.4 185,273 58.8 177,899 56.2
Operating income (loss) (43,149 ) (14.9 ) (5,496 ) (1.7 ) 16,927 5.3
Interest expense (775 ) (0.2 ) (681 ) (0.2 ) (391 ) (0.1 )
Other income (expense), net (56 ) - 101 - 160 0.1
Income (loss) from continuing
operations before income tax
expense (43,980 ) (15.1 ) (6,076 ) (1.9 ) 16,696 5.3
Income tax (benefit) expense 18,737 (6.5 ) (1,687 ) (0.5 ) 7,106 2.2
Income (loss) from continuing (21.6 )%
operations $ (62,717 ) $ (4,389 ) (1.4 )% $ 9,590 3.0 %
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RESULTS OF OPERATIONS FOR 2012 AS COMPARED TO 2011
Net Sales and Gross Profit
Sales and gross profit results for the years ended December 31, 2012 and 2011
were as follows:
(Dollars in thousands)
Year ended December 31, Change
2012 2011 Amount %
Net sales
MRO 273,562 300,399 (26,837 ) (8.9 )%
OEM 16,925 14,560 2,365 16.2
Consolidated 290,487 314,959 (24,472 ) (7.8 )
Gross profit
MRO 157,418 176,872 (19,454 ) (11.0 )%
OEM 3,764 2,905 859 29.6
Consolidated 161,182 179,777 (18,595 ) (10.3 )
Gross profit margin
MRO 57.5 % 58.9 %
OEM 22.2 20.0
Consolidated 55.5 57.1
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Net Sales
Net sales for 2012 decreased 7.8% to $290.5 million from $315.0 million in 2011 on one additional selling day in 2012. Excluding the negative Canadian exchange rate impact of $0.4 million, net sales decreased 7.6% for the year.
MRO net sales decreased 8.9% in 2012 to $273.6 million from $300.4 million in 2011. Average MRO daily sales were $1.086 million in 2012 compared to $1.197 million in 2011. The majority of the $26.8 million decrease in MRO sales was due to a decrease in territorial sales coverage due to a 14% net decline in sales representatives during the year. The decrease in sales representatives occurred primarily in the first half of 2012 and the size of the sales force stabilized in the second half of the year. Additionally, government sales decreased $10.1 million in 2012 compared to 2011 primarily because we benefited from troop deployments in 2011. We anticipate that growth in the government segment may be limited given our past support to troop deployments which is not expected to increase in the near future.
OEM net sales increased 16.2% in 2012 to $16.9 million from $14.6 million in 2011, driven primarily by stronger demand from existing customers.
Gross Profit
Overall gross profit decreased 10.3% in 2012 to $161.2 million from $179.8 million in 2011. As a percent of sales, gross profit margin decreased to 55.5% in 2012 compared to 57.1% in 2011.
MRO gross profit decreased 11.0% in 2012 to $157.4 million from $176.9 million in 2011. As a percent of net sales, MRO gross profit margin decreased to 57.5% in 2012 from 58.9% in 2011. This decrease was principally due to a net increase of $3.3 million of inventory reserves primarily as a result of discontinuing certain products, a decrease of $2.6 million in outbound freight recoveries and a shift toward higher volume national customers with lower margins. These national accounts represented approximately 12.7% of MRO sales in 2012 compared to approximately 11.2% in 2011. We expect that our gross margin percentage will be under pressure in the future as we continue to increase the mix of national accounts in our customer base as well as continued competitive pressures. During 2013, we do not anticipate that our decision to discontinue certain inventoried products in the second quarter of 2012, will have a material negative impact on our sales or gross margins as the majority of these products will either have suitable substitute items available or be offered on a drop-ship basis with similar pricing to our customers.
OEM gross profit increased $0.9 million in 2012 to $3.8 million from $2.9 million in 2011. Gross profit as a percent of net sales increased to 22.2% in 2012 from 20.0% in 2011, primarily driven by leverage gained from a higher sales volume from existing customers.
Selling, General and Administrative Expenses
SG&A expenses for the years ended December 31, 2012 and 2011 were as follows:
(Dollars in thousands)
Year ended December 31, Change
2012 2011 Amount %
Selling expenses $ 80,389 $ 86,520 $ (6,131 ) (7.1 )%
General and administrative 91,336 94,771 (3,435 ) (3.6 )
Total SG&A $ 171,725 $ 181,291 $ (9,566 ) (5.3 )
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Total SG&A expenses were $171.7 million or 59.2% of net sales and $181.3 million or 57.6% of net sales in 2012 and 2011, respectively.
Selling Expenses
Selling expenses consist of commissions paid to our sales representatives and related expenses to support our sales efforts. Selling expenses decreased to $80.4 million in 2012 from $86.5 million in 2011due primarily to implementing cost control measures across the organization and lower sales. Selling expenses increased as a percent of sales to 27.7% in 2012 from 27.5% in 2011 primarily due to the impact of fixed selling costs on the decreased sales levels.
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 $3.4 million or 3.6% primarily due to $5.0 million less ERP related expenses in 2012 compared to 2011 and $4.2 million of reduced compensation costs driven primarily by a cost reduction strategy implemented in 2012. The cost reduction strategy included a reduction in our work force of approximately 130 individuals. These savings were partially offset by an increase in depreciation and facility costs of $2.5 million, $2.2 million of consulting fees related to our turnaround strategy, $0.5 million related to the move into our new distribution center and headquarters and $0.8 million related to other expense to support the business.
Severance Expenses
Severance expenses were $8.0 million in 2012 compared to $1.6 million in 2011. The severance charge recorded in 2012 consisted primarily of $6.5 million related to the elimination of corporate and distribution positions, primarily as a result of a strategic restructuring plan designed to reduce our cost structure and $1.3 million related to the retirement of our former President and Chief Executive Officer.
Goodwill Impairment
During 2012, we identified indicators of potential goodwill impairment, specifically, the operating losses incurred in our MRO segment and a reduction in our market capitalization below book value. Therefore, we performed an impairment analysis of the goodwill related to our MRO segment. Based on this analysis, we determined that the full amount of the goodwill was impaired and recorded a non-cash charge of $28.3 million.
Gain on Sale of Assets
In 2012, in conjunction with the construction of a new distribution center in McCook, Illinois and the relocation of our headquarters to Chicago, Illinois, we sold four properties: our former Des Plaines, Illinois headquarters and packaging facility,
our Addison, Illinois distribution center; our Vernon Hills, Illinois distribution center; and a Des Plaines, Illinois administrative building. We received cash proceeds of $12.3 million from the sale of the four facilities which resulted in a gain of $3.7 million.
Other Operating Expenses
In 2011, the Company recorded a $1.2 million expense for the estimated cost of settling an employment tax matter related to the classification of the sales representatives of one of the Company's subsidiaries as independent contractors. Also in 2011, we recorded an impairment charge of $1.1 million related to certain long-term assets of our OEM segment. No such charges were incurred in 2012.
Interest Expense
Interest expense increased to $0.8 million in 2012 from $0.7 million in 2011. The 2012 expense was primarily due to borrowings on our revolving line of credit while the 2011 interest expense was primarily comprised of interest assessed on unclaimed property settlements.
Income Tax Expense
In 2012, we recorded income tax expense of $18.7 million on a pre-tax loss of $44.0 million. Primarily due to the cumulative losses that we recorded over the past several periods, we determined that it was more likely than not that we will not be able to utilize our deferred tax assets to offset future taxable income. Therefore, we increased our deferred tax valuation allowance by $33.3 million. Exclusive of the effect of the increase in the tax valuation allowance, the effective income tax rate would have been 33.2%.
The 2011, income tax benefit was $1.7 million on pre-tax loss of $6.1 million, resulting in an effective tax rate of 27.8%.
Operating Income (Loss)
Operating income (loss) in 2012 was significantly impacted in the second quarter
by the charges incurred related to our restructuring. The following represents
our quarterly results for 2012:
(Dollars in thousands)
2012 Quarter Ended
Dec. 31 Sep. 30 Jun. 30 Mar. 31
Net sales $ 68,193 $ 71,984 $ 74,348 $ 75,962
Gross profit (1) 39,672 43,360 36,816 41,334
Gross profit percentage 58.2 % 60.2 % 49.5 % 54.4 %
Operating expenses:
Selling, general & administrative expenses $ 38,948 $ 43,311 $ 45,484 $ 43,982
Severance expense (benefit) (159 ) 1,410 6,585 185
Gain on sale of assets (1,588 ) (11 ) (2,122 ) -
Goodwill impairment - - 28,306 -
Total operating expenses $ 37,201 $ 44,710 $ 78,253 $ 44,167
Operating income (loss) $ 2,471 $ (1,350 ) $ (41,437 ) $ (2,833 )
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(1) Gross profit for the three months ended June 30, 2012 includes a $3.9 million charge for discontinuing certain stocked products.
RESULTS OF OPERATIONS FOR 2011 AS COMPARED TO 2010
Net Sales and Gross Profit
Sales and gross profit results for the years ended December 31, 2011 and 2010
were as follows:
(Dollars in thousands)
Year ended December 31, Change
2011 2010 Amount %
Net sales
MRO $ 300,399 $ 303,138 $ (2,739 ) (0.9 )%
OEM 14,560 13,642 918 6.7 %
Consolidated $ 314,959 $ 316,780 $ (1,821 ) (0.6 )%
Gross profit
MRO $ 176,872 $ 192,544 $ (15,672 ) (8.1 )%
OEM 2,905 2,282 623 27.3 %
Consolidated $ 179,777 $ 194,826 $ (15,049 ) (7.7 )%
Gross profit margin
MRO 58.9 % 63.5 %
OEM 20.0 % 16.7 %
Consolidated 57.1 % 61.5 %
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Net sales for 2011 decreased 0.6% to $315.0 million from $316.8 million in 2010 on one less selling day. Excluding the Canadian exchange rate impact, net sales decreased 1.0% for the year. MRO net sales decreased $2.7 million or 0.9% in 2011 to $300.4 million from $303.1 million in 2010. The decrease was largely due to certain challenges we encountered following the launch of our ERP system which caused delays in our supply chain and fulfillment processes leading to a build-up of backorders and lost sales in the second half of the year. For the year, average MRO daily sales were $1.197 million in 2011 compared to $1.203 million in 2010. In the first half of 2011, prior to the ERP launch our average MRO daily sales were $1.259 million, up 7.5% over 2010 levels.
OEM net sales increased $0.9 million or 6.7% in 2011 to $14.6 million from $13.6 million in 2010.
Overall gross profit decreased 7.7% in 2011 to $179.8 million from $194.8 million in 2010. As a percent of sales, gross profit margin decreased to 57.1% in 2011 compared to 61.5% in 2010. MRO gross profit decreased 8.1% in 2011 to $176.9 million from $192.5 million in 2010. As a percent of net sales, MRO gross profit margin decreased to 58.9% in 2011 from 63.5% in 2010. This decline was driven by four main factors: (1) increased vendor costs were not passed along to our customers as we held pricing constant to facilitate our ERP implementation; (2) outbound freight costs increased as we shipped more single line orders to support our customers following the ERP conversion; (3) increased labor costs associated with the packaging of inventory; and (4) a strategic decision to pursue larger customers with lower margins, which is expected to increase retention and allow for dollar margin expansion over time. We also encountered a deterioration of MRO gross margins subsequent to our ERP conversion. MRO gross margins for the first, second, third and fourth quarters of 2011 were 62.2%, 59.1%, 58.4% and 55.3 %, respectively.
OEM gross profit increased $0.6 million in 2011 to $2.9 million from $2.3 million in 2010. Gross profit as a percent of net sales increased to 20.0% in 2011 from 16.7% in 2010, primarily due to a shift in sales toward higher margin customers.
Selling, General and Administrative Expenses
SG&A expenses for the years ended December 31, 2011 and 2010 were as follows:
(Dollars in thousands)
Year ended December 31, Change
2011 2010 Amount %
Selling expenses 86,520 $ 88,240 $ (1,720 ) (1.9 )%
General and administrative 94,771 91,781 2,990 3.3
Total SG&A $ 181,291 $ 180,021 $ 1,270 0.7
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Total SG&A expenses were $181.3 million or 57.6% of net sales and $180.0 million or 56.8% of net sales in 2011 and 2010, respectively.
Selling Expenses
Selling expenses decreased to $86.5 million in 2011 from $88.2 million in 2010 and decreased as a percent of sales to 27.5% in 2011 from 27.9% in 2010, reflecting lower health insurance costs and a shift in our customer mix to larger strategic accounts which tend to result in lower commissions.
General and Administrative Expenses
General and administrative expenses increased $3.0 million or 3.3%. An increase in ERP implementation costs of $3.2 million primarily drove the increase. Additionally, we incurred higher temporary labor, consulting and overtime costs in the second half of the year to address the increase in the number of customer service calls and to reduce backorder levels following the launch of our ERP system. These higher operating costs were partially offset by lower incentive compensation expenses due to our operating performance and decline of our stock price.
Severance Expenses
Severance expenses were $1.6 million in 2011 compared to $3.6 million in 2010. Severance included the restructuring of some of our managerial responsibilities resulting in the elimination of certain positions within both the sales and corporate teams.
Gain on Sale of Assets
In 2010, we sold our previously discontinued Dallas, Texas distribution center for $2.0 million, resulting in a gain of $1.7 million.
Other Operating Expenses (Income)
In 2011, the Company recorded a $1.2 million expense for the estimated cost of settling an employment tax matter related to the classification of the sales representatives of one of the Company's subsidiaries as independent contractors. Also in 2011, we recorded an impairment charge of $1.1 million related to certain long-term assets of our OEM segment.
In 2010, we recorded a $4.1 million benefit related to proceeds received from a settlement of litigation.
Interest Expense
Interest expense increased $0.3 million to $0.7 million in 2011 from $0.4 million in 2010, primarily due to interest assessed on unclaimed property settlements in 2011.
Other Income
Other income was relatively unchanged at $0.1 million in 2011 compared to $0.2 million in 2010.
Income Tax Expense
The effective tax rates for continuing operations for 2011 and 2010 were 27.8% and 42.6%, respectively. The 2011 tax rate decreased from 2010 primarily due to the effect of permanent tax differences on pre-tax operating loss reported in 2011 compared to pre-tax operating income reported in 2010.
Operating Income (Loss)
Operating income (loss) in 2011 was significantly impacted in the second half of
the year by the implementation of our ERP system, reflected in lower sales and
lower gross margins and higher operating expenses as a percent of sales. The
following represents our quarterly results for 2011:
(Dollars in thousands)
2011 Quarter Ended
Dec. 31 Sep. 30 Jun. 30 Mar. 31
Net sales $ 72,860 $ 75,366 $ 84,154 $ 82,579
Gross profit 38,993 42,546 48,299 49,939
Gross profit percentage 53.5 % 56.5 % 57.4 % 60.5 %
Operating expenses:
Selling, general & administrative expenses $ 44,265 $ 45,335 $ 46,242 $ 45,449
Severance expense 122 282 465 745
Loss on sale of assets 22 - - -
Other operating expenses 2,346 - - -
Total operating expenses $ 46,755 $ 45,617 $ 46,707 $ 46,194
Operating income (loss) $ (7,762 ) $ (3,071 ) $ 1,592 $ 3,745
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LIQUIDITY AND CAPITAL RESOURCES
Cash used in operating activities was $7.3 million in 2012 compared to $22.9 million in 2011 and cash provided by operations of $11.3 million in 2010. In 2012, cash used was primarily due to operating losses incurred in the first half of the year. During 2012 payments of $4.9 million were made for severance and $6.9 million under our security bonus plan for sales representatives which were mostly offset by a $10.4 million decrease in accounts receivable. Accounts receivable declined due to lower sales levels and the collection of past due amounts that built up in the second half of 2011.
In 2011, cash was primarily used to support increased levels of accounts receivable and inventory. The increase in inventory was attributable to ERP issues which negatively affected our procurement process and service level to customers. These issues also led to delays in the collection of our receivables. In 2010, cash was primarily generated from operating income.
Capital expenditures were $18.5 million in 2012 compared to $11.1 million in 2011 and $10.0 million in 2010. Capital expenditures in 2012 were primarily for warehouse equipment to support the opening of the new leased McCook, Illinois distribution center, the build out of our new leased headquarters and expenditures related to our website redevelopment. Capital expenditures in 2011 and 2010 included $5.9 million and $6.5 million, respectively, related to the ERP implementation. We received cash proceeds of $12.3 million and $2.0 million from the sale of properties in 2012 and 2010, respectively. Net proceeds of $0.9 million and $27.3 million from the sale of non-core businesses in 2010 were realized in 2012 and 2010, respectively.
In 2012, we entered into a new five year $40.0 million asset based credit facility. The terms of the credit facility, including future covenant requirements are more fully detailed in Note 9 - Revolving Line of Credit of the Consolidated Financial Statements included in Item 8. In addition to other customary representations, warranties and covenants, we are required to meet minimum quarterly consolidated EBITDA levels as defined in the credit facility. The minimum quarterly EBITDA levels are detailed in the following table:
Quarter Ended Minimum EBITDA (as Defined in the Credit Facility) December 31, 2012 $ (1,500,000 ) March 31, 2013 0 June 30, 2013 2,000,000 September 30, 2013 3,500,000 December 31, 2013 3,000,000 . . . |
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