Form 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
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þ |
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Quarterly Report under Section 13 OR 15(d) of the
Securities Exchange Act of 1934 |
For quarterly period ended September 30, 2010
or
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o |
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Transition Report under Section 13 OR 15(d) of the Securities Exchange Act of 1934 |
For the transition period from to
Commission file Number: 0-10546
LAWSON PRODUCTS, INC.
(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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1666 East Touhy Avenue, Des Plaines, Illinois
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60018 |
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(Address of principal executive offices)
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(Zip Code) |
(847) 827-9666
(Registrants 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). Yes
o 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.
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Large accelerated filer o
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Accelerated filer þ
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Non-accelerated filer o
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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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 o No þ
The number of shares outstanding of the registrants common stock, $1 par value, as of
October 15, 2010 was 8,522,001.
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 managements 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 the effect of
general economic and market conditions; increases in commodity prices; work stoppages and other
disruptions at transportation centers or shipping ports; disruptions of the Companys information
and communication systems; competition and competitive pricing pressures; changes in customer
demand; the influence of controlling stockholders; the inability of management to successfully
implement strategic initiatives and, all of the factors discussed in the Companys Risk Factors
set forth in its Annual Report on Form 10-K for the year ended December 31, 2009 and in this
Quarterly Report on Form 10-Q.
The Company undertakes no obligation to update any such factor 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.
2
PART I FINANCIAL INFORMATION
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ITEM 1 |
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FINANCIAL STATEMENTS |
Lawson Products, Inc.
Condensed Consolidated Balance Sheets
(Dollars in thousands, except per share data)
(Unaudited)
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September 30, |
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December 31, |
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2010 |
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2009 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
23,170 |
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$ |
8,787 |
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Accounts receivable, less allowance for doubtful accounts |
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39,032 |
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32,225 |
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Inventories |
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55,802 |
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54,692 |
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Miscellaneous receivables and prepaid expenses |
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11,281 |
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10,214 |
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Deferred income taxes |
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4,711 |
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2,935 |
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Property held for sale |
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332 |
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Discontinued operations |
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1,106 |
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29,135 |
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Total current assets |
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135,102 |
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138,320 |
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Property, plant and equipment, less accumulated
depreciation and amortization |
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41,012 |
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40,394 |
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Cash value of life insurance |
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14,983 |
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17,021 |
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Deferred income taxes |
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11,795 |
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14,313 |
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Goodwill |
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28,099 |
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27,957 |
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Other assets |
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2,132 |
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2,524 |
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Discontinued operations |
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1,118 |
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Total assets |
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$ |
233,123 |
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$ |
241,647 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
19,704 |
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$ |
14,191 |
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Settlement payable |
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10,000 |
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Accrued expenses and other liabilities |
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32,402 |
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34,681 |
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Discontinued operations |
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314 |
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4,368 |
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Total current liabilities |
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52,420 |
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63,240 |
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Security bonus plan |
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25,365 |
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25,931 |
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Deferred compensation |
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10,249 |
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10,374 |
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Other |
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1,186 |
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5,456 |
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36,800 |
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41,761 |
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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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Common stock, $1 par value: |
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Authorized 35,000,000 shares, Issued and outstanding
8,522,001 shares |
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8,522 |
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8,522 |
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Capital in excess of par value |
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5,124 |
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4,780 |
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Retained earnings |
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127,632 |
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121,888 |
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Accumulated other comprehensive income |
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2,625 |
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1,456 |
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Stockholders equity |
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143,903 |
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136,646 |
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Total liabilities and stockholders equity |
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$ |
233,123 |
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$ |
241,647 |
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See notes to condensed consolidated financial statements.
4
Lawson Products, Inc.
Condensed Consolidated Statements of Operations
(Amounts in thousands, except per share data)
(Unaudited)
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Three Months Ended |
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Nine Months Ended |
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September 30, |
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September 30, |
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2010 |
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2009 |
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2010 |
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2009 |
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Net sales |
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$ |
89,264 |
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$ |
84,054 |
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$ |
260,102 |
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$ |
254,483 |
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Cost of goods sold |
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33,210 |
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30,009 |
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96,792 |
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94,550 |
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Gross profit |
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56,054 |
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54,045 |
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163,310 |
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159,933 |
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Operating expenses: |
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Selling, general and administrative expenses |
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49,512 |
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49,947 |
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150,195 |
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153,210 |
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Severance and other expenses (benefits) |
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(2,024 |
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464 |
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(875 |
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6,253 |
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Loss (gain) on disposal of property, plant
and equipment |
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(1,701 |
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16 |
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Operating income |
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8,566 |
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3,634 |
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15,691 |
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454 |
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Other income (expense), net |
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(14 |
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124 |
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32 |
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896 |
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Interest expense |
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(105 |
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(132 |
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(386 |
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(474 |
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Income from continuing operations before
income taxes |
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8,447 |
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3,626 |
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15,337 |
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876 |
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Income tax expense |
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2,584 |
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853 |
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5,880 |
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254 |
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Income from continuing operations |
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5,863 |
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2,773 |
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9,457 |
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622 |
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Loss from discontinued operations,
net of income taxes |
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(2,434 |
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(1,270 |
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(2,009 |
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(3,220 |
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Net income (loss) |
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$ |
3,429 |
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$ |
1,503 |
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$ |
7,448 |
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$ |
(2,598 |
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Basic and diluted income (loss) per share of
common stock: |
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Continuing operations |
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$ |
0.69 |
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$ |
0.33 |
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$ |
1.11 |
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$ |
0.07 |
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Discontinued operations |
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(0.29 |
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(0.15 |
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(0.24 |
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(0.37 |
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Net income (loss) per share |
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$ |
0.40 |
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$ |
0.18 |
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$ |
0.87 |
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$ |
(0.30 |
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Basic weighted average shares outstanding |
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8,522 |
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8,522 |
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8,522 |
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8,522 |
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Dilutive effect of stock based compensation |
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12 |
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6 |
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Diluted weighted average shares outstanding |
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8,534 |
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8,522 |
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8,528 |
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8,522 |
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Cash dividends declared per share of common
stock |
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$ |
0.08 |
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$ |
0.06 |
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$ |
0.20 |
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$ |
0.12 |
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See notes to condensed consolidated financial statements.
5
Lawson Products, Inc.
Condensed Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
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Nine Months Ended September 30, |
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2010 |
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2009 |
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Operating activities: |
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Net income (loss) |
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$ |
7,448 |
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$ |
(2,598 |
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Loss from discontinued operations |
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2,009 |
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3,220 |
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Income from continuing operations |
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9,457 |
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622 |
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Adjustments to reconcile to net cash provided by operating
activities: |
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Depreciation and amortization |
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4,489 |
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5,265 |
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Deferred income taxes |
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3,325 |
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2,219 |
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Settlement payment |
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(10,000 |
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(5,000 |
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Loss (gain) from disposal of property, plant and equipment |
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(1,701 |
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16 |
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Changes in operating assets and liabilities |
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Accounts receivable |
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(7,471 |
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3,031 |
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Inventories |
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(1,013 |
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6,196 |
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Prepaid expenses and other assets |
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1,549 |
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118 |
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Accounts payable and accrued expenses |
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2,612 |
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5 |
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Other |
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(247 |
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2,169 |
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Net cash provided by operating activities of continuing
operations |
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1,000 |
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14,641 |
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Investing activities: |
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Additions to property, plant and equipment |
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(5,218 |
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(2,352 |
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Proceeds from sale of property |
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2,027 |
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2,179 |
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Proceeds from sale of business |
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16,000 |
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Net cash provided by (used in) investing activities of
continuing operations |
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12,809 |
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(173 |
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Financing activities: |
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Net payments of revolving line of credit |
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(7,700 |
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Dividends paid |
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(1,534 |
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(2,216 |
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Other |
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(32 |
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(420 |
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Net cash used in financing activities of continuing operations |
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(1,566 |
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(10,336 |
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Discontinued operations: |
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Operating cash flows |
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2,144 |
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2,407 |
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Investing cash flows |
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(4 |
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(43 |
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Net cash provided by discontinued operations |
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2,140 |
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2,364 |
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Increase in cash and cash equivalents |
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14,383 |
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6,496 |
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Cash and cash equivalents at beginning of period |
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8,787 |
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4,300 |
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Cash and cash equivalents at end of period |
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$ |
23,170 |
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$ |
10,796 |
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See notes to condensed consolidated financial statements.
6
Lawson Products, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1 Basis of Presentation and Summary of Significant Accounting Policies
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 Companys Annual Report on Form 10-K for the year ended
December 31, 2009. 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 nine-month periods ended September 30, 2010 are not necessarily
indicative of the results that may be expected for the year ending December 31, 2010.
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
nine months ended September 30, 2010 as compared to the significant accounting policies described
in our Annual Report on Form 10-K for the year ended December 31, 2009. The Company has evaluated
subsequent events through October 28, 2010, the filing date of this Form 10-Q, and has determined
that there were no subsequent events to recognize or disclose in these financial statements.
Note 2 Discontinued operations
On August 31, 2010 the Company entered into a transaction to sell substantially all of the
assets of Assembly Component Systems, Inc. (ACS), a wholly owned subsidiary, to Supply
Technologies LLC (Supply Technologies), a wholly owned company of Park-Ohio Holdings Corp. Under
the terms of the Asset Purchase Agreement (the Agreement), Supply Technologies purchased
substantially all of the assets of ACS for $19.0 million. Of the total consideration, $16.0 million
was paid to Lawson in cash on September 1, 2010. The remaining balance due, adjusted based on the
final value of the working capital of ACS on August 31, 2010, will be paid in quarterly
installments over the next three years, subject to the terms of a subordinated promissory note
between Supply Technologies and Lawson. In addition, Supply Technologies assumed certain
liabilities of ACS. A $3.9 million pre-tax loss on the sale was recorded in the third quarter of
2010.
ACS was previously included in the Companys Original Equipment Manufacturing (OEM) segment.
Losses per share of $0.15 and $0.37 related to the ACS operations for the three and nine month
periods ended September 30, 2009, respectively, have been reclassified from continuing operations
to discontinued operations.
The Company closed its operations in Mexico in 2007.
7
Lawson Products, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The following table details the components of income (loss) from discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Amounts in thousands, except per share data) |
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales of ACS |
|
$ |
8,928 |
|
|
$ |
7,134 |
|
|
$ |
34,786 |
|
|
$ |
31,119 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax income (loss) from
discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ACS |
|
$ |
186 |
|
|
$ |
(779 |
) |
|
$ |
979 |
|
|
$ |
(3,135 |
) |
Mexico |
|
|
(76 |
) |
|
|
(19 |
) |
|
|
(172 |
) |
|
|
(96 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total pre-tax income (loss) |
|
|
110 |
|
|
|
(798 |
) |
|
|
807 |
|
|
|
(3,231 |
) |
Income tax expense (benefit) |
|
|
44 |
|
|
|
472 |
|
|
|
316 |
|
|
|
(11 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued
operations |
|
|
66 |
|
|
|
(1,270 |
) |
|
|
491 |
|
|
|
(3,220 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax loss on sale of ACS |
|
|
(3,858 |
) |
|
|
|
|
|
|
(3,858 |
) |
|
|
|
|
Income tax benefit |
|
|
(1,358 |
) |
|
|
|
|
|
|
(1,358 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on sale of ACS |
|
|
(2,500 |
) |
|
|
|
|
|
|
(2,500 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations |
|
$ |
(2,434 |
) |
|
$ |
(1,270 |
) |
|
$ |
(2,009 |
) |
|
$ |
(3,220 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted loss per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ACS |
|
$ |
(0.28 |
) |
|
$ |
(0.15 |
) |
|
$ |
(0.22 |
) |
|
$ |
(0.36 |
) |
Mexico |
|
|
(0.01 |
) |
|
|
|
|
|
|
(0.02 |
) |
|
|
(0.01 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
(0.29 |
) |
|
$ |
(0.15 |
) |
|
$ |
(0.24 |
) |
|
$ |
(0.37 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 3 Inventories
Components of inventories were as follows:
|
|
|
|
|
|
|
|
|
|
|
(Amounts in thousands) |
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
Finished goods |
|
$ |
60,270 |
|
|
$ |
59,172 |
|
Work in progress |
|
|
1,275 |
|
|
|
1,227 |
|
Raw materials |
|
|
1,640 |
|
|
|
1,759 |
|
|
|
|
|
|
|
|
Total |
|
|
63,185 |
|
|
|
62,158 |
|
Reserve for obsolete and excess inventory |
|
|
(7,383 |
) |
|
|
(7,466 |
) |
|
|
|
|
|
|
|
|
|
$ |
55,802 |
|
|
$ |
54,692 |
|
|
|
|
|
|
|
|
8
Lawson Products, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 4 Severance Reserve
The table below shows the changes in the Companys reserve for severance and related payments,
included in accrued expenses and other liabilities on the Condensed Consolidated Balance Sheets as
of September 30, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
(Amounts in thousands) |
|
|
|
Nine Months Ended September 30, |
|
|
|
2010 |
|
|
2009 |
|
Balance at beginning of year |
|
$ |
4,086 |
|
|
$ |
6,012 |
|
Charged to earnings |
|
|
3,242 |
|
|
|
6,418 |
|
Payments |
|
|
(3,699 |
) |
|
|
(6,653 |
) |
Adjustment to prior reserve |
|
|
(67 |
) |
|
|
(165 |
) |
|
|
|
|
|
|
|
Balance at end of the period |
|
$ |
3,562 |
|
|
$ |
5,612 |
|
|
|
|
|
|
|
|
Note 5 Litigation Settlement Proceeds
During the three and nine month periods ended September 30, 2010 the Company recorded a
benefit of $3.5 million and $4.1 million, respectively, in Severance and Other Expenses
(Benefits) as a result of proceeds received from a settlement agreement and legal remedies related
to the actions of several former sales agents and the Share Corporation (Share) alleging, among
other things, breach of contract and interference with the Companys business relationships. In
exchange for the proceeds, the Company agreed to settle all related claims with Share and the
former sales agents.
Note 6 Loss (Gain) on Disposal of Property, Plant and Equipment
In the first nine 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.
Note 7 Stock Based Compensation
Service based awards
Service based awards vest based on the participants service to the Company over a fixed period
of time. During the first nine months of 2010 the Company issued 35,692 of restricted stock awards
with a vesting period of either one or three years. Each restricted stock award can be exchanged
for the Companys common stock on the vesting date. The Company also issued 30,944 restricted stock
units during the first nine months of 2010 with a vesting period of one year. Each restricted stock
unit can be exchanged for either the Companys common stock or the equivalent value in cash on the
vesting date. The Company had 72,092 unvested restricted stock awards and 30,944 unvested
restricted stock units outstanding at September 30, 2010. An expense of $0.3 million and $0.6
million for outstanding restricted stock awards and restricted stock units was recorded in
Selling, general and administrative expenses in the three and nine month periods ended September
30, 2010, respectively.
Performance based awards
The Company has established two Long-Term Incentive Plans (LTIP); one for the Senior
Executive Officers (SEO LTIP) and one for the Companys Vice Presidents (VP LTIP). Awards under
both plans are contingent on the level of financial performance of the Company over the three year
period ending December 31, 2012.
Under the terms of the SEO LTIP, at the end of the three year period, one half of the amount
earned would be payable in cash and one half payable in the Companys common stock. The maximum
amount of stock that could be issued, assuming the December 31, 2012 closing price of the stock
remained at the September 30, 2010 closing price of $15.27, would be 99,154 shares.
9
Lawson Products, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The VP LTIP is payable one half in restricted stock and one half in non-qualified stock
options. The Company has issued 28,249 shares of restricted stock and 59,556 of non-qualified stock
options with an exercise price of $14.04. These amounts represent the maximum amount that can be
earned by the participants over the three year period and the amounts may be reduced based on the
Companys financial performance.
Stock Performance Rights (SPRs)
SPRs are similar to stock options, however, they are settled in cash rather than in stock. The
exercise price of an SPR is equal to the fair market value of the Companys stock as of date of
grant and the value is only realized by the participant if the stock price at the time of exercise
is higher than at the date of grant. The participant receives a cash payment for the difference
upon exercise. SPR grants generally have a three-year vesting schedule, with awards
vesting ratably over that period on the anniversary of the grant date and have a term of seven to
ten years from the date of grant.
Activity related to the Companys SPRs during the nine months ended September 30, 2010 was as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
Number |
|
|
Average |
|
|
|
of SPRs |
|
|
Exercise Price |
|
|
|
|
|
|
|
|
|
|
Outstanding on December 31, 2009 |
|
|
388,300 |
|
|
$ |
28.31 |
|
Granted |
|
|
2,600 |
|
|
|
14.04 |
|
Cancelled |
|
|
(27,150 |
) |
|
|
23.16 |
|
|
|
|
|
|
|
|
|
Outstanding on September 30, 2010 |
|
|
363,750 |
|
|
|
28.59 |
|
|
|
|
|
|
|
|
|
The fair value of the outstanding SPRs was remeasured on September 30, 2010 using the
Black-Scholes valuation model. This model requires the input of the following subjective
assumptions that may have a significant impact on the fair value estimate:
|
|
|
Expected volatility |
|
50.9% to 88.6% |
Risk-free interest rate |
|
0.2% to 1.1% |
Expected remaining term (in years) |
|
0.1 to 4.5 |
Expected annual dividend |
|
$0.32 |
A benefit of $0.2 million and an expense of $0.4 million for outstanding SPRs was recorded in
Selling, general and administrative expenses in the third quarters of 2010 and 2009,
respectively. The Company recorded a benefit of $0.3 million and $0.1 million during the first nine
months of 2010 and 2009, respectively.
10
Lawson Products, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 8 Income Tax
The Company and its subsidiaries are subject to U.S. Federal income tax as well as income tax
of multiple state and international jurisdictions. As of September 30, 2010, the Company is subject
to U.S. Federal income tax examinations for 2009 and non-U.S. income tax examinations for the years
2005 through 2009. During the third quarter of 2010, the Company completed its U.S. Federal
examinations for the years ended December 31, 2007 and 2008 with no material adjustments.
Note 9 Contingencies
During 2009, the Internal Revenue Service initiated an employment tax examination for the
years 2006 through 2008 of the long-standing treatment by a Company subsidiary, Drummond American
LLC, of its sales agents as independent contractors. It is not possible at this time to predict
the final outcome of this examination or to establish a reasonable estimate of possible additional
taxes owed, if any.
Note 10 Comprehensive Income (loss)
Components of comprehensive income (loss) for the three and nine months ended September 30,
2010 and 2009 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Amounts in thousands) |
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
3,429 |
|
|
$ |
1,503 |
|
|
$ |
7,448 |
|
|
$ |
(2,598 |
) |
Foreign currency translation adjustment |
|
|
1,296 |
|
|
|
701 |
|
|
|
1,169 |
|
|
|
1,190 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) |
|
$ |
4,725 |
|
|
$ |
2,204 |
|
|
$ |
8,617 |
|
|
$ |
(1,408 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 11 Related Party Transaction
The Companys Chairman of the Board, Dr. Port, is a partner in two partnerships that have an
interest in Lawsons 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 names Dr. Port as a defendant based on his role in the partnerships and
as a director of the Company. The Company is not a party to the lawsuit.
The Company incurred $0.5 million for legal services provided to Dr. Port in relation to this
litigation. As of September 30, 2010, the Company has not made a determination as to whether Dr.
Port is entitled to indemnification in this matter or if he is responsible for the legal fees.
11
Lawson Products, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 12 Segment Reporting
The Companys operating units have been aggregated into two reportable segments: MRO and OEM.
The Companys MRO segment is a distributor of products and services to the industrial, commercial,
institutional, and governmental maintenance repair and operations marketplace. The Companys OEM
segment manufactures and distributes production and specialized component parts to the original
equipment marketplace. The Companys 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 OEM segment has been restated for prior periods to reflect the sale of the ACS
business.
The following table presents summary financial information for the Companys reportable segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Amounts in thousands) |
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MRO |
|
$ |
85,660 |
|
|
$ |
81,359 |
|
|
$ |
250,014 |
|
|
$ |
244,748 |
|
OEM |
|
|
3,604 |
|
|
|
2,695 |
|
|
|
10,088 |
|
|
|
9,735 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated total |
|
$ |
89,264 |
|
|
$ |
84,054 |
|
|
$ |
260,102 |
|
|
$ |
254,483 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MRO |
|
$ |
6,390 |
|
|
$ |
4,384 |
|
|
$ |
13,129 |
|
|
$ |
7,144 |
|
OEM |
|
|
152 |
|
|
|
(286 |
) |
|
|
(14 |
) |
|
|
(421 |
) |
Severance
and other benefits (expense) |
|
|
2,024 |
|
|
|
(464 |
) |
|
|
875 |
|
|
|
(6,253 |
) |
Gain (loss) from disposal
of property, plant and
equipment |
|
|
|
|
|
|
|
|
|
|
1,701 |
|
|
|
(16 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated total |
|
$ |
8,566 |
|
|
$ |
3,634 |
|
|
$ |
15,691 |
|
|
$ |
454 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense), net |
|
|
(14 |
) |
|
|
124 |
|
|
|
32 |
|
|
|
896 |
|
Interest expense |
|
|
(105 |
) |
|
|
(132 |
) |
|
|
(386 |
) |
|
|
(474 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing
operations before income taxes |
|
$ |
8,447 |
|
|
$ |
3,626 |
|
|
$ |
15,337 |
|
|
$ |
876 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents total assets for the Companys reportable segments:
|
|
|
|
|
|
|
|
|
|
|
(Amounts in thousands) |
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
Total assets |
|
|
|
|
|
|
|
|
MRO |
|
$ |
201,030 |
|
|
$ |
181,717 |
|
OEM |
|
|
14,481 |
|
|
|
12,429 |
|
|
|
|
|
|
|
|
Segment total |
|
|
215,511 |
|
|
|
194,146 |
|
Corporate |
|
|
16,506 |
|
|
|
17,248 |
|
Discontinued operations |
|
|
1,106 |
|
|
|
30,253 |
|
|
|
|
|
|
|
|
Consolidated total |
|
$ |
233,123 |
|
|
$ |
241,647 |
|
|
|
|
|
|
|
|
12
|
|
|
ITEM 2. |
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Quarter ended September 30, 2010 compared to Quarter ended September 30, 2009
The following table presents a summary of our financial performance for the three months
ended September 30, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
($ in thousands) |
|
Amount |
|
|
Net Sales |
|
|
Amount |
|
|
Net Sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MRO |
|
$ |
85,660 |
|
|
|
96.0 |
% |
|
$ |
81,359 |
|
|
|
96.8 |
% |
OEM |
|
|
3,604 |
|
|
|
4.0 |
|
|
|
2,695 |
|
|
|
3.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated total |
|
$ |
89,264 |
|
|
|
100.0 |
% |
|
$ |
84,054 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MRO |
|
$ |
55,440 |
|
|
|
64.7 |
% |
|
$ |
53,784 |
|
|
|
66.1 |
% |
OEM |
|
|
614 |
|
|
|
17.0 |
|
|
|
261 |
|
|
|
9.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated total |
|
|
56,054 |
|
|
|
62.8 |
|
|
|
54,045 |
|
|
|
64.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
expenses |
|
|
49,512 |
|
|
|
55.5 |
|
|
|
49,947 |
|
|
|
59.4 |
|
Severance and other expenses (benefits) |
|
|
(2,024 |
) |
|
|
(2.3 |
) |
|
|
464 |
|
|
|
0.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
8,566 |
|
|
|
9.6 |
|
|
|
3,634 |
|
|
|
4.3 |
|
Other (expense), net |
|
|
(119 |
) |
|
|
(0.1 |
) |
|
|
(8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
before income tax expense |
|
|
8,447 |
|
|
|
9.5 |
|
|
|
3,626 |
|
|
|
4.3 |
|
Income tax expense |
|
|
2,584 |
|
|
|
2.9 |
|
|
|
853 |
|
|
|
1.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
5,863 |
|
|
|
6.6 |
% |
|
$ |
2,773 |
|
|
|
3.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
Net sales for the third quarter of 2010 increased 6.2% to $89.3 million, from $84.1 million in
the third quarter of 2009.
MRO net sales increased 5.3% in the third quarter of 2010, to $85.7 million from $81.4 million
in the prior year period, primarily reflecting continued growth with our strategic, governmental
and automotive customers. OEM net sales increased $0.9 million, or 33.7%, in the third quarter of
2010, to $3.6 million from $2.7 million in the prior year period driven by strength in our
aerospace customer base and new customer growth.
Gross Profit
Gross profit increased $2.0 million in the third quarter of 2010, to $56.1 million from
$54.0 million in the prior year period. The gross profit margin for the third quarter of 2010
decreased to 62.8%, 1.5 percentage points less than the 64.3% achieved in the third quarter of 2009
primarily due to the intentional change in mix to higher volume strategic customers with lower
margins. The growth in lower margin OEM sales also contributed to the margin percentage decline.
13
Selling, General and Administrative Expenses (SG&A)
SG&A expenses decreased in the third quarter of 2010 to $49.5 million, including the $1.6
million of expenses incurred due to ERP implementation, from $49.9 million in 2009. As a percent of
net sales, SG&A decreased 3.9 percentage points to 55.5% in the third quarter of 2010 compared to
59.4% in the third quarter of 2009, primarily due to operating efficiencies and our cost savings
initiatives. SG&A expenses in the third quarter of 2010 include legal fees of $0.5 million
advanced to a related party (see Note 11 Related Party Transaction) and a benefit of $0.3 million
pertaining to the Companys long-term incentive program.
Severance and Other Expenses (Benefits)
Severance expense was $1.5 million in the third quarter of 2010 compared to a $0.5 million in
the third quarter of 2009. A restructuring of some of our managerial responsibilities focused on
improved operating efficiencies during the third quarter of 2010 resulted in the elimination of
certain positions.
During the third quarter of 2010 we recorded a benefit of $3.5 million related to proceeds
received from a settlement agreement and legal remedies related to the actions of several former
sales agents and the Share Corporation (Share) alleging, among other things, breach of contract
and interference with the Companys business relationships. In exchange for the proceeds, we agreed
to settle all related claims with Share and the former sales agents.
Income Tax Expense
Income tax expense of $2.6 million was recorded based on pre-tax income of $8.4 million for
the three months ended September 30, 2010, resulting in an
effective tax rate of 30.6%. For the
three months ended September 30, 2009, we recorded income tax of $0.9 million based on pre-tax
income of $3.6 million, resulting in an effective tax rate of 23.5%. The higher 2010 tax rate
primarily reflects the effect of the 2010 projected pre-tax income compared to the 2009 pre-tax
loss.
Discontinued Operations
The Company recorded a loss from discontinued operations of $2.4 million and $1.3 million for
the third quarter of 2010 and 2009, respectively. The 2010 loss included $2.5 million for the after
tax charge related to the sale of its ACS business, while the 2009 loss represented operating
losses of ACS and Mexico.
Net Income
We reported net income of $3.4 million or $0.40 per share in the third quarter of 2010.
Pre-tax 2010 income was primarily driven by increased sales, a $3.5 million benefit from the Share
legal settlement and operating cost savings partially offset by the loss from discontinued
operations. Third quarter 2009 net income was $1.5 million or $0.18 per share.
14
Nine Months ended September 30, 2010 compared to Nine Months ended September 30, 2009
The following table presents a summary of our financial performance for the nine months
ended September 30, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
($ in thousands) |
|
Amount |
|
|
Net Sales |
|
|
Amount |
|
|
Net Sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MRO |
|
$ |
250,014 |
|
|
|
96.1 |
% |
|
$ |
244,748 |
|
|
|
96.2 |
% |
OEM |
|
|
10,088 |
|
|
|
3.9 |
|
|
|
9,735 |
|
|
|
3.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated total |
|
$ |
260,102 |
|
|
|
100.0 |
% |
|
$ |
254,483 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MRO |
|
$ |
161,700 |
|
|
|
64.7 |
% |
|
$ |
158,560 |
|
|
|
64.8 |
% |
OEM |
|
|
1,610 |
|
|
|
16.0 |
|
|
|
1,373 |
|
|
|
14.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated total |
|
|
163,310 |
|
|
|
62.8 |
|
|
|
159,933 |
|
|
|
62.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
expenses |
|
|
150,195 |
|
|
|
57.7 |
|
|
|
153,210 |
|
|
|
60.2 |
|
Severance and other expenses (benefits) |
|
|
(875 |
) |
|
|
(0.3 |
) |
|
|
6,253 |
|
|
|
2.4 |
|
Loss (gain) on disposal of property,
plant and equipment |
|
|
(1,701 |
) |
|
|
(0.6 |
) |
|
|
16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
15,691 |
|
|
|
6.0 |
|
|
|
454 |
|
|
|
0.2 |
|
Other income (expense), net |
|
|
(354 |
) |
|
|
(0.1 |
) |
|
|
422 |
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
before income tax expense |
|
|
15,337 |
|
|
|
5.9 |
|
|
|
876 |
|
|
|
0.3 |
|
Income tax expense |
|
|
5,880 |
|
|
|
2.3 |
|
|
|
254 |
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
9,457 |
|
|
|
3.6 |
% |
|
$ |
622 |
|
|
|
0.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
Net sales for the first nine months of 2010 increased 2.2% to $260.1 million, from
$254.5 million in the first nine months of 2009. MRO net sales increased $5.3 million or 2.2% in
the first nine months of 2010, to $250.0 million from $244.7 million in the prior year period. The
growth in MRO sales was primarily driven by our strategic, governmental and automotive customers.
OEM net sales increased $0.4 million in the first nine months of 2010, to $10.1 million from
$9.7 million in the prior year period.
Gross Profit
Gross profit increased $3.4 million in the first nine months of 2010, to $163.3 million from
$159.9 million in the prior year period. Gross profit as a percent of net sales remained constant
at 62.8% in the first nine months of both 2010 and 2009.
Selling, General and Administrative Expenses (SG&A)
SG&A expenses were $150.2 million or 57.7% of net sales and $153.2 million or 60.2% of net
sales for the nine months ended September 30, 2010 and 2009, respectively. SG&A as a percent of net
sales improved 2.5 percentage points in the first nine months of 2010 compared to the first nine
months of 2009 as we realized certain operating efficiencies and the streamlining of our cost structure,
including the closure of our Dallas and Charlotte distribution centers in 2009. During the nine
months ended September 30, 2010 we incurred ERP implementation expenses of $2.3 million which
partially offset the cost savings from our initiatives.
15
Severance and Other Restructuring Charges
Severance expense was $3.2 million and $6.4 million in the first nine months of 2010 and 2009,
respectively. A restructuring of some of our managerial responsibilities focused on improved
operating efficiencies during the first nine months of 2010 resulted in the elimination of certain
positions. During the first nine months of 2009, primarily in response to the economic recession,
we reduced the size of our work force across the organization.
During the first nine months of 2010 we recorded a benefit of $4.1 million related to proceeds
received from a settlement agreement and legal remedies related to the actions of several former
sales agents and the Share Corporation (Share) alleging, among other things, breach of contract
and interference with the Companys business relationships. In exchange for the proceeds, we agreed
to settle all related claims with Share and the former sales agents.
Loss (Gain) on Disposal of Property, Plant and Equipment
In the first nine months of 2010, we received cash proceeds of $2.0 million from the sale of
our Dallas, Texas distribution center, resulting in a gain of $1.7 million. In 2009, a $0.4 million
gain from the sale of the Companys Charlotte, North Carolina distribution center was offset by a
$0.4 million write-down in the value of equipment.
Income Tax Expense
Income tax expense of $5.9 million was recorded based on pre-tax income of $15.3 million for
the nine months ended September 30, 2010, resulting in an effective tax rate of 38.3%. For the nine
months ended September 30, 2009, the Company recorded income tax expense of $0.3 million based on
pre-tax income of $0.9 million resulting in an effective tax rate of 29.0%. The higher 2010 tax
rate primarily reflects the effect of 2010 projected pre-tax income compared to the 2009 pre-tax
loss.
Discontinued Operations
The Company recorded a loss from discontinued operations of $2.0 million and $3.2 million for
the nine months ended 2010 and 2009, respectively. The 2010 loss included $2.5 million for the
after tax charge related to the sale of its ACS business while the 2009 loss represented operating
losses of ACS and Mexico.
Net Income (loss)
We reported net income of $7.4 million or $0.87 per diluted share in the first nine months of
2010. Pre-tax 2010 income was driven by higher gross profit from increased sales, a $1.7 million
gain related to the sale of the Dallas distribution center, a $4.1 million legal settlement and
significant operating cost savings. These items were offset by ERP implementation costs of $2.3
million, severance costs of $3.2 million and the loss from discontinued operations.
16
Liquidity and Capital Resources
Cash on hand was $23.2 million on September 30, 2010 compared to $8.8 million on December 31,
2009. Net cash provided by continuing operations was $1.0 million for the first nine months of 2010
compared to $14.6 million in the first nine months of 2009. Increased net income in the first nine
months of 2010 was somewhat offset by an increase in working capital and the final settlement
payment related to prior year litigation. Accounts receivable increased $7.5 million as the
increased sales had not yet been fully realized in cash on September 30, 2010. Additionally, $1.0
million was invested to increase inventory levels to support higher sales. Cash provided by
operations in the first nine months of 2009 primarily reflected a decrease in accounts receivable
and lower inventory levels.
We received $16.0 million from the sale of ACS in the third quarter of 2010. Additionally,
cash flows from investing activities in the first nine months of 2010 and 2009 benefited from the
receipt of $2.0 million and $2.2 million, respectively from the sale of our Dallas, Texas and
Charlotte, North Carolina distribution centers. Capital expenditures, including $4.1 million
related to the implementation of a new ERP system, were $5.2 million for the first nine months of
2010. We anticipate that the total cost of the ERP implementation, including both capital and
expense, will be approximately $20 million and will continue through 2011.
Net cash used in financing activities in the first nine months of 2010 and 2009 was
$1.6 million and $10.3 million, respectively. The change was primarily due to a net payment of $7.7
million on our revolving line of credit in the first nine months of 2009 and a $0.7 million
decrease in dividend payments in 2010 compared to 2009. On September 30, 2010 and 2009, we had no
borrowings outstanding on our revolving line of credit. At September 30, 2010 we were in compliance
with all covenants related to our revolving line of credit as detailed below:
|
|
|
|
|
|
|
|
|
Covenant |
|
Requirement |
|
|
Actual |
|
Minimum
EBITDA, as defined in the amended Credit Agreement |
|
$ |
10.0 million |
|
|
$ |
21.0 million |
|
Cash plus accounts receivable and inventory to debt ratio |
|
|
2.00:1.00 |
|
|
|
89.46:1.00 |
|
Minimum tangible net worth |
|
$ |
55.0 million |
|
|
$ |
85.6 million |
|
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, ERP implementation,
capital improvements and other commitments and obligations.
17
|
|
|
ITEM 3. |
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
There have been no material changes in market risk at September 30, 2010 from that reported in
the Companys Annual Report on Form 10-K for the year ended December 31, 2009.
|
|
|
ITEM 4. |
|
CONTROLS AND PROCEDURES |
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 Companys internal control over financial reporting during the
quarter ended September 30, 2010 that has materially affected, or is reasonably likely to
materially affect, the Companys internal control over financial reporting.
PART II
OTHER INFORMATION
ITEMS 1, 1A, 2, 3 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 |
18
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 October 28, 2010 |
/s/ Thomas J. Neri
|
|
|
Thomas J. Neri |
|
|
President and Chief Executive Officer |
|
|
(principal executive officer) |
|
|
|
|
|
|
Dated October 28, 2010 |
/s/ Ronald J. Knutson
|
|
|
Ronald J. Knutson |
|
|
Senior Vice President and Chief Financial Officer
(principal financial and accounting officer) |
|
19