10-K
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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(Mark One)
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þ
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31, 2008
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or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission file
number: 0-10546
(Exact Name of Registrant as
Specified in Charter)
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Delaware
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36-2229304
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(State or other jurisdiction
of
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(I.R.S. Employer
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incorporation or
organization)
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Identification No.
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)
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1666 East
Touhy Avenue, Des Plaines, Illinois 60018
(Address
of principal executive offices)
Registrants telephone number, including area code:
(847) 827-9666
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which
Registered
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Common Stock, $1.00 par value
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The NASDAQ Stock Market LLC
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Securities registered pursuant to Section 12(g) of the
Act:
None
(Title of class)
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes
o No
þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Exchange Act. Yes
o
No
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Indicate by check mark whether the registrant (l) 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 if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
(§ 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrants
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this
Form 10-K
or any amendment to this
Form 10-K. þ
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. (Check one):
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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)
Indicate by check mark whether the registrant is a shell company
(as defined by
Rule 12b-2
of the Exchange Act). Yes
o
No
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The aggregate market value of the registrants voting stock
held by non-affiliates on June 30, 2008 (based upon the per
share closing price of $24.78) was approximately $92,600,000.
As of March 5, 2009, 8,522,001 shares of Common Stock
were outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
The following documents are incorporated into this
Form 10-K
by reference:
Part III incorporates information by reference to the
registrants definitive proxy statement, to be filed with
the Securities and Exchange Commission within 120 days
after the close of the fiscal year.
TABLE OF
CONTENTS
Safe Harbor Statement under the Securities
Litigation Reform Act of 1995: This Annual Report on
Form 10-K
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 risk factors set forth in Item 1A
of this
Form 10-K.
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
Overview
Lawson Products, Inc. (Lawson, the
Company, we or us) was
incorporated in Illinois in 1952, and reincorporated in Delaware
in 1982. Lawson is a North American distributor and marketer of
systems, services and products to the industrial, commercial,
institutional, and governmental maintenance repair and
operations (MRO) marketplace. The Company also
manufactures, sells and distributes production and specialized
component parts to the original equipment marketplace
(OEM) including the automotive, appliance,
aerospace, construction, and transportation industries. Please
see Note O Segment Reporting in the
Notes to the Consolidated Financial Statements, included
elsewhere in this Annual Report on
Form 10-K,
for further information regarding financial results related to
the Companys geographical and business segments. (Such
information is incorporated herein by reference.)
MRO
Segment
Industry
and competition
The MRO industry consists of companies that buy and stock
products in bulk and supply these products to customers on an as
needed basis. The customer benefits from lower costs and
convenience of ordering. We estimate the MRO industry in North
America to exceed $100 billion in revenues.
We encounter intense competition from several national
distributors and manufacturers and a large number of regional
and local distributors. Some competitors have greater financial
and personnel resources, handle more extensive lines of
merchandise, operate larger facilities and price some
merchandise more competitively than we do. We compete for
business delivering on our proposition of vendor managed
inventory, technical expertise and highly engineered products.
Operations
We participate in the MRO industry through our Lawson Products
business unit and through our Rutland Tools subsidiary
(Rutland) which together represented 83% of our
overall net sales for the year ended December 31, 2008.
The majority of our sales are generated through a network of
approximately 1,500 independent sales agents. These agents
deliver value to the customer by offering vendor managed
inventory, technical expertise and highly engineered products.
Sales agents receive education in the best uses of our products
enabling them to provide solutions customized to our customers
needs. This includes
on-site
visits to help manage customer inventories, introducing cost
savings and improving their profitability. Regular inventory
analysis and replenishment is conducted to prevent unnecessary
purchases and unplanned downtime. Additionally, we provide
customized storage systems for improved organization and a more
efficient workflow. Product demonstrations that can improve our
customers productivity are regularly given by our agents.
We distribute printed catalogs to two primary markets. One is
the retail market where business is done with the end user of
the product. The other is the wholesale market where the
distributor resells our product to an end customer. In 2008, we
delivered printed catalogs to approximately 70,000 retail
customers and approximately 62,000 wholesale customers. We also
have showrooms located in Whittier, California; City of
Industry, California; San Jose, California; Santa Ana,
California; Chatsworth, California; Phoenix, Arizona; and
Houston, Texas.
We receive product orders in various ways. Customers can place
orders with our customer service team via fax or phone, orders
can be placed directly through the on-line catalog on our web
site and agents enter orders directly into an electronic
ordering system.
Our engineering department provides technical support as part of
our value proposition for our extensive product line and
on-site
problem solving. Material Safety Data Sheets are maintained
electronically and are available to our customers seven days a
week, 24 hours a day. Additionally, product certifications
and material test
3
reports are available by contacting the engineering department
at engineering@lawsonproducts.com. Our engineering department
also develops and presents product safety and technical training
seminars tailored to meet our customers needs.
We sell products in all 50 states, the District of
Columbia, and Canada. An important factor in attracting and
retaining customers is our ability to process orders promptly.
We normally ship to customers within one to two days of order
placement. This rapid shipment is facilitated by automated order
entry and inventory control systems. Products are stocked in and
processed from strategically placed general distribution centers
in Des Plaines, Illinois; Addison, Illinois; Vernon Hills,
Illinois; Reno, Nevada; Fairfield, New Jersey; Dallas, Texas;
Suwanee, Georgia; and Mississauga, Ontario.
We carry a significant amount of inventories to ensure product
availability and rapid processing of customer orders. We depend
on accurate forecasting of customer demand to establish the
proper level of inventory for each product. Inventory levels
need to be sufficient to meet customer demand while avoiding the
costs of stocking excess items. Technology is critical to
provide management with timely information related to our
current inventory on hand in relation to customer demand, vendor
pricing and purchase lead times to order the replenishment of
the optimal number of parts at the proper time at the best
price. We are seeking to improve and upgrade the quality of our
information technology to maximize the efficiency of our supply
chain.
Products
We offer approximately 240,000 different products for sale of
which approximately 180,000 products are maintained in
inventory. Sales percentages by broad categories of our product
mix are as follows:
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Product Category
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Percent of Total MRO Sales
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Fastening systems
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20
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Specialty chemicals
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13
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Cutting tools and abrasives
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13
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Fluid power
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11
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Aftermarket automotive supplies
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9
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Electrical
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9
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Welding and metal repair
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6
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Other
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19
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100
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%
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Substantially all of our products are manufactured by others,
purchased in bulk and repackaged in smaller quantities for sale
to our customers. During 2008, our Lawson Products business unit
purchased products from over 1,100 suppliers and our Rutland
business unit purchased products from approximately 600
suppliers. We generally do not engage in long-term or
fixed-price contracts. No single supplier accounted for more
than three percent of our purchases in 2008 and we believe that
the loss of any single supplier would not significantly affect
our operations.
We actively participate in the design and development of
products with our manufacturers. Technology has helped us to
develop new items that are application specific. We review
applications and recommend alternative products that could prove
beneficial to the customer. Our quality control department tests
our product offerings to assure they meet our specifications. We
also conduct failure analysis and recommend solutions to help
customers maximize product performance and avoid costly product
failures. To promote brand loyalty, we sell products using
various private labels and tradenames including Lawson Products,
Kent Automotive, Cronatron, and Drummond, among others.
Customers
Our customers include a wide range of purchasers of industrial
supply products from small repair shops to large national and
governmental accounts. Our customers operate in a wide variety
of industries including
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automotive repair, transportation, governmental including the
military, manufacturing, construction, mining, wholesale,
service and others.
During 2008, our Lawson Products business unit sold products to
approximately 140,000 customers and our Rutland business unit
sold products to approximately 30,000 customers. No customer
accounted for more than two percent of net sales. In 2008, 94%
of our net sales came from customers in the United States and 6%
came from customers in Canada.
OEM
Segment
Two of our subsidiaries, Assembly Component Systems
(ACS) and Automatic Screw Machine Parts Company
(ASMP) compete in the OEM marketplace. The OEM
marketplace generally consists of large manufacturing companies
with multiple supply chain needs. ACS and ASMP accounted for 13%
and 4% of the Companys net sales for the year ended
December 31, 2008.
ACS specializes in providing OEM manufacturers with
just-in-time
delivery of fasteners, components and fittings to maximize the
efficiency of the customers supply chain. ACS seeks
long-term agreements with companies to identify product needs
and parameters of use, offer engineering expertise, provide
product sourcing and manage inventory replenishment. Sales
support and dedicated warehousing is provided, enabling
partnered companies to focus on manufacturing operations while
affording them a reduction in financial obligations associated
with inventory housing and usage. ACS operates a distribution
network that includes Des Plaines, Illinois; Lenexa, Kansas;
Cincinnati, Ohio; and Memphis, Tennessee. Inventory supply rooms
staffed by dedicated ACS sales personnel located close to, or
within a companys operating space, are used to facilitate
the selection and transfer of goods that are called for during a
production schedule. Additional sales support is available
through sales calls, special needs requests, and pre-determined
replenishment schedules.
ASMP manufactures and distributes components, fasteners and
fittings for use by OEM manufacturers. Based in Decatur,
Alabama, ASMP manufactures components specific to the
customers production needs including various nondependent
or interdependent components. ASMP seeks to obtain long-term
commitments to enable proper support of the customers
supply chain. ASMP manufactures products developed for high
strength critical applications and also sources externally
produced items if applications call for such goods.
Employees
and Sales Agents
As of December 31, 2008, we employed approximately 1,350
full time workers, consisting of approximately 340 sales and
marketing employees, 760 operations and distribution employees
and 250 management and administrative staff. Approximately 12%
of our workforce is represented by four collective bargaining
agreements. We believe that our relations with our employees and
their collective bargaining organizations are good.
Additionally, sales in our MRO segment are made primarily
through a network of approximately 1,500 independent sales
agents. Independent sales agents are compensated on a commission
only basis and are responsible for repayment of commissions on
any uncollectible accounts.
Available
Information
We file or furnish annual reports on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K
and file or furnish amendments to those reports pursuant to
Section 13(a) or 15(d) of the Exchange Act and
Section 16 reports with the Securities and Exchange
Commission. The public can obtain copies of these materials by
visiting the Commissions Public Reference Room at
100 F Street, NE, Washington DC 20549, by accessing
the SECs website at
http://www.sec.gov.
In addition, as soon as reasonably practicable after such
materials are filed with or furnished to the Commission, we make
copies available to the public free of charge on or through our
website at www.lawsonproducts.com. Information on our
website is not incorporated by reference into this report.
5
Executive
Officers of the Registrant
The executive officers of Lawson as of December 31, 2008
were as follows.
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Year First
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Elected to
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Present
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Name
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Age
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Office
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Position
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Thomas J. Neri
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57
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2007
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Chief Executive Officer and Director
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F. Terrence Blanchard
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55
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2008
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Chief Financial Officer
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Neil E. Jenkins
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59
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2004
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Executive Vice President; Secretary and General Counsel
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Harry Dochelli
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49
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2008
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Executive Vice President Sales and Marketing
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William Holmes
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49
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2006
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Vice President and Treasurer
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Stewart Howley
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47
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2008
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Senior Vice President Strategic Business Development
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Michelle Russell
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47
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2007
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Senior Vice President Operations and Supply Chain Management
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Mary Ellen Schopp
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2007
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Senior Vice President, Human Resources
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Biographical information for the past five years relating to
each of our executive officers is set forth below.
Mr. Neri was elected Chief Executive Officer in
April 2007. Mr. Neri was elected to the Board of Directors
in December 2007. Mr. Neri was elected President and Chief
Operating Officer in January 2007. Mr. Neri was elected
Executive Vice President, Finance, Planning and Corporate
Development; Chief Financial Officer and Treasurer in 2004.
Mr. Neri joined the Company in October 2003 as Executive
Vice President, Finance and Corporate Planning.
Mr. Blanchard was elected Chief Financial Officer
effective June 30, 2008. Mr. Blanchard has been a
partner in the executive services firm Tatum, LLC
(Tatum) since 2006, where he has served as Interim
Vice President, Controller and Chief Accounting Officer for Dura
Automotive Systems, Inc., as Senior Financial Officer for
Hyperfeed Technologies, Inc. and in a financial consultation
role for Zimmer Holdings, Inc. Mr. Blanchard served from
1999 to 2006 in various management positions with Florsheim
Group Inc., including as President and Chief Financial Officer,
Vice President, Finance and Vice President and Controller.
Florsheim Group Inc. filed a petition for relief under
Chapter 11 of the U.S. Bankruptcy Code on
March 4, 2002.
Mr. Jenkins was elected Executive Vice President;
Secretary and General Counsel in 2004. From 2000 to 2003
Mr. Jenkins served as Secretary and Corporate Counsel of
the Company.
Mr. Dochelli was elected Executive Vice President
Sales and Marketing effective April 2008. Previously,
Mr. Dochelli served as Executive Vice President, North
America Contract Sales for OfficeMax from 2007 until 2008,
Executive Vice President of U.S. Operations for
OfficeMax/Boise Cascade Office Solutions from 2005 to 2007 and
in various other management positions with OfficeMax/Boise
Cascade Office Solutions from 1987 to 2005.
Mr. Holmes was elected Vice President and Treasurer
effective January 2006. From 2001 through 2005 Mr. Holmes
was Vice President and Assistant Treasurer of the Company.
Mr. Howley was elected Senior Vice President
Strategic Business Development effective April 2008.
Mr. Howley served as Chief Marketing Officer from December
2005 until May 2008. From August 2002 through December 2005, he
was Director of Strategic Business Development with Home Depot
Supply.
Ms. Russell was elected Senior Vice President
Operations and Supply Chain Management in August 2007.
Ms. Russell served as Chief Ethics and Compliance Officer
from April 2006 until August 2007 and in a consulting capacity
from November 2005 through March 2006. Prior to this
Ms. Russell held the role of Vice President of Operations
at Associated Materials from 2001 until 2005.
Ms. Schopp was elected Senior Vice President, Human
Resources in 2007. Prior to this Ms. Schopp held the role of
Vice President, Human Resources at ConAgra Foods, Inc. from 2003
until 2006.
6
In addition to the other information in this Annual Report on
Form 10-K
for the fiscal year ended December 31, 2008, the following
factors should be considered in evaluating Lawsons
business. Our operating results depend upon many factors and are
subject to various risks and uncertainties. The material risks
and uncertainties known to us which may cause the operating
results to vary from anticipated results or which may negatively
affect our operating results are as follows:
Our
results of operations may continue to be adversely impacted by
the current worldwide economic recession. As a result, demand
for our products may significantly decline or the market price
of our common stock may decline.
In late 2007, the U.S. and world economies entered into a
severe economic recession due to the effects of the subprime
lending crisis, general credit market crisis, collateral effects
on the finance and banking industries, volatile energy and
commodity costs, concerns about inflation, slower economic
activity, decreased consumer confidence, reduced corporate
profits and capital spending, adverse business conditions and
liquidity concerns. These conditions make it difficult for our
customers and us to accurately forecast and plan future business
activities, and have caused U.S. and foreign businesses to
slow spending on products throughout our industry, which
adversely impacts our revenues and our ability to manage
inventory levels, collect customer receivables and ultimately
our profitability. We cannot predict the duration of the
recession or the timing or strength of a subsequent economic
recovery. Additionally, our stock price could decrease if
investors have concerns that our business, financial condition,
results of operations and capital requirements will be
negatively impacted by a continued worldwide recession. A
decrease in our stock price reduces the market value of the
Company compared to the book value of our net assets, which may
lead to further impairment of our assets.
Our
Deferred Prosecution Agreement with the U.S. Attorneys
Office for the Northern District of Illinois, and any potential
breach of such agreement, may adversely affect our business,
financial condition, results of operations and stock
price.
We entered into a Deferred Prosecution Agreement (the
DPA) in August 2008 with the
U.S. Attorneys Office for the Northern District of
Illinois (the U.S. Attorneys Office), which
provides for the payment of $30.0 million in penalties to
resolve our liability for the actions of our representatives in
improperly providing gifts or awards to purchasing agents
through our then-existing customer loyalty programs. The signing
of the DPA may negatively affect our ability to do business with
certain customers (both government and non-government
customers). In addition, under the terms of the DPA, if it is
determined that we deliberately gave false, incomplete or
misleading information under the DPA or have committed any
federal crimes subsequent to the DPA, or otherwise knowingly,
intentionally, and materially violated any provision of the DPA,
we may be subject to prosecution for any federal criminal
violation of which the U.S. Attorneys Office has
knowledge. We cannot predict the impact, if any, of the signing
of the DPA on our business, financial condition, results of
operations, and stock price.
A
significant portion of our inventory may become
obsolete.
Our business strategy requires us to carry a significant amount
of inventory in order to meet rapid processing of customer
orders. If our inventory forecasting and production planning
processes result in inventory levels exceeding the levels
demanded by customers, our operating results could be adversely
affected due to costs of carrying the inventory and additional
inventory write-downs for excess and obsolete inventory.
Work
stoppages and other disruptions at transportation centers or
shipping ports may adversely affect our ability to obtain
inventory and make deliveries to Lawsons
customers.
Our ability to rapidly process customer orders is an integral
component of our overall business strategy. Disruptions at
transportation centers or shipping ports, due to events such as
severe weather or labor interruptions or other events, affect
both our ability to maintain core products in inventory and
deliver products to our customers on a
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timely basis, which may in turn adversely affect our results of
operations. In addition, severe weather conditions could
adversely affect demand for our products in particularly hard
hit regions.
Changes
in our customers and product mix could cause our gross margin
percentage to decline in the future.
From time to time, we have experienced changes in product mix
and inventory costs. When our product mix changes, there can be
no assurance that we will be able to maintain our historical
gross profit margins. Changes in our customers, product mix, or
the volume of orders could cause our gross profit margin
percentage to decline.
Increases
in energy costs and the cost of raw materials used in our
products could impact our cost of goods and distribution and
occupancy expenses, which may result in lower operating
margins.
Increases in the cost of raw materials used in our products
(e.g., steel) and energy costs raise the production costs of our
vendors. Those vendors typically look to pass the higher costs
along to us through price increases. If we are unable to fully
pass these increased prices and costs through to our customers
or to modify our activities, the impact would have an adverse
effect on our operating profit margins.
Disruptions
of our information systems could adversely affect the
Company.
We depend on our information systems to process orders, to
manage inventory and accounts receivable collections, to
purchase, sell and ship products, to maintain cost-effective
operations, and to service customers. Disruptions in the
operation of information systems can occur due to a variety of
factors including power outages, computer bugs and human error.
Any disruption in the operation of our information systems
whether over a short or an extended period of time or affecting
one or multiple distribution centers could have a material
adverse effect on our business, financial condition and results
of operations.
A
limited number of the Companys stockholders can exert
significant influence over the Company.
As of January 31, 2009, members of the Port family
collectively beneficially owned 55.3% of the outstanding shares
of common stock. This share ownership would permit these
stockholders, if they chose to act together, to exert
significant influence over the outcome of stockholder votes,
including votes concerning the election of directors, by-law
amendments, possible mergers, corporate control contests and
other significant corporate transactions. The interests of the
Port family may differ from those of other stockholders.
The
Company operates in highly competitive markets.
Our marketplace, although consolidating, still includes large,
fragmented industries that are highly competitive. We believe
that customers and competitors may continue to consolidate over
the next few years, which may make the industry even more
competitive. Our current or future competitors include companies
with similar or greater market presence, name recognition, and
financial, marketing, and other resources, and we believe they
will continue to challenge the marketplace with their product
selection, financial resources, and services.
Future
acquisitions are subject to integration and other
risks.
We anticipate that we may, from time to time, selectively
acquire additional businesses or assets. Acquisitions are
accompanied by risks, such as potential exposure to unknown
liabilities of acquired companies and the possible loss of key
employees and customers of the acquired business. In addition,
we may not obtain the expected benefits or cost savings from
acquisitions. Acquisitions are subject to risks associated with
financing the acquisition and integrating the operations and
personnel of the acquired businesses or assets. If any of these
risks materialize, they may result in disruptions to our
business and the diversion of management time and attention,
which could increase the costs of operating our existing or
acquired businesses or negate the expected benefits of the
acquisitions.
8
An
economic or other situation that affects government and
tax-supported entities could negatively impact our sales and
earnings.
We sell to numerous government and tax supported entities. Any
situation that impacts these funded entities or our ability to
sell to these entities could have a material adverse effect on
the Company.
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ITEM 1B.
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UNRESOLVED
STAFF COMMENTS.
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None.
Our headquarters is located in Des Plaines, Illinois and we
conduct our business from owned or leased facilities at the
following locations.
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Square
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Location
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Segment
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Function
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Own/Lease
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Footage
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Addison, Illinois
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MRO
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Distribution
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Own
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85,800
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Des Plaines, Illinois
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MRO
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Administration/Distribution
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Own
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175,000
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Des Plaines, Illinois
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MRO
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Administration
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Own
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45,000
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Des Plaines, Illinois
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MRO/OEM
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Distribution
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Lease
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135,000
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Dallas, Texas
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MRO
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Distribution
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Own
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44,264
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Fairfield, New Jersey
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MRO
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Distribution
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Own
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|
|
30,444
|
|
Independence, Ohio
|
|
|
MRO
|
|
|
|
Call Center
|
|
|
|
Lease
|
|
|
|
23,096
|
|
Mississauga, Ontario Canada
|
|
|
MRO
|
|
|
|
Distribution
|
|
|
|
Own
|
|
|
|
78,000
|
|
Vernon Hills, Illinois
|
|
|
MRO
|
|
|
|
Distribution
|
|
|
|
Own
|
|
|
|
107,061
|
|
Reno, Nevada
|
|
|
MRO
|
|
|
|
Distribution
|
|
|
|
Own
|
|
|
|
244,280
|
|
Suwanee, Georgia
|
|
|
MRO
|
|
|
|
Distribution
|
|
|
|
Own
|
|
|
|
91,235
|
|
Whittier, California
|
|
|
MRO
|
|
|
|
Administration
|
|
|
|
Lease
|
|
|
|
22,023
|
|
Houston, Texas
|
|
|
MRO
|
|
|
|
Dist./Warehouse/Showroom
|
|
|
|
Lease
|
|
|
|
28,000
|
|
San Jose, California
|
|
|
MRO
|
|
|
|
Warehouse/Showroom
|
|
|
|
Lease
|
|
|
|
6,425
|
|
Santa Ana, California
|
|
|
MRO
|
|
|
|
Warehouse/Showroom
|
|
|
|
Lease
|
|
|
|
5,570
|
|
Phoenix, Arizona
|
|
|
MRO
|
|
|
|
Warehouse/Showroom
|
|
|
|
Lease
|
|
|
|
3,750
|
|
Chatsworth, California
|
|
|
MRO
|
|
|
|
Warehouse/Showroom
|
|
|
|
Lease
|
|
|
|
11,300
|
|
City of Industry, California
|
|
|
MRO
|
|
|
|
Warehouse/Showroom
|
|
|
|
Lease
|
|
|
|
20,100
|
|
Decatur, Alabama
|
|
|
OEM
|
|
|
|
Manufacturing
|
|
|
|
Own
|
|
|
|
65,000
|
|
Centralia, Missouri
|
|
|
OEM
|
|
|
|
Warehouse
|
|
|
|
Lease
|
|
|
|
26,800
|
|
Cincinnati, Ohio
|
|
|
OEM
|
|
|
|
Warehouse
|
|
|
|
Lease
|
|
|
|
12,583
|
|
Dunlap, Tennessee
|
|
|
OEM
|
|
|
|
Warehouse
|
|
|
|
Lease
|
|
|
|
16,569
|
|
Ettrick, Wisconsin
|
|
|
OEM
|
|
|
|
Warehouse
|
|
|
|
Lease
|
|
|
|
9,000
|
|
Hopkinsville, Kentucky
|
|
|
OEM
|
|
|
|
Warehouse
|
|
|
|
Lease
|
|
|
|
3,820
|
|
Johnson City, Tennessee
|
|
|
OEM
|
|
|
|
Warehouse
|
|
|
|
Lease
|
|
|
|
2,000
|
|
Lenexa, Kansas
|
|
|
OEM
|
|
|
|
Administration/Warehouse
|
|
|
|
Lease
|
|
|
|
48,000
|
|
Memphis, Tennessee
|
|
|
OEM
|
|
|
|
Warehouse
|
|
|
|
Lease
|
|
|
|
26,250
|
|
Michigan City, Indiana
|
|
|
OEM
|
|
|
|
Warehouse
|
|
|
|
Lease
|
|
|
|
10,000
|
|
Reynosa, Mexico
|
|
|
OEM
|
|
|
|
Warehouse
|
|
|
|
Lease
|
|
|
|
13,778
|
|
Waite Park, Minnesota
|
|
|
OEM
|
|
|
|
Warehouse
|
|
|
|
Lease
|
|
|
|
2,400
|
|
Stuttgart, Arkansas
|
|
|
OEM
|
|
|
|
Warehouse
|
|
|
|
Lease
|
|
|
|
16,000
|
|
Willowbrook, Illinois
|
|
|
OEM
|
|
|
|
Administration
|
|
|
|
Lease
|
|
|
|
2,613
|
|
Nuevo Laredo, Mexico
|
|
|
OEM
|
|
|
|
Warehouse
|
|
|
|
Lease
|
|
|
|
24,220
|
|
9
The location and operation of our facilities is frequently
reviewed to determine whether they meet the strategic needs of
our business. We believe that our current facilities are
adequate to meet our needs.
|
|
ITEM 3.
|
LEGAL
PROCEEDINGS.
|
There is no material pending litigation to which the Company, or
any of its subsidiaries, is a party or to which any of their
property is subject.
In December 2005, the FBI executed a search warrant for records
at the Companys offices and informed the Company that it
was conducting an investigation as to whether any of the
Companys representatives improperly provided gifts or
awards to purchasing agents (including government purchasing
agents) through the Companys customer loyalty programs
(the investigation). The U.S. Attorneys
Office for the Northern District of Illinois (the
U.S. Attorneys Office) subsequently
issued a subpoena for documents in connection with the
investigation.
In April 2007, thirteen people, including seven former sales
agents of the Company, were indicted on federal criminal
charges, including mail fraud, in connection with the
investigation. These indictments alleged that, under the
Companys customer loyalty programs, sales agents would
provide cash gift certificates to individuals purchasing Company
merchandise on behalf of their employers as a way to increase
their commissions and prices paid by customers. All of the cases
involved commissioned sales agents of the Company. All seven of
the indicted former sales agents have entered guilty pleas to
federal criminal charges.
On August 11, 2008, in connection with the investigation,
the Company entered into a Deferred Prosecution Agreement (the
DPA) with the U.S. Attorneys Office. An
additional three people, including a former sales manager and a
former sales agent were indicted on August 11, 2008 and
have since pled guilty. Under the terms of the DPA, the
U.S. Attorneys Office filed a one count criminal
Information charging the Company with mail fraud in the
U.S. District Court for the Northern District of Illinois,
but agreed to defer prosecution of such charge for three years.
If the Company abides by the terms and conditions of the DPA,
the U.S. Attorneys Office will seek dismissal with
prejudice of the Information within 30 days of the
expiration of the three-year period.
Pursuant to the DPA, the Company agreed to a $30.0 million
penalty, which includes $0.8 million of restitution, and
recorded a charge of $30.0 million in the second quarter of
2008. The penalty is payable in three equal installments. The
first $10.0 million payment was made in August 2008. The
remaining $10.0 million payments are due in August 2009 and
in August 2010. If a controlling interest in the Company is
sold, any unpaid amounts shall due at the closing of the sale.
Under the DPA, the Company agreed to make restitution payments
to certain customers that employed individuals who received over
ten thousand dollars in payments through the Winners Choice
incentive program, that employed individuals who have been or
later are convicted of mail fraud as a result of Winners Choice
payments, or that purchased Company merchandise from sales
agents who have been or later are convicted of mail fraud for
providing checks to the customers employees. Restitution
payments were made to these customers from the Companys
first installment payment.
In conjunction with the Companys internal investigation,
several customer loyalty programs were terminated because the
Company believes that these programs provided or had the
potential of providing promotional considerations, such as gifts
and awards, to purchasing agents that the Company deemed
inappropriate. The Company has modified another customer loyalty
program to limit the amount and nature of customer gifts
distributed under the program. In addition, twenty-three
independent agents have been terminated, a number have resigned
and the Company has terminated four employees. The Company has
also implemented a compliance and ethics program to prevent
future abuses. Under the terms of the DPA, the Company agreed to
continue to implement its compliance and ethics program.
|
|
ITEM 4.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS.
|
No matter was submitted to a vote of security holders during the
fourth quarter of the fiscal year covered by this Report.
10
PART II
|
|
ITEM 5.
|
MARKET
FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES.
|
The Companys Common Stock is traded on the NASDAQ Global
Select Market under the symbol of LAWS. The
following table sets forth the high and low closing sale prices
as reported on the NASDAQ Global Select Market along with cash
dividends declared for each outstanding share during the last
two years for the periods presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
Cash Dividends
|
|
|
|
|
|
|
|
|
Cash Dividends
|
|
|
|
High
|
|
|
Low
|
|
|
Paid Per Share
|
|
|
High
|
|
|
Low
|
|
|
Paid Per Share
|
|
|
First Quarter
|
|
$
|
38.00
|
|
|
$
|
23.21
|
|
|
$
|
0.20
|
|
|
$
|
47.00
|
|
|
$
|
34.54
|
|
|
$
|
0.20
|
|
Second Quarter
|
|
|
29.39
|
|
|
|
23.77
|
|
|
|
0.20
|
|
|
|
39.70
|
|
|
|
34.99
|
|
|
|
0.20
|
|
Third Quarter
|
|
|
38.49
|
|
|
|
23.90
|
|
|
|
0.20
|
|
|
|
39.05
|
|
|
|
34.81
|
|
|
|
0.20
|
|
Fourth Quarter
|
|
|
32.10
|
|
|
|
11.81
|
|
|
|
0.20
|
|
|
|
38.73
|
|
|
|
29.96
|
|
|
|
0.20
|
|
On March 5, 2009 the closing sales price of our common
stock was $14.33 and the number of stockholders of record was
609.
Stock
Price Performance Chart
Set forth below is a line graph comparing the yearly change in
the cumulative total stockholder return on the Companys
common stock against the cumulative total return of the S&P
SmallCap 600 Index and a peer group (the Peer Group)
of the Company for the five prior years. The Peer Group consists
of Barnes Group Inc., Fastenal Company and MSC Industrial
Direct. The Company believes that the Peer Group is
representative of the markets it services in terms of product
sales and customers. The chart below represents the cumulative
return of a hypothetical $100 invested on December 31, 2003
in stock or index, including reinvestment of dividends.
Comparison
of 5 Year Cumulative Total Return
Among
Lawson Products, the S&P SmallCap 600 Index and a Peer Group
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indexed Returns Years Ending December 31,
|
Company Name/Index
|
|
|
Base Period 2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
Lawson Products
|
|
|
|
100.00
|
|
|
|
|
154.52
|
|
|
|
|
118.57
|
|
|
|
|
146.33
|
|
|
|
|
123.43
|
|
|
|
|
76.41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
S&P Smallcap 600
|
|
|
|
100.00
|
|
|
|
|
122.65
|
|
|
|
|
132.07
|
|
|
|
|
152.04
|
|
|
|
|
151.59
|
|
|
|
|
104.48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Peer Group
|
|
|
|
100.00
|
|
|
|
|
120.52
|
|
|
|
|
151.68
|
|
|
|
|
148.38
|
|
|
|
|
174.46
|
|
|
|
|
140.98
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
|
|
ITEM 6.
|
SELECTED
FINANCIAL DATA.
|
The following selected financial data should be read in
conjunction with the Consolidated Financial Statements of the
Company and Notes thereto included elsewhere in this Annual
Report. The income statement data and balance sheet data are
for, and as of the end of each of, the years in the five-year
period ended December 31, 2008, and are derived from the
audited Consolidated Financial Statements of the Company.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
(Dollars in thousands, except per share data)
|
|
Net Sales(1)
|
|
$
|
485,207
|
|
|
$
|
512,543
|
|
|
$
|
514,273
|
|
|
$
|
443,823
|
|
|
$
|
402,142
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations before cumulative
effect of accounting change(2)(3)(4)
|
|
$
|
(27,060
|
)
|
|
$
|
11,332
|
|
|
$
|
13,702
|
|
|
$
|
21,944
|
|
|
$
|
21,570
|
|
(Loss) income from discontinued operations(5)
|
|
|
(571
|
)
|
|
|
(703
|
)
|
|
|
(729
|
)
|
|
|
4,794
|
|
|
|
(145
|
)
|
(Loss) income before cumulative effect of accounting change
|
|
|
(27,631
|
)
|
|
|
10,629
|
|
|
|
12,973
|
|
|
|
26,738
|
|
|
|
21,425
|
|
Cumulative effect of accounting change, net of tax
|
|
|
|
|
|
|
|
|
|
|
(361
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(27,631
|
)
|
|
$
|
10,629
|
|
|
$
|
12,612
|
|
|
$
|
26,738
|
|
|
$
|
21,425
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (loss) income per share of common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations before cumulative effect of accounting
change
|
|
$
|
(3.18
|
)
|
|
$
|
1.33
|
|
|
$
|
1.54
|
|
|
$
|
2.42
|
|
|
$
|
2.29
|
|
Discontinued operations
|
|
|
(0.06
|
)
|
|
|
(0.08
|
)
|
|
|
(0.08
|
)
|
|
|
0.53
|
|
|
|
(0.02
|
)
|
Cumulative effect of accounting change
|
|
|
|
|
|
|
|
|
|
|
(0.04
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(3.24
|
)
|
|
$
|
1.25
|
|
|
$
|
1.42
|
|
|
$
|
2.94
|
|
|
$
|
2.28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted (loss) income per share of common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations before cumulative effect of accounting
change
|
|
$
|
(3.18
|
)
|
|
$
|
1.33
|
|
|
$
|
1.54
|
|
|
$
|
2.41
|
|
|
$
|
2.29
|
|
Discontinued operations
|
|
|
(0.06
|
)
|
|
|
(0.08
|
)
|
|
|
(0.08
|
)
|
|
|
0.53
|
|
|
|
(0.02
|
)
|
Cumulative effect of accounting change
|
|
|
|
|
|
|
|
|
|
|
(0.04
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(3.24
|
)
|
|
$
|
1.25
|
|
|
$
|
1.42
|
|
|
$
|
2.94
|
|
|
$
|
2.27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared per share
|
|
$
|
0.80
|
|
|
$
|
0.80
|
|
|
$
|
0.80
|
|
|
$
|
0.80
|
|
|
$
|
0.72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
270,996
|
|
|
$
|
299,863
|
|
|
$
|
281,292
|
|
|
$
|
279,224
|
|
|
$
|
260,550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncurrent liabilities
|
|
$
|
64,660
|
|
|
$
|
52,660
|
|
|
$
|
48,320
|
|
|
$
|
41,256
|
|
|
$
|
37,271
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity
|
|
$
|
138,744
|
|
|
$
|
174,361
|
|
|
$
|
170,317
|
|
|
$
|
185,425
|
|
|
$
|
180,332
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes
|
|
|
(1) |
|
Results include Rutland since the date of acquisition in
December 2005, accounting for net sales of $46.5 million,
$54.8 million, $57.7 million and $4.3 million in
2008, 2007, 2006 and 2005, respectively. |
|
(2) |
|
Severance and other charges, of $9.3 million,
$12.3 million and $1.2 million were recorded in 2008,
2007 and 2006, respectively. |
|
(3) |
|
Settlement and related charges of $31.7 million,
$5.8 million and $3.2 million related to the
investigation disclosed in Item 3 Legal
Proceedings were recorded in 2008, 2007 and 2006,
respectively. |
|
(4) |
|
The 2008 results include a $2.3 million charge for goodwill
impairment. |
|
(5) |
|
The 2005 results include a $7.5 million after tax loss
related to discontinuation of the UK business and an after tax
gain of $12.2 million related to the gain on the sale of
the Companys investment in real estate. |
12
|
|
ITEM 7.
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
|
OVERVIEW
The two principal factors affecting our 2008 results were the
one-time $30.0 million DPA settlement penalty and the
global economic recession and contraction in the credit markets
that led to decreased customer demand throughout our industry.
The duration of the recession is uncertain and industry demand
is expected to continue to decline and create downward pressure
on sales volume in 2009. Despite the negative effects of the
economy, we were able to take steps to improve our financial
condition during 2008. Operationally, we made progress in
integrating previously separate businesses to allow our
customers access to an expanded range of products from a single
point of contact. We were able to generate cash by reducing our
working capital requirements primarily through initiatives taken
to improve inventory management. Additionally, the settlement
with the United States Attorneys Office for the Northern
District of Illinois substantially brings to a close the
uncertainty created by the investigation initiated in 2005.
SUMMARY
OF FINANCIAL PERFORMANCE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
Amount
|
|
|
% of Net Sales
|
|
|
Amount
|
|
|
% of Net Sales
|
|
|
Amount
|
|
|
% of Net Sales
|
|
|
|
(Dollars in thousands)
|
|
|
Net sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MRO
|
|
$
|
403,584
|
|
|
|
83.2
|
%
|
|
$
|
429,508
|
|
|
|
83.8
|
%
|
|
$
|
430,815
|
|
|
|
83.8
|
%
|
OEM
|
|
|
81,623
|
|
|
|
16.8
|
|
|
|
83,035
|
|
|
|
16.2
|
|
|
|
83,458
|
|
|
|
16.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated total
|
|
$
|
485,207
|
|
|
|
100.0
|
%
|
|
$
|
512,543
|
|
|
|
100.0
|
%
|
|
$
|
514,273
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MRO
|
|
$
|
266,371
|
|
|
|
54.9
|
%
|
|
$
|
284,598
|
|
|
|
55.5
|
%
|
|
$
|
286,519
|
|
|
|
55.7
|
%
|
OEM
|
|
|
12,627
|
|
|
|
2.6
|
|
|
|
19,231
|
|
|
|
3.8
|
|
|
|
20,207
|
|
|
|
3.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated total
|
|
|
278,998
|
|
|
|
57.5
|
|
|
|
303,829
|
|
|
|
59.3
|
|
|
|
306,726
|
|
|
|
59.6
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
255,999
|
|
|
|
52.8
|
|
|
|
265,267
|
|
|
|
51.8
|
|
|
|
278,537
|
|
|
|
54.2
|
|
Settlement related costs
|
|
|
31,666
|
|
|
|
6.5
|
|
|
|
5,793
|
|
|
|
1.1
|
|
|
|
3,224
|
|
|
|
0.6
|
|
Severance and other charges
|
|
|
9,313
|
|
|
|
1.9
|
|
|
|
12,328
|
|
|
|
2.4
|
|
|
|
1,196
|
|
|
|
0.2
|
|
Impairment of goodwill
|
|
|
2,251
|
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on sale of equipment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
806
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income
|
|
|
(20,231
|
)
|
|
|
(4.2
|
)
|
|
|
20,441
|
|
|
|
4.0
|
|
|
|
22,963
|
|
|
|
4.5
|
|
Other, net
|
|
|
(469
|
)
|
|
|
(0.1
|
)
|
|
|
(369
|
)
|
|
|
(0.1
|
)
|
|
|
2,157
|
|
|
|
0.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations before income tax
expense
|
|
|
(20,700
|
)
|
|
|
(4.3
|
)
|
|
|
20,072
|
|
|
|
3.9
|
|
|
|
25,120
|
|
|
|
4.9
|
|
Income tax expense
|
|
|
6,360
|
|
|
|
1.3
|
|
|
|
8,740
|
|
|
|
1.7
|
|
|
|
11,418
|
|
|
|
2.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations
|
|
$
|
(27,060
|
)
|
|
|
(5.6
|
)%
|
|
$
|
11,332
|
|
|
|
2.2
|
%
|
|
$
|
13,702
|
|
|
|
2.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13
RESULTS
OF OPERATIONS FOR 2008 AS COMPARED TO 2007
Sales
and Gross Profit
Sales and gross profit results for the years ending
December 31, 2008 and 2007 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Change
|
|
|
|
2008
|
|
|
2007
|
|
|
Amount
|
|
|
%
|
|
|
|
(Dollars in thousands)
|
|
|
Net sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MRO
|
|
$
|
403,584
|
|
|
$
|
429,508
|
|
|
$
|
(25,924
|
)
|
|
|
(6.0
|
)%
|
OEM
|
|
|
81,623
|
|
|
|
83,035
|
|
|
|
(1,412
|
)
|
|
|
(1.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
485,207
|
|
|
$
|
512,543
|
|
|
$
|
(27,336
|
)
|
|
|
(5.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MRO
|
|
$
|
266,371
|
|
|
$
|
284,598
|
|
|
$
|
(18,227
|
)
|
|
|
(6.4
|
)%
|
OEM
|
|
|
12,627
|
|
|
|
19,231
|
|
|
|
(6,604
|
)
|
|
|
(34.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
278,998
|
|
|
$
|
303,829
|
|
|
$
|
(24,831
|
)
|
|
|
(8.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MRO
|
|
|
66.0
|
%
|
|
|
66.3
|
%
|
|
|
|
|
|
|
|
|
OEM
|
|
|
15.5
|
|
|
|
23.2
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
57.5
|
|
|
|
59.3
|
|
|
|
|
|
|
|
|
|
The 5.3% decrease in net sales to $485.2 million in 2008
compared to $512.5 million in 2007 resulted from decreases
in both the MRO and OEM segments as our businesses were
negatively impacted by the slowdown in the global economy. Net
sales of our MRO business experienced a severe decline of 14.3%
in the fourth quarter of 2008 compared to 2007 as our customers,
affected by overall weakness in the economy and a much more
restrictive credit environment, reduced their purchasing
requirements. We expect the demand level to continue to
deteriorate until the credit markets recover and the global
economic environment improves. Sales were also negatively
impacted by a net reduction of over 100 sales agents in 2008
compared to 2007. Net sales of our OEM segment decreased
$1.4 million due to customer losses and the economic
slowdown in the fourth quarter, partially offset by increased
sales generated from some of our current customers.
Gross profit decreased $24.8 million to $279.0 million
in 2008 primarily due to the reduction in net sales and a
decline of 1.8 percentage points as a percent of sales. The
decline was primarily attributable to higher product and
commodity costs.
Selling,
General and Administrative Expenses
Selling, general and administrative costs declined by 3.5% to
$256.0 million in 2008 compared to $265.3 million in
2007 primarily due to decreases in sales commissions and
compensation expenses. Selling, general and administrative costs
as a percent of sales increased 1.0 percentage points to
52.8% in 2008 as fixed costs were not reduced in direct
proportion to the overall decrease in net sales.
Settlement
and Related Costs
Settlement costs relate to the investigation by the
U.S. Attorneys Office for the Northern District of
Illinois as to whether our sales representatives provided
improper gifts or awards to purchasing agents (including
government purchasing agents) through our customer loyalty
programs. In August 2008, in connection with the investigation,
we entered into the DPA with the U.S. Attorneys
Office and agreed to pay a $30.0 million penalty. In
addition to the penalty, we incurred legal and other expenses of
$1.7 million in 2008 and $5.8 million in 2007 in
connection with the investigation.
14
Severance
and Other Charges
In 2008, the Company recorded $9.3 million of severance and
other charges. Of this amount, $5.4 million related to
severance costs associated with the departure of certain
executives and operational efficiency improvement initiatives
and $3.9 million related to unclaimed property liabilities
primarily associated with years prior to 2003. During 2007, the
Company implemented several initiatives designed to improve
operating efficiencies. As a result of these initiatives,
certain positions and departments were eliminated and
restructured, resulting in $12.3 million of severance costs
and other charges.
Impairment
of Goodwill
Annually, we assess the fair value of our goodwill for
impairment. Our 2008 review resulted in a $2.3 million
non-cash charge to reflect the impairment of goodwill recorded
in our OEM segment related to ACS.
Other
Expense, Net
Other expense, net of $0.5 million in 2008 was relatively
unchanged compared to 2007. A $0.2 million decrease in
interest income was somewhat offset by a $0.1 million
decrease in interest expense.
Income
Tax Expense
The effective tax rates for continuing operations for 2008 and
2007 were (30.7)% and 43.5%, respectively. The 2008 effective
tax rate reflects the effect of $29.2 million related to
the penalty under the DPA which was non-deductible and a
$6.1 million non-deductible expense related to a decline in
the cash value of life insurance. Excluding these items, the
2008 effective tax rate would have been 43.7%.
RESULTS
OF OPERATIONS FOR 2007 AS COMPARED TO 2006
Sales
and Gross Profit
Sales and gross profit results for the years ending
December 31, 2007 and 2006 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Change
|
|
|
|
2007
|
|
|
2006
|
|
|
Amount
|
|
|
%
|
|
|
|
(Dollars in thousands)
|
|
|
Net sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MRO
|
|
$
|
429,508
|
|
|
$
|
430,815
|
|
|
$
|
(1,307
|
)
|
|
|
(0.3
|
)%
|
OEM
|
|
|
83,035
|
|
|
|
83,458
|
|
|
|
(423
|
)
|
|
|
(0.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
512,543
|
|
|
$
|
514,273
|
|
|
$
|
(1,730
|
)
|
|
|
(0.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MRO
|
|
$
|
284,598
|
|
|
$
|
286,519
|
|
|
$
|
(1,921
|
)
|
|
|
(0.7
|
)%
|
OEM
|
|
|
19,231
|
|
|
|
20,207
|
|
|
|
(976
|
)
|
|
|
(4.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
303,829
|
|
|
$
|
306,726
|
|
|
$
|
(2,897
|
)
|
|
|
(0.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MRO
|
|
|
66.3
|
%
|
|
|
66.5
|
%
|
|
|
|
|
|
|
|
|
OEM
|
|
|
23.2
|
|
|
|
24.2
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
59.3
|
|
|
|
59.6
|
|
|
|
|
|
|
|
|
|
The decrease in net sales to $512.5 million in 2007
compared to $514.3 million in 2006 resulted from decreases
in both the MRO and OEM segments. The sales decrease for MRO
businesses was primarily driven by lower sales of metalworking
products due to order fulfillment problems encountered during
the Reno, Nevada distribution facility expansion which was
completed in December 2007. OEM sales decreased primarily due to
the loss of some customer contracts.
Gross profit decreased $2.9 million to $303.8 million
in 2007 compared to $306.7 million in 2006 primarily due to
lower overall sales in 2007. As a percent of sales, gross profit
declined by 0.3 percentage points to 59.3% in 2007 from
15
59.6% in 2006. The decline was primarily attributable to a
change in sales mix and increased product and commodity costs
compared to 2006.
MRO gross profit margins declined slightly to 66.3% in 2007 from
66.5% in 2006. The gross profit margins for the OEM segment
decreased 1.0 percentage points to 23.2% in 2007 from 24.2%
in 2006, principally, due to increased product costs.
Selling,
General and Administrative Expenses
Selling, general and administrative costs declined by 4.8% to
$265.3 million in 2007 compared to $278.5 million in
2006. As a percent of sales selling, general and administrative
costs declined 2.4 percentage points to 51.8% in 2007
compared to 54.2% in 2006 primarily due to several initiatives
undertaken during 2007 designed to improve operating
efficiencies. The initiatives included the elimination of
certain positions and restructuring of departments.
Settlement
Related Costs
The Company incurred legal and other expenses of
$5.8 million in 2007 and $3.2 million in 2006 in
connection with the investigation by the
U.S. Attorneys office for the Northern District of
Illinois related to whether Company sales representatives
provided improper gifts or awards to purchasing agents
(including government purchasing agents) through the
Companys customer loyalty programs.
Severance
and Other Charges
The Company implemented several initiatives during 2007 designed
to improve operating efficiencies. As a result of these
initiatives, certain positions and departments were eliminated
and restructured, resulting in $12.3 million of severance
costs and other charges. The Company incurred $1.2 million
of severance and other charges in 2006.
Other
(Expense) Income, Net
The Company recorded $0.4 million of other expense, net in
2007 compared to $2.2 million of other income, net, in
2006. The $2.6 million increase in other expense, net was
primarily due to a higher average balance on our revolving line
of credit which increased our interest expense in 2007 and lower
foreign currency gains realized in 2007 compared to 2006.
Income
Tax Expense
The effective tax rates for continuing operations for 2007 and
2006 were 43.5% and 45.5%, respectively. The higher effective
tax rate in 2006 primarily reflects adjustments related to the
deductibility of the Companys customer loyalty programs in
its MRO business for tax years 2005, 2004 and 2003. Many of the
customer loyalty and promotion programs in place for these years
were terminated or replaced early in 2006.
LIQUIDITY
AND CAPITAL RESOURCES
Cash provided by operating activities for 2008, 2007 and 2006
was $15.7 million, $11.6 million and
$19.9 million, respectively. The $4.1 million increase
in 2008 compared to 2007 was primarily due to improved working
capital utilization which was mostly offset by a decrease in net
income and the $10.0 million payment related to the DPA
penalty. The $8.3 million decline in 2007 cash provided by
operating activities from 2006 was due primarily to lower net
income and increases in inventories, prepaid expenses and
miscellaneous receivables.
Working capital at December 31, 2008 and 2007 was
$90.0 million and $99.1 million, respectively. The
$9.1 million decrease in working capital is primarily
attributable to a $10.4 million reduction in inventory, and
a $10.3 million reduction in accounts receivable, partially
offset by decreases in other liabilities. Initiatives taken to
improve the inventory management process led to the lower
inventory balance, while increased attention to collections and
a reduction in sales during the fourth quarter led to the
decrease in the amount of outstanding accounts receivable.
16
Cash used to purchase property plant and equipment was
$3.5 million in 2008 compared to $17.7 million in 2007
and $5.3 million in 2006. 2007 included $12.1 million
related to the Reno, Nevada facility expansion. Capital spending
was reduced in 2008 in response to the economic downturn that
began in the second half of 2008.
Financing activities included a $3.3 million paydown of our
line of credit in 2008 compared to $11.0 million borrowed
from the line of credit in 2007. The Company paid dividends of
$6.8 million, $6.8 million and $7.2 million to
shareholders of its common stock in 2008, 2007 and 2006,
respectively.
In October 2006, we purchased 486,493 of our common shares in a
Dutch Auction tender offer at a cost of
$20.9 million. We did not purchase any of our common stock
in 2008 or 2007. At December 31, 2008, 202,780 shares
remained available for purchase pursuant to the 2004
authorization by our Board of Directors to purchase up to
500,000 shares of our common stock.
In November 2008, we entered into a First Amended and Restated
Credit Agreement (the Credit Facility) with Bank of
America, N.A. The Credit Facility provides for a total
commitment of $75 million in the form of revolving loans
and letters of credit and matures on November 7, 2011. The
interest rate for the Credit Facility bears interest at either,
LIBOR plus 0.625%, or the prime rate minus 1.0%, as elected by
us. The interest rate may be adjusted based on the ratio of
consolidated total debt to EBITDA calculated on the basis of our
most recent annual or quarterly financial statements. We had
$7.7 million outstanding as of December 31, 2008 under
the Credit Facility. The weighted average interest rate was 3.2%
for the year ended December 31, 2008. The Credit Facility
specifies certain financial covenants, including a fixed charge
coverage and total debt to equity and minimum net worth
calculations which must be met as of the end of each fiscal
quarter. At December 31, 2008 we were in compliance with
all covenants.
In March 2009 we amended the Credit Facility (the Amended
Credit Facility), reducing the amount of the facility,
adjusting the covenants and providing additional security to
Bank of America, N.A. The Amended Credit Facility provides for a
total commitment of $55 million. The maturity date remains
November 7, 2011. The interest rate is LIBOR plus a margin
of 2.0% to 3.5%, based on the ratio of total debt to EBITDA. The
Amended Credit Facility contains covenants for adjusted EBITDA,
as defined in the agreement, for each quarter through
September 30, 2009. Commencing with the quarter ending
December 31, 2009, additional covenants will be in place,
including fixed charge coverage, total debt to equity and
minimum net worth, as defined in the credit agreement. The
Amended Credit Facility places a restriction on quarterly
dividends of $0.26 million, or $1.04 million on an
annual basis. The Amended Credit Facility is secured by
substantially all of the assets of the Company, excluding real
property and the capital stock of the Companys
subsidiaries, except for the stock of Lawson Canada. The Company
paid an amendment fee of $0.1 million.
We believe that cash provided by operations and the
$55 million revolving line of credit will be sufficient to
fund our operating requirements, cash dividends and capital
improvements for the upcoming fiscal year.
17
CONTRACTUAL
OBLIGATIONS
Contractual obligations that will require payment over future
periods are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due In Years Ended December 31,
|
|
|
|
Total
|
|
|
2009
|
|
|
2010 - 2011
|
|
|
2012 - 2013
|
|
|
Thereafter
|
|
|
|
(Amounts in thousands)
|
|
|
Operating leases
|
|
$
|
6,446
|
|
|
$
|
2,396
|
|
|
$
|
3,341
|
|
|
$
|
709
|
|
|
$
|
|
|
Capital leases
|
|
|
2,904
|
|
|
|
1,133
|
|
|
|
1,634
|
|
|
|
137
|
|
|
|
|
|
Revolving line of credit
|
|
|
7,700
|
|
|
|
|
|
|
|
7,700
|
|
|
|
|
|
|
|
|
|
Deferred compensation
|
|
|
11,301
|
|
|
|
1,922
|
|
|
|
3,475
|
|
|
|
1,789
|
|
|
|
4,115
|
|
Security bonus plan*
|
|
|
26,218
|
|
|
|
906
|
|
|
|
|
|
|
|
|
|
|
|
25,312
|
|
Severance obligation
|
|
|
6,111
|
|
|
|
4,889
|
|
|
|
1,222
|
|
|
|
|
|
|
|
|
|
Long term incentive plan
|
|
|
6,071
|
|
|
|
3,090
|
|
|
|
2,981
|
|
|
|
|
|
|
|
|
|
Purchase commitments
|
|
|
4,485
|
|
|
|
4,485
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred Prosecution Agreement
|
|
|
20,000
|
|
|
|
10,000
|
|
|
|
10,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual cash obligations
|
|
$
|
91,236
|
|
|
$
|
28,821
|
|
|
$
|
30,353
|
|
|
$
|
2,635
|
|
|
$
|
29,427
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Payments to beneficiaries of the security bonus plan are made on
a lump sum basis at time of retirement. Payouts for known
retirement dates have been included in 2009, while payouts for
unknown retirement dates are reflected in the thereafter column. |
OFF-BALANCE
SHEET ARRANGEMENTS
We have not entered into any off-balance sheet arrangements.
CRITICAL
ACCOUNTING POLICIES
The Company has disclosed its significant accounting policies in
Note B to the Consolidated Financial Statements. The
following provides supplemental information to these accounting
policies as well as information on the accounts requiring more
significant estimates.
Allowance for Doubtful Accounts Methodology
We evaluate the collectibility of accounts receivable based on a
combination of factors. In circumstances where we are aware of a
specific customers inability to meet its financial
obligations (e.g., bankruptcy filings, substantial down-grading
of credit ratings), a specific reserve for bad debts is recorded
against amounts due to reduce the receivable to the amount we
believe will be collected. For all other customers, we recognize
reserves for bad debts based on our historical experience of bad
debt write-offs as a percent of accounts receivable outstanding.
If circumstances change (i.e., higher than expected defaults or
an unexpected material adverse change in a major customers
ability to meet its financial obligations), the estimates of the
recoverability of amounts due to us could be revised by a
material amount. In 2008, we recorded an allowance reserve equal
to 3% of our trade receivables outstanding. A hypothetical
change of one percent to our reserve allowance would have
affected our annual doubtful accounts expense by approximately
$0.5 million.
Inventory Reserves We carry a significant
amount of inventory as part of our strategy to fulfill the vast
majority of our customers orders the same day received.
However, this strategy increases the chance that portions of the
inventory have lost value through obsolescence or becoming
slow-moving or excess. To reduce inventory to a lower of cost or
market value, we record a reserve for slow-moving and obsolete
inventory. Obsolete and slow-moving inventory is monitored by
examining reports of parts which have not been sold for extended
periods. If experience or market conditions change, estimates of
the reserves needed could be revised by a material amount. In
2008, we have an allowance reserve of $10.1 million equal
to approximately 10% of our total inventory. A hypothetical
change of one percent to our reserve allowance would have
affected our selling, general and administrative expenses by
approximately $1.0 million.
Income Taxes Deferred tax assets and
liabilities are determined based on the difference between the
financial statements and tax basis of assets and liabilities
using enacted tax rates in effect for the year in which the
18
differences are expected to reverse. We record a provision for
income taxes based on domestic and international statutory
income tax rates and tax planning opportunities in the
jurisdictions in which we operate. Significant judgment is
required in determining income tax provisions as well as
deferred tax asset and liability balances, including the
estimation of valuation allowances and the evaluation of tax
positions.
|
|
ITEM 7A.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
|
Through one of our subsidiaries, we distribute products in
Canada. The functional currency of this subsidiary is the
Canadian dollar which is translated into U.S. dollars when
included in our consolidated financial statements. Therefore, we
are exposed to market risk relating to the change in the value
of the Canadian dollar relative to the U.S. dollar. A
hypothetical 10% change in the Canadian foreign currency
exchange rate would have affected our 2008 net sales by
$3.2 million and total assets by $2.0 million.
We are exposed to investment market risk relating to changes in
the value of the $18.0 million cash value of life insurance
asset. This exposure is mostly offset by the $10.8 million
value of the deferred compensation liability. A hypothetical 10%
increase or decrease in the investment portfolios of both the
cash value of life insurance asset and the deferred compensation
liability would have affected our net income by
$0.7 million.
At December 31, 2008, we had a $7.7 million
outstanding balance on our revolving line of credit. The market
risk of a one percentage point change in the LIBOR or Prime
interest rates would be immaterial to our operating results.
We are exposed to market risk relating to increased commodity
and energy costs affecting the production costs of our vendors.
Those vendors typically look to pass their increased costs along
to us and if we are unable to fully pass these costs through to
our customers or to modify our activities, the impact would have
an adverse effect on our operating profit margins.
19
|
|
ITEM 8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA.
|
The following information is presented in this item:
|
|
|
|
|
|
|
|
21
|
|
|
|
|
22
|
|
|
|
|
23
|
|
|
|
|
24
|
|
|
|
|
25
|
|
|
|
|
26
|
|
|
|
|
27
|
|
|
|
|
28
|
|
|
|
|
43
|
|
20
Managements
Report on Internal Control Over Financial Reporting
The Companys management is responsible for establishing
and maintaining adequate internal control over financial
reporting, as such term is defined in
Rules 13a-15(f)
under the Securities Exchange Act of 1934, as amended. All
internal control systems have inherent limitations, regardless
of how well-designed they are. Therefore, an effective internal
control over financial reporting system provides only
reasonable, and not absolute, assurance with respect to the
preparation
and/or
presentation of the financial statements.
The Companys management conducted an evaluation, with the
participation of the Companys chief executive officer and
chief financial officer, of the effectiveness of its internal
control over financial reporting as of December 31, 2008
based on the framework in Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO).
Based on the evaluation described above and using the COSO
criteria, the Companys management concluded that our
internal control over financial reporting was effective as of
December 31, 2008.
Ernst & Young LLP, the Companys independent
registered public accounting firm, has audited the Consolidated
Financial Statements included in this Annual Report on
Form 10-K
and, as part of its audit, has issued an attestation report,
which is included herein, on the effectiveness of the
Companys internal control over financial reporting as of
December 31, 2008.
21
Report of
Independent Registered Public Accounting Firm
on Internal Control Over Financial Reporting
To the
Stockholders and Board of Directors
Lawson Products, Inc.
We have audited Lawson Products, Inc.s (the
Company) internal control over financial reporting
as of December 31, 2008 based on criteria established in
Internal Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(the COSO criteria). Lawson Products, Inc.s
management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting
included in the accompanying Managements Report on
Internal Control over Financial Reporting. Our responsibility is
to express an opinion on the effectiveness of the Companys
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that the
transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, Lawson Products, Inc. maintained in all material
respects, effective internal control over financial reporting as
of December 31, 2008, based on the COSO criteria.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Lawson Products, Inc. as of
December 31, 2008 and 2007 and the related consolidated
statements of operations, changes in stockholders equity,
and cash flows for each of the three years in the period ended
December 31, 2008 and our report dated March 11, 2009
expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Chicago,
Illinois
March 11, 2009
22
Report of
Independent Registered Public Accounting Firm
on Consolidated Financial Statements
To the
Stockholders and Board of Directors
Lawson Products, Inc.
We have audited the accompanying consolidated balance sheets of
Lawson Products, Inc. as of December 31, 2008 and 2007, and
the related consolidated statements of operations, changes in
stockholders equity, and cash flows for each of the three
years in the period ended December 31, 2008. Our audits
also included the financial statement schedule listed in the
Index at Item 15(a). These financial statements and
schedule are the responsibility of the Companys
management. Our responsibility is to express an opinion on the
financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Lawson Products, Inc. at December 31,
2008 and 2007, and the consolidated results of its operations
and its cash flows for each of the three years in the period
ended December 31, 2008, in conformity with
U.S. generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken
as a whole, presents fairly in all material respects the
information set forth therein.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States),
Lawson Products, Incs. internal control over financial
reporting as of December 31, 2008, based on criteria
established in Internal Control-Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated March 11, 2009, expressed
an unqualified opinion thereon.
/s/ Ernst & Young LLP
Chicago,
Illinois
March 11, 2009
23
Lawson
Products, Inc.
Consolidated
Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in thousands)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
4,300
|
|
|
$
|
1,671
|
|
Accounts receivable, less allowance for doubtful accounts of
$1,680 and $1,376 respectively
|
|
|
48,634
|
|
|
|
58,882
|
|
Inventories
|
|
|
86,435
|
|
|
|
96,785
|
|
Miscellaneous receivables and prepaid expenses
|
|
|
11,812
|
|
|
|
10,303
|
|
Deferred income taxes
|
|
|
6,127
|
|
|
|
3,226
|
|
Discontinued current assets
|
|
|
296
|
|
|
|
1,064
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
157,604
|
|
|
|
171,931
|
|
Property, plant and equipment, less accumulated depreciation and
amortization
|
|
|
47,783
|
|
|
|
53,031
|
|
Other assets:
|
|
|
|
|
|
|
|
|
Cash value of life insurance
|
|
|
17,970
|
|
|
|
23,702
|
|
Deferred income taxes
|
|
|
18,159
|
|
|
|
21,344
|
|
Goodwill
|
|
|
25,748
|
|
|
|
27,999
|
|
Other
|
|
|
3,732
|
|
|
|
1,856
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
270,996
|
|
|
$
|
299,863
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Revolving line of credit
|
|
$
|
|
|
|
$
|
11,000
|
|
Accounts payable
|
|
|
16,334
|
|
|
|
16,266
|
|
Settlement payable current
|
|
|
10,000
|
|
|
|
|
|
Accrued expenses and other liabilities
|
|
|
41,205
|
|
|
|
45,254
|
|
Discontinued current liabilities
|
|
|
53
|
|
|
|
322
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
67,592
|
|
|
|
72,842
|
|
|
|
|
|
|
|
|
|
|
Noncurrent liabilities and deferred credits
|
|
|
|
|
|
|
|
|
Revolving line of credit
|
|
|
7,700
|
|
|
|
|
|
Security bonus plan
|
|
|
26,218
|
|
|
|
25,491
|
|
Deferred compensation
|
|
|
11,301
|
|
|
|
19,119
|
|
Settlement payable noncurrent
|
|
|
10,000
|
|
|
|
|
|
Other
|
|
|
9,441
|
|
|
|
8,050
|
|
|
|
|
|
|
|
|
|
|
|
|
|
64,660
|
|
|
|
52,660
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies Note L
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Preferred stock, $1 par value:
|
|
|
|
|
|
|
|
|
Authorized 500,000 shares, Issued and
outstanding None
|
|
|
|
|
|
|
|
|
Common stock, $1 par value:
|
|
|
|
|
|
|
|
|
Authorized 35,000,000 shares, Issued and
outstanding 8,522,001 shares
|
|
|
8,522
|
|
|
|
8,522
|
|
Capital in excess of par value
|
|
|
4,774
|
|
|
|
4,774
|
|
Retained earnings
|
|
|
126,158
|
|
|
|
160,606
|
|
Accumulated other comprehensive (loss) income
|
|
|
(710
|
)
|
|
|
459
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
138,744
|
|
|
|
174,361
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
270,966
|
|
|
$
|
299,863
|
|
|
|
|
|
|
|
|
|
|
See notes to Consolidated Financial Statements
24
Lawson
Products, Inc.
Consolidated
Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands, except per share data)
|
|
|
Net sales
|
|
$
|
485,207
|
|
|
$
|
512,543
|
|
|
$
|
514,273
|
|
Cost of goods sold
|
|
|
206,209
|
|
|
|
208,714
|
|
|
|
207,547
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
278,998
|
|
|
|
303,829
|
|
|
|
306,726
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
255,999
|
|
|
|
265,267
|
|
|
|
278,537
|
|
Settlement and related costs
|
|
|
31,666
|
|
|
|
5,793
|
|
|
|
3,224
|
|
Severance and other charges
|
|
|
9,313
|
|
|
|
12,328
|
|
|
|
1,196
|
|
Impairment of goodwill
|
|
|
2,251
|
|
|
|
|
|
|
|
|
|
Loss on sale of equipment
|
|
|
|
|
|
|
|
|
|
|
806
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income
|
|
|
(20,231
|
)
|
|
|
20,441
|
|
|
|
22,963
|
|
Interest and dividend income
|
|
|
47
|
|
|
|
255
|
|
|
|
513
|
|
Interest expense
|
|
|
(789
|
)
|
|
|
(910
|
)
|
|
|
(150
|
)
|
Other income, net
|
|
|
273
|
|
|
|
286
|
|
|
|
1,794
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations before income taxes and
cumulative effect of accounting change
|
|
|
(20,700
|
)
|
|
|
20,072
|
|
|
|
25,120
|
|
Income tax expense
|
|
|
6,360
|
|
|
|
8,740
|
|
|
|
11,418
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations before cumulative
effect of accounting change
|
|
|
(27,060
|
)
|
|
|
11,332
|
|
|
|
13,702
|
|
Discontinued operations, net
|
|
|
(571
|
)
|
|
|
(703
|
)
|
|
|
(729
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before cumulative effect of accounting change
|
|
|
(27,631
|
)
|
|
|
10,629
|
|
|
|
12,973
|
|
Cumulative effect of accounting change, net of tax
|
|
|
|
|
|
|
|
|
|
|
(361
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(27,631
|
)
|
|
$
|
10,629
|
|
|
$
|
12,612
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (loss) income per share of common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations before cumulative effect of accounting
change
|
|
$
|
(3.18
|
)
|
|
$
|
1.33
|
|
|
$
|
1.54
|
|
Discontinued operations
|
|
|
(0.06
|
)
|
|
|
(0.08
|
)
|
|
|
(0.08
|
)
|
Cumulative effect of accounting change
|
|
|
|
|
|
|
|
|
|
|
(0.04
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(3.24
|
)
|
|
$
|
1.25
|
|
|
$
|
1.42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted (loss) income per share of common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations before cumulative effect of accounting
change
|
|
$
|
(3.18
|
)
|
|
$
|
1.33
|
|
|
$
|
1.54
|
|
Discontinued operations
|
|
|
(0.06
|
)
|
|
|
(0.08
|
)
|
|
|
(0.08
|
)
|
Cumulative effect of accounting change
|
|
|
|
|
|
|
|
|
|
|
(0.04
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(3.24
|
)
|
|
$
|
1.25
|
|
|
$
|
1.42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to Consolidated Financial Statements
25
Lawson
Products, Inc.
Consolidated
Statements of Changes in Stockholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Common
|
|
|
Capital in
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
Stock,
|
|
|
Excess of
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Comprehensive
|
|
|
|
$1 Par Value
|
|
|
Par Value
|
|
|
Earnings
|
|
|
(Loss) Income
|
|
|
Income (Loss)
|
|
|
|
(Dollars in thousands)
|
|
|
Balance at January 1, 2006
|
|
$
|
8,972
|
|
|
$
|
4,137
|
|
|
$
|
172,668
|
|
|
$
|
(352
|
)
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
12,612
|
|
|
|
|
|
|
$
|
12,612
|
|
Other comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment for foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(609
|
)
|
|
|
(609
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income for the year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
12,003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared
|
|
|
|
|
|
|
|
|
|
|
(7,098
|
)
|
|
|
|
|
|
|
|
|
Stock issued under employee stock plans
|
|
|
35
|
|
|
|
870
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase and retirement of common stock
|
|
|
(486
|
)
|
|
|
(258
|
)
|
|
|
(20,174
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
|
8,521
|
|
|
|
4,749
|
|
|
|
158,008
|
|
|
|
(961
|
)
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
10,629
|
|
|
|
|
|
|
$
|
10,629
|
|
Other comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative translation adjustment related to closure of Mexico
operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
403
|
|
|
|
403
|
|
Adjustment for foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,017
|
|
|
|
1,017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income for the year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
12,049
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment for FIN 48 adoption
|
|
|
|
|
|
|
|
|
|
|
(1,213
|
)
|
|
|
|
|
|
|
|
|
Cash dividends declared
|
|
|
|
|
|
|
|
|
|
|
(6,818
|
)
|
|
|
|
|
|
|
|
|
Stock issued under employee stock plans
|
|
|
1
|
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
|
8,522
|
|
|
|
4,774
|
|
|
|
160,606
|
|
|
|
459
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
(27,631
|
)
|
|
|
|
|
|
$
|
(27,631
|
)
|
Other comprehensive loss, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment for foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,169
|
)
|
|
|
(1,169
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss for the year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(28,800
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared
|
|
|
|
|
|
|
|
|
|
|
(6,817
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
$
|
8,522
|
|
|
$
|
4,774
|
|
|
$
|
126,158
|
|
|
$
|
(710
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to Consolidated Financial Statements
26
Lawson
Products, Inc.
Consolidated
Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
|
Operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(27,631
|
)
|
|
$
|
10,629
|
|
|
$
|
12,612
|
|
Adjustments to reconcile net (loss) income to net cash provided
by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
8,282
|
|
|
|
7,435
|
|
|
|
7,544
|
|
Provision for allowance for doubtful accounts
|
|
|
1,481
|
|
|
|
954
|
|
|
|
594
|
|
Deferred income taxes
|
|
|
912
|
|
|
|
(1,456
|
)
|
|
|
(4,309
|
)
|
Deferred compensation and security bonus plans
|
|
|
(526
|
)
|
|
|
5,000
|
|
|
|
6,593
|
|
Payments under deferred compensation and security bonus plans
|
|
|
(6,255
|
)
|
|
|
(4,922
|
)
|
|
|
(3,285
|
)
|
Stock based compensation
|
|
|
(843
|
)
|
|
|
(427
|
)
|
|
|
2,482
|
|
Provision for settlement
|
|
|
30,000
|
|
|
|
|
|
|
|
|
|
Settlement payment
|
|
|
(10,000
|
)
|
|
|
|
|
|
|
|
|
Impairment of goodwill
|
|
|
2,251
|
|
|
|
|
|
|
|
|
|
Loss on sale of equipment
|
|
|
56
|
|
|
|
|
|
|
|
806
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
7,956
|
|
|
|
1,120
|
|
|
|
(991
|
)
|
Inventories
|
|
|
9,368
|
|
|
|
(5,955
|
)
|
|
|
(11,723
|
)
|
Prepaid expenses and other assets
|
|
|
2,276
|
|
|
|
(5,732
|
)
|
|
|
(357
|
)
|
Accounts payable and accrued expenses
|
|
|
(3,101
|
)
|
|
|
(387
|
)
|
|
|
7,664
|
|
Other
|
|
|
1,512
|
|
|
|
5,289
|
|
|
|
2,255
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
15,738
|
|
|
|
11,548
|
|
|
|
19,885
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment
|
|
|
(3,549
|
)
|
|
|
(17,694
|
)
|
|
|
(5,291
|
)
|
Other
|
|
|
36
|
|
|
|
90
|
|
|
|
631
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used for investing activities
|
|
|
(3,513
|
)
|
|
|
(17,604
|
)
|
|
|
(4,660
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (payments on ) proceeds from revolving line of credit
|
|
|
(3,300
|
)
|
|
|
11,000
|
|
|
|
|
|
Dividends paid
|
|
|
(6,817
|
)
|
|
|
(6,817
|
)
|
|
|
(7,189
|
)
|
Purchases of common stock
|
|
|
|
|
|
|
|
|
|
|
(20,919
|
)
|
Proceeds from other common stock transactions
|
|
|
|
|
|
|
26
|
|
|
|
906
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used for) provided by financing activities
|
|
|
(10,117
|
)
|
|
|
4,209
|
|
|
|
(27,202
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
2,108
|
|
|
|
(1,847
|
)
|
|
|
(11,977
|
)
|
Cash and cash equivalents at beginning of year
|
|
|
2,473
|
|
|
|
4,320
|
|
|
|
16,297
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
|
4,581
|
|
|
|
2,473
|
|
|
|
4,320
|
|
Cash held by discontinued operations
|
|
|
(281
|
)
|
|
|
(802
|
)
|
|
|
(929
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents held by continuing operations at end
of year
|
|
$
|
4,300
|
|
|
$
|
1,671
|
|
|
$
|
3,391
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to Consolidated Financial Statements
27
Lawson
Products, Inc.
Notes to
Consolidated Financial Statements
(Dollars
in thousands, except per share data)
|
|
Note A
|
Description
of Business
|
Lawson Products, Inc. (Lawson or the
Company) is a North American distributor and
marketer of systems, services and products to the industrial,
commercial and institutional maintenance, repair and operations
(MRO) marketplace. The Company also manufactures
sells and distributes specialized component parts to the
original equipment marketplace (OEM).
|
|
Note B
|
Summary
of Significant Accounting Policies
|
Principles of Consolidation The accompanying
consolidated financial statements include the accounts and
transactions of the Company and its wholly owned subsidiaries.
All intercompany accounts and transactions have been eliminated
in consolidation.
Revenue Recognition Revenue includes product
sales, billings for freight and handling charges and fees earned
for services provided. Sales and associated cost of goods sold
are generally recognized when products are shipped and title
passes to customers. We accrue for returns under the guidance of
Statement of Financial Accounting Standards (SFAS)
No. 48, Revenue Recognition When Right of Return
Exists, based on historical evidence of rates of return.
Shipping and Handling Fees and Costs Costs
related to shipping and handling fees are included on the
Consolidated Statements of Operations in the caption
Selling, general and administrative expenses.
Shipping and handling fees charged to customers are included in
the caption Net sales and totaled $18,624, $17,130
and $16,819 in 2008, 2007 and 2006, respectively.
Cash Equivalents The Company considers all
highly liquid investments with a maturity of three months or
less when purchased to be cash equivalents.
Allowance for Doubtful Accounts Methodology
The Company evaluates the collectibility of accounts receivable
based on a combination of factors. In circumstances where the
Company is aware of a specific customers inability to meet
its financial obligations (e.g., bankruptcy filings, substantial
down-grading of credit ratings), a specific reserve for bad
debts is recorded against amounts due to reduce the receivable
to the amount the Company reasonably believes will be collected.
For all other customers, the Company recognizes reserves for bad
debts based on the Companys historical experience of bad
debt write-offs as a percent of accounts receivable outstanding.
If circumstances change (i.e., higher than expected defaults or
an unexpected material adverse change in a major customers
ability to meet its financial obligations), the estimates of the
recoverability of amounts due the Company could be revised by a
material amount.
Inventories Inventories which consist
principally of finished goods are stated at the lower of cost
(first-in,
first-out method) or market. To reduce inventory to a lower of
cost or market value, the Company records a reserve for
slow-moving and obsolete inventory based on historical
experience and monitoring current inventory activity.
Property, Plant and Equipment Property, plant
and equipment are stated at cost less accumulated depreciation
and amortization. Depreciation expense is computed by the
straight-line method for buildings and improvements using useful
lives of 20 to 30 years and using the double declining
balance method for machinery and equipment, furniture and
fixtures and vehicles using useful lives of 3 to 10 years.
Amortization of capitalized leases is included in depreciation
expense. Depreciation expense was $5,357, $4,308 and $4,568 for
2008, 2007 and 2006, respectively. Capitalized software is
amortized over estimated useful lives of 3 to 5 years using
the straight-line method. Amortization expense of capitalized
software was $2,675, $2,877 and $2,726 for 2008, 2007 and 2006,
respectively.
Stock-Based Compensation The Company adopted
SFAS No. 123(R), Share-Based Payment
(SFAS 123(R)) on January 1, 2006 using
the modified prospective method. The adoption resulted in
recording a $361 Cumulative effect of accounting change, net of
tax in the Consolidated Statements of Operations for the year
28
Lawson
Products, Inc.
Notes to
Consolidated Financial Statements
(Dollars
in thousands, except per share
data) (Continued)
ended December 31, 2006. Under SFAS No. 123(R),
share based compensation is valued at its fair value at the
grant date and the expense is recognized over the vesting
period. Fair value is re-measured each reporting period for
liability classified awards.
Goodwill and Other Intangibles Goodwill
represents the cost of business acquisitions in excess of the
fair value of identifiable net tangible and intangible assets
acquired. Intangible assets with a finite life are amortized on
a straight-line basis over the assets useful life.
Goodwill and other intangible assets with indeterminate lives
are assessed for impairment at least annually or more often if
triggering events occur.
Income Taxes Deferred tax assets or
liabilities reflect temporary differences between amounts of
assets and liabilities for financial and tax reporting. Such
amounts are adjusted, as appropriate, to reflect changes in tax
rates expected to be in effect when the temporary differences
reverse. A valuation allowance is established to offset any
deferred tax assets if, based upon the available evidence, it is
more likely than not that some or all of the deferred tax assets
will not be realized. The determination of the amount of a
valuation allowance to be provided on recorded deferred tax
assets involves estimates regarding (1) the timing and
amount of the reversal of taxable temporary differences,
(2) expected future taxable income, and (3) the impact
of tax planning strategies. In assessing the need for a
valuation allowance, the Company considers all available
positive and negative evidence, including past operating
results, projections of future taxable income and the
feasibility of ongoing tax planning strategies. The projections
of future taxable income include a number of estimates and
assumptions regarding our volume, pricing and costs.
Additionally, valuation allowances related to deferred tax
assets can be impacted by changes to tax laws.
Significant judgment is required in determining income tax
provisions under SFAS No. 109, Accounting for
Income Taxes (SFAS No. 109) and in
evaluating tax positions. In the normal course of business, the
Company and its subsidiaries are examined by various Federal,
State and foreign tax authorities. The Company regularly
assesses the potential outcomes of these examinations and any
future examinations for the current or prior years in
determining the adequacy of our provision for income taxes. The
Company continually assesses the likelihood and amount of
potential adjustments and adjusts the income tax provision, the
current tax liability and deferred taxes in the period in which
the facts that give rise to a revision become known.
Effective January 1, 2007, the Company adopted Financial
Accounting Standards Board Interpretation No. 48,
Accounting for Uncertainty in Income Taxes
(FIN 48), which requires that the Company
recognize in the financial statements, the impact of a tax
position, if that position is more likely than not of being
sustained on audit, based on the technical merits of the
position. In addition, FIN 48 provides guidance on the
derecognition, classification, accounting in interim periods and
disclosure requirements for uncertain tax positions. As a result
of the implementation of FIN 48, the Company recorded at
the date of adoption an additional liability of $1,213 for
unrecognized tax benefits relating to uncertain tax positions
which was accounted for as a reduction to the January 1,
2007 balance of retained earnings
Earnings Per Share Basic earnings per share
is computed by dividing net income by the weighted average
number of common shares outstanding during the period. Diluted
earnings per share reflect the potential dilution from the
exercise or conversion of stock options into common stock.
Foreign Currency The accounts of foreign
subsidiaries are measured using the local currency as the
functional currency. All balance sheet amounts have been
translated into U.S. dollars using the exchange rates in
effect at the applicable period end. Income statement amounts
have been translated using the average exchange rate for the
applicable period. The gains and losses resulting from the
changes in exchange rates from the translation of subsidiary
accounts in local currency to U.S. dollars have been
reported as a component of Accumulated other comprehensive
income in the Consolidated Balance Sheets. Foreign
currency transaction gains and losses result from the effect of
exchange rate changes on transactions denominated in currencies
other than the functional currency. These gains and losses are
included in the Consolidated Statements of Operations and were
immaterial for all years presented.
29
Lawson
Products, Inc.
Notes to
Consolidated Financial Statements
(Dollars
in thousands, except per share
data) (Continued)
Use of Estimates Preparation of financial
statements in conformity with accounting principles generally
accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results
could differ from these estimates.
Reclassifications Certain amounts related to
freight charges billed to customers and the addition of the
settlement and related costs line item have been reclassified in
the 2007 and 2006 financial statements to conform with the 2008
presentation. The reclassifications did not affect operating
income. The following financial statement line items in the
Consolidated Statements of Operations were affected by the
reclassification for the years ended December 31, 2007 and
2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassifications
|
|
|
|
|
As Originally
|
|
Billed
|
|
Settlement
|
|
|
|
|
Reported
|
|
Freight
|
|
Charges
|
|
As Adjusted
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
509,695
|
|
|
$
|
2,848
|
|
|
|
|
|
|
$
|
512,543
|
|
Gross profit
|
|
|
300,981
|
|
|
|
2,848
|
|
|
|
|
|
|
|
303,829
|
|
Selling, general and administrative expenses
|
|
|
268,212
|
|
|
|
2,848
|
|
|
|
(5,793
|
)
|
|
|
265,267
|
|
Settlement and related costs
|
|
|
|
|
|
|
|
|
|
|
5,793
|
|
|
|
5,793
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
511,377
|
|
|
$
|
2,896
|
|
|
|
|
|
|
$
|
514,273
|
|
Gross profit
|
|
|
303,830
|
|
|
|
2,896
|
|
|
|
|
|
|
|
306,726
|
|
Selling, general and administrative expenses
|
|
|
278,780
|
|
|
|
2,896
|
|
|
|
(3,139
|
)
|
|
|
278,537
|
|
Settlement and related costs
|
|
|
|
|
|
|
|
|
|
|
3,224
|
|
|
|
3,224
|
|
Severance and other charges
|
|
|
1,281
|
|
|
|
|
|
|
|
(85
|
)
|
|
|
1,196
|
|
Recent
Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements, which defines fair value,
establishes a framework for measuring fair value, and expands
disclosures about fair value measurements. The provisions of
SFAS 157 are effective as of the beginning of our 2009
fiscal year, as it relates to fair value measurement
requirements for nonfinancial assets and liabilities that are
not remeasured at fair value on a recurring basis. We do not
expect the adoption to have a material impact on our financial
statements.
In December 2007, the FASB issued SFAS 141(R), Business
Combinations. SFAS 141(R) establishes principles and
requirements for an acquirer, which improves the relevance,
representational faithfulness and comparability of information
provided by a reporting entity in its financial reports about
business combinations and its effects. SFAS 141(R) is
effective prospectively to business combinations as of the
beginning of our 2009 fiscal year. We do not expect the adoption
to have a material impact on our financial statements.
In December 2007, the FASB issued SFAS 160,
Noncontrolling Interests in Consolidated Financial Statements
(an amendment of ARB No. 51). SFAS 160 establishes
accounting and reporting standards designed to improve the
relevance, comparability and transparency of the financial
information provided in a reporting entitys consolidated
financial statements. SFAS 160 is effective as of the
beginning of our 2009 fiscal year. Currently, we do not expect
the adoption to have a material impact on our financial
statements.
In March 2008, the FASB issued SFAS No. 161,
Disclosures about Derivative Instruments and Hedging
Activities, which is an amendment of FASB Statement
No. 133. This statement requires enhanced disclosures about
an entitys derivative and hedging activities and thereby
improves the transparency of financial reporting. This statement
is effective as of the beginning of our 2009 fiscal year. Based
on current conditions, we do not expect the adoption of
SFAS 161 to have a significant impact on our financial
statements.
30
Lawson
Products, Inc.
Notes to
Consolidated Financial Statements
(Dollars
in thousands, except per share
data) (Continued)
Components of inventories were as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Finished goods
|
|
$
|
92,565
|
|
|
$
|
102,410
|
|
Work in progress
|
|
|
1,791
|
|
|
|
1,885
|
|
Raw materials
|
|
|
2,146
|
|
|
|
2,514
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
96,502
|
|
|
|
106,809
|
|
Reserve for obsolete and excess inventory
|
|
|
(10,067
|
)
|
|
|
(10,024
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
86,435
|
|
|
$
|
96,785
|
|
|
|
|
|
|
|
|
|
|
|
|
Note D
|
Property,
Plant and Equipment
|
Components of property, plant and equipment were as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Land
|
|
$
|
9,197
|
|
|
$
|
9,444
|
|
Buildings and improvements
|
|
|
54,069
|
|
|
|
54,333
|
|
Machinery and equipment
|
|
|
32,754
|
|
|
|
32,142
|
|
Furniture and fixtures
|
|
|
6,708
|
|
|
|
6,384
|
|
Vehicles
|
|
|
354
|
|
|
|
414
|
|
Capitalized software
|
|
|
13,246
|
|
|
|
14,563
|
|
Capital leases
|
|
|
3,736
|
|
|
|
3,342
|
|
Construction in progress
|
|
|
1,014
|
|
|
|
924
|
|
|
|
|
|
|
|
|
|
|
|
|
|
121,078
|
|
|
|
121,546
|
|
Accumulated depreciation and amortization
|
|
|
(73,295
|
)
|
|
|
(68,515
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
47,783
|
|
|
$
|
53,031
|
|
|
|
|
|
|
|
|
|
|
The Company reviews goodwill annually for impairment as required
by SFAS 142, Accounting for Goodwill and Other
Intangible Assets. Goodwill impairment is deemed to exist if
the carrying amount of a reporting unit exceeds its estimated
fair value and the carrying amount of the goodwill exceeds its
estimated fair value. In the fourth quarter of 2008 the Company
determined, based on market prices of comparable businesses and
forecasted discounted cash flows, that the goodwill associated
with its OEM segment was impaired and recorded a non-cash charge
of $2,251 for the year ended December 31, 2008.
Goodwill by business segment consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MRO
|
|
|
OEM
|
|
|
Total
|
|
|
Balance at December 31, 2007 and 2006
|
|
$
|
25,748
|
|
|
$
|
2,251
|
|
|
$
|
27,999
|
|
Impairment loss
|
|
|
|
|
|
|
(2,251
|
)
|
|
|
(2,251
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
$
|
25,748
|
|
|
$
|
|
|
|
$
|
25,748
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31
Lawson
Products, Inc.
Notes to
Consolidated Financial Statements
(Dollars
in thousands, except per share
data) (Continued)
|
|
Note F
|
Other
Intangibles
|
Intangible assets, included in other assets on the
Consolidated Balance Sheets at December 31, 2008 and 2007
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
December 31, 2007
|
|
|
|
|
|
|
|
|
|
Net
|
|
|
|
|
|
|
|
|
Net
|
|
|
|
Gross
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
Gross
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
|
Balance
|
|
|
Amortization
|
|
|
Amount
|
|
|
Balance
|
|
|
Amortization
|
|
|
Amount
|
|
|
Trademarks and tradenames
|
|
$
|
1,400
|
|
|
$
|
787
|
|
|
$
|
613
|
|
|
$
|
1,400
|
|
|
$
|
737
|
|
|
$
|
663
|
|
Non-compete covenant
|
|
|
1,000
|
|
|
|
600
|
|
|
|
400
|
|
|
|
1,000
|
|
|
|
400
|
|
|
|
600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,400
|
|
|
$
|
1,387
|
|
|
$
|
1,013
|
|
|
$
|
2,400
|
|
|
$
|
1,137
|
|
|
$
|
1,263
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks and tradenames are amortized over 20 years. The
non-compete covenant is being amortized over 5 years.
Amortization expense, all of which is included in the MRO
segment, for these intangible assets was $250 per year for 2008,
2007 and 2006 and is expected to be $250 per year for 2009 and
2010 and $50 per year thereafter until the trademarks and
tradenames are fully amortized.
(Loss) income from continuing operations before income taxes and
cumulative effect of accounting change for the years ended
December 31, consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
United States
|
|
$
|
(23,901
|
)
|
|
$
|
15,741
|
|
|
$
|
20,446
|
|
Canada
|
|
|
3,201
|
|
|
|
4,331
|
|
|
|
4,674
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(20,700
|
)
|
|
$
|
20,072
|
|
|
$
|
25,120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provisions (benefit) for income taxes from continuing operations
for the years ended December 31, consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Current income tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Federal
|
|
$
|
2,920
|
|
|
$
|
6,485
|
|
|
$
|
11,438
|
|
U.S. State
|
|
|
666
|
|
|
|
1,960
|
|
|
|
3,025
|
|
Canada
|
|
|
915
|
|
|
|
1,544
|
|
|
|
1,264
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,501
|
|
|
|
9,989
|
|
|
|
15,727
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax (benefit):
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Federal
|
|
$
|
1,874
|
|
|
$
|
(1,500
|
)
|
|
$
|
(4,281
|
)
|
U.S. State
|
|
|
21
|
|
|
|
177
|
|
|
|
(489
|
)
|
Canada
|
|
|
(36
|
)
|
|
|
74
|
|
|
|
461
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,859
|
|
|
$
|
(1,249
|
)
|
|
$
|
(4,309
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Federal
|
|
$
|
4,794
|
|
|
$
|
4,985
|
|
|
$
|
7,157
|
|
U.S. State
|
|
|
687
|
|
|
|
2,137
|
|
|
|
2,536
|
|
Canada
|
|
|
879
|
|
|
|
1,618
|
|
|
|
1,725
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
6,360
|
|
|
$
|
8,740
|
|
|
$
|
11,418
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32
Lawson
Products, Inc.
Notes to
Consolidated Financial Statements
(Dollars
in thousands, except per share
data) (Continued)
The reconciliation between the effective income tax rate and the
statutory federal rate for continuing operations was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Statutory federal rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
Increase (decrease) resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
State income taxes, net of federal income tax benefit
|
|
|
(3.7
|
)
|
|
|
7.4
|
|
|
|
7.8
|
|
Settlement penalty
|
|
|
(49.3
|
)
|
|
|
|
|
|
|
|
|
Canadian subsidiaries
|
|
|
0.2
|
|
|
|
0.2
|
|
|
|
0.4
|
|
Executive life insurance
|
|
|
(10.3
|
)
|
|
|
(3.4
|
)
|
|
|
(3.0
|
)
|
Non-deductible promotion expense
|
|
|
|
|
|
|
|
|
|
|
7.7
|
|
Other items, net
|
|
|
(2.6
|
)
|
|
|
4.3
|
|
|
|
(2.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
(30.7
|
)%
|
|
|
43.5
|
%
|
|
|
45.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid for the years ended December 31, 2008,
2007, and 2006 amounted to $7,008, $13,958 and $11,284,
respectively.
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts
used for income tax purposes. The Company also has a $8,154
capital loss carryforward remaining related to the 2003 sale of
the Companys UK MRO business and the closure of its Mexico
operations. A valuation allowance is recorded for all of the
capital loss carryforward due to the uncertainty of the
Companys ability to realize the capital loss against
future capital gains prior to expiration in 2008.
Significant components of the Companys deferred tax assets
and liabilities as of December 31 were as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
$
|
20,879
|
|
|
$
|
25,075
|
|
Inventories
|
|
|
6,142
|
|
|
|
4,122
|
|
Capital loss
|
|
|
2,854
|
|
|
|
3,337
|
|
Accounts receivable
|
|
|
594
|
|
|
|
503
|
|
Property, plant & equipment
|
|
|
260
|
|
|
|
230
|
|
Other
|
|
|
903
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
31,632
|
|
|
|
33,267
|
|
Valuation allowance for deferred tax assets
|
|
|
(2,854
|
)
|
|
|
(3,337
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
|
28,778
|
|
|
|
29,930
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
3,687
|
|
|
|
3,259
|
|
Other
|
|
|
805
|
|
|
|
2,101
|
|
|
|
|
|
|
|
|
|
|
Total deferred liabilities
|
|
|
4,492
|
|
|
|
5,360
|
|
|
|
|
|
|
|
|
|
|
Total net deferred assets
|
|
$
|
24,286
|
|
|
$
|
24,570
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets:
|
|
|
|
|
|
|
|
|
Net current deferred income taxes
|
|
|
6,127
|
|
|
|
3,226
|
|
Net noncurrent deferred income taxes
|
|
|
18,159
|
|
|
|
21,344
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
24,286
|
|
|
$
|
24,570
|
|
|
|
|
|
|
|
|
|
|
33
Lawson
Products, Inc.
Notes to
Consolidated Financial Statements
(Dollars
in thousands, except per share
data) (Continued)
Net deferred tax assets include the tax impact of items in
comprehensive income of $382 and $(247) at December 31,
2008 and 2007, respectively.
A reconciliation of the beginning and ending amount of
unrecognized tax benefits is as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Balance at beginning of year
|
|
$
|
923
|
|
|
$
|
4,059
|
|
Additions for tax positions of current year
|
|
|
248
|
|
|
|
|
|
Additions for tax positions of prior years
|
|
|
1,799
|
|
|
|
1,029
|
|
Reductions for tax positions of prior years
|
|
|
|
|
|
|
(2,010
|
)
|
Settlements
|
|
|
|
|
|
|
(2,155
|
)
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
2,970
|
|
|
$
|
923
|
|
|
|
|
|
|
|
|
|
|
The recognition of the $2,970 unrecognized tax benefits would
have a favorable effect on the effective tax rate. Due to the
uncertainty of both timing and resolution of income tax
examinations, the Company is unable to determine whether any
amounts included in the December 31, 2008 balance of
unrecognized tax benefits represent tax positions that could
significantly change during the next twelve months.
The Company recognizes interest and penalties related to
unrecognized tax benefits as a component of income tax expense.
At December 31, 2008, the Company had accrued $1,793 for
the potential payment of interest and penalties related to
unrecognized tax benefits.
The Company and its subsidiaries are subject to
U.S. federal income tax as well as income tax of multiple
state and Canadian jurisdictions. As of December 31, 2008,
the Company is subject to income tax examinations for the tax
years 2000 through 2007.
|
|
Note H
|
Accrued
Expenses and Other Liabilities
|
Accrued expenses and other liabilities consisted of the
following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Salaries, commissions and other compensation
|
|
$
|
15,498
|
|
|
$
|
18,386
|
|
Accrued severance
|
|
|
4,889
|
|
|
|
4,344
|
|
Accrued and withheld taxes, other than income taxes
|
|
|
2,774
|
|
|
|
3,101
|
|
Accrued profit sharing contributions
|
|
|
2,372
|
|
|
|
3,952
|
|
Accrued stock performance rights
|
|
|
1,206
|
|
|
|
2,098
|
|
Accrued self-insured health benefits
|
|
|
2,630
|
|
|
|
2,548
|
|
Cash dividends payable
|
|
|
1,704
|
|
|
|
1,704
|
|
Other
|
|
|
10,132
|
|
|
|
9,121
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
41,205
|
|
|
$
|
45,254
|
|
|
|
|
|
|
|
|
|
|
|
|
Note I
|
Revolving
Line of Credit
|
In November 2008 the Company entered into a First Amended and
Restated Credit Agreement (the Credit Facility) with
Bank of America, N.A. The Credit Facility provides for a total
commitment of $75 million in the form of revolving loans
and letters of credit and matures on November 7, 2011. The
interest rate for the Credit Facility bears interest at either,
LIBOR plus 0.625%, or the prime rate minus 1.0%, as elected by
the Company. The
34
Lawson
Products, Inc.
Notes to
Consolidated Financial Statements
(Dollars
in thousands, except per share
data) (Continued)
interest rate may be adjusted based on the Companys ratio
of consolidated total debt to EBITDA calculated on the basis of
the Companys most recent annual or quarterly financial
statements. The Credit Facility also specifies unused commitment
fees that are assessed based on the average unused balance and
the Companys ratio of total debt to EBITDA. The Credit
Facility is secured by a pledge of 65% of the capital stock of
the Companys subsidiary, Lawson Products, Inc. (Ontario)
(Lawson Canada). The Credit Facility specifies
certain financial covenants, including a fixed charge coverage
and total debt to equity calculation which must be met as of the
end of each fiscal quarter. At December 31, 2008 the
Company was in compliance with all covenants.
The Company had $7,700 outstanding under the revolving line at
December 31, 2008 and paid interest of $535, $910 and $150
in 2008, 2007 and 2006, respectively. The weighted average
interest rate charged on the outstanding balance of the Credit
Facility was 3.2% for the year ended December 31, 2008.
In March 2009 the Company amended the Credit Facility (the
Amended Credit Facility), reducing the amount of the
facility, adjusting the covenants and providing additional
security to Bank of America, N.A. The Amended Credit Facility
provides for a total commitment of $55.0 million. The
maturity date remains November 7, 2011. The interest rate
is LIBOR plus a margin of 2.0% to 3.5%, based on the ratio of
total debt to EBITDA. The Amended Credit Facility contains
covenants for adjusted EBITDA, as defined in the agreement, for
each quarter through September 30, 2009. Commencing with
the quarter ending December 31, 2009, additional covenants
will be in place, including fixed charge coverage, total debt to
equity and minimum net worth, as defined in the credit
agreement. The Amended Credit Facility places a restriction on
quarterly dividends of $260, or $1,040 on an annual basis. The
Amended Credit Facility is secured by substantially all of the
assets of the Company, excluding real property and the capital
stock of the Companys subsidiaries, except for the stock
of Lawson Canada. The Company paid an amendment fee of $100.
|
|
Note J
|
Reserve
for Severance
|
Severance charges related to management realignment and
reorganization of $5,378, $10,886 and $1,196 were recorded in
2008, 2007 and 2006, respectively. The severance costs are
primarily related to the MRO segment. The table below shows the
changes in the Companys reserve for severance and related
payments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Beginning balance
|
|
$
|
7,058
|
|
|
$
|
962
|
|
|
$
|
216
|
|
Charged to earnings
|
|
|
5,378
|
|
|
|
10,886
|
|
|
|
1,196
|
|
Cash paid
|
|
|
(6,264
|
)
|
|
|
(4,670
|
)
|
|
|
(297
|
)
|
Adjustment to reserves
|
|
|
(61
|
)
|
|
|
(120
|
)
|
|
|
(153
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
6,111
|
|
|
$
|
7,058
|
|
|
$
|
962
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued severance charges were included in the line items of the
Consolidated Balance Sheets at December 31, 2008 and 2007
as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Accrued severance included in:
|
|
|
|
|
|
|
|
|
Accrued expenses and other liabilities
|
|
$
|
4,889
|
|
|
$
|
4,344
|
|
Noncurrent other
|
|
|
1,222
|
|
|
|
2,714
|
|
|
|
|
|
|
|
|
|
|
Total accrued severance
|
|
$
|
6,111
|
|
|
$
|
7,058
|
|
|
|
|
|
|
|
|
|
|
The Company anticipates the remaining benefits outstanding as of
December 31, 2008 will be substantially paid out by the end
of 2010.
35
Lawson
Products, Inc.
Notes to
Consolidated Financial Statements
(Dollars
in thousands, except per share
data) (Continued)
|
|
Note K
|
Retirement
and Security Bonus Plans
|
The Company has a retirement plan with a profit sharing feature
for certain office and warehouse personnel. The amounts of the
companys annual contributions are determined by the board
of directors subject to limitations based upon operating
results. Provisions for the profit sharing plan were $2,216,
$3,997 and $4,152 for the years ended December 31, 2008,
2007 and 2006, respectively.
The Company provides 401(k) defined contribution benefit plans
to give employees a pre-tax investment vehicle to save for
retirement. Matching funds contributed by the Companys
subsidiaries amounted to $169, $160 and $154 in the years ended
December 31, 2008, 2007 and 2006.
The Company has a security bonus plan for the benefit of its
independent sales agents, under the terms of which participants
are credited with a percentage of their yearly earnings. The
aggregate amounts credited to participants accounts vest
25% after five years and an additional 5% vests each year
thereafter. For financial reporting purposes, amounts are
charged to operations over the vesting period. Provisions for
the security bonus plan were $2,641, $2,093 and $3,364 for the
years ended December 31, 2008, 2007 and 2006, respectively.
|
|
Note L
|
Commitments
and Contingencies
|
Lease
Commitments
Total rental expense for the years ended December 31, 2008,
2007 and 2006 amounted to $3,479, $4,126 and $4,355,
respectively. The Companys future minimum lease
commitments, principally for facilities and equipment, as of
December 31, 2008, were as follows:
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
Operating Leases
|
|
|
Capital Leases
|
|
|
2009
|
|
$
|
2,396
|
|
|
$
|
1,133
|
|
2010
|
|
|
2,055
|
|
|
|
933
|
|
2011
|
|
|
1,286
|
|
|
|
701
|
|
2012
|
|
|
709
|
|
|
|
137
|
|
2013 and thereafter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
6,446
|
|
|
$
|
2,904
|
|
|
|
|
|
|
|
|
|
|
Litigation
In December 2005, the FBI executed a search warrant for records
at the Companys offices and informed the Company that it
was conducting an investigation as to whether any of the
Companys representatives improperly provided gifts or
awards to purchasing agents (including government purchasing
agents) through the Companys customer loyalty programs
(the investigation). The U.S. Attorneys
Office for the Northern District of Illinois (the
U.S. Attorneys Office) subsequently
issued a subpoena for documents in connection with the
investigation.
In April 2007, thirteen people, including seven former sales
agents of the Company, were indicted on federal criminal
charges, including mail fraud, in connection with the
investigation. These indictments alleged that, under the
Companys customer loyalty programs, sales agents would
provide cash gift certificates to individuals purchasing Company
merchandise on behalf of their employers as a way to increase
their commissions and prices paid by customers. All of the cases
involved commissioned sales agents of the Company. All seven of
the indicted former sales agents have entered guilty pleas to
federal criminal charges.
On August 11, 2008, in connection with the investigation,
the Company entered into a Deferred Prosecution Agreement (the
DPA) with the U.S. Attorneys Office. An
additional three people, including a former sales manager and a
former sales agent were indicted on August 11, 2008 and
have since pled guilty. Under the terms of the DPA, the
U.S. Attorneys Office filed a one count criminal
Information charging the Company with mail fraud in
36
Lawson
Products, Inc.
Notes to
Consolidated Financial Statements
(Dollars
in thousands, except per share
data) (Continued)
the U.S. District Court for the Northern District of
Illinois, but would defer prosecution of such charge for three
years. If the Company abides by the terms and conditions of the
DPA, the U.S. Attorneys Office will seek dismissal
with prejudice of the Information within 30 days of the
expiration of the three-year period.
Pursuant to the DPA, the Company agreed to a $30,000 penalty,
which includes $806 of restitution, and recorded a charge of
$30,000 in the second quarter of 2008. The penalty is payable in
three equal installments. The first $10,000 payment was made in
August 2008. The remaining $10,000 payments are due in August
2009 and in August 2010. If a controlling interest in the
Company is sold, any unpaid amounts shall be accelerated and due
at the closing of the sale.
Other
In November 2008, the Company became aware that it had not
properly withheld state income tax from a small number
of employees in approximately 15 states. The Company
may have exposure for penalties and interest for state income
taxes withholdings and payroll tax returns, however, since the
amount is subject to further analysis and interpretations by
state taxing jurisdictions, the Company is unable to reasonably
estimate the amount of the exposure at this time.
|
|
Note M
|
Stock
Performance Plan
|
The Stock Performance Plan (the Plan), provides for
the issuance of incentive compensation to non-employee
directors, officers and key employees including in the form of
stock performance rights (SPRs). The Plan is
administered by the Compensation Committee of the Board of
Directors.
Stock
Performance Rights
The Company grants SPRs pursuant to the Plan to selected
employees and outside directors. The SPRs have a ten-year life
and vest ratably over three years beginning on the first
anniversary of the date of the grant. The SPRs entitle the
recipient to receive a cash payment equal to the excess of the
market value of the Companys common stock over the SPR
exercise price when the SPRs are surrendered.
Employees and non-employee directors who are retirement
eligible, defined as age 65 or older, are permitted to
retain their awards after retirement and exercise them during
the remaining contractual life. Grants of SPRs, with the
retirement eligible provision, are recognized as expense on the
grant date.
As required by SFAS 123(R), the SPRs outstanding have been
remeasured at fair value using the Black-Scholes valuation
model. This model requires the input of subjective assumptions
that will usually have a significant impact on the fair value
estimate. The weighted-average estimated value of SPRs
outstanding as of December 31, 2008 was $6.12 per SPR using
the Black-Scholes valuation model with the following assumptions:
|
|
|
Expected volatility
|
|
51.0% to 88.8%
|
Risk-free interest rate
|
|
0.4% to 1.6%
|
Expected term (in years)
|
|
1.0 to 5.4
|
Expected annual dividend
|
|
$0.80
|
The expected volatility was based on the historic volatility of
the Companys stock price commiserate with the expected
life of the SPR. The risk-free rate of return reflects the
weighted average interest rate offered for zero coupon treasury
bonds over the expected life of the SPR. The expected life
represents the period of time that options granted are expected
to be outstanding and was calculated using the simplified method
prescribed by the SEC Staff Accounting
Bulletin No. 107. The estimated annual dividend was
based on the recent dividend payout trend.
Compensation (income) expense, included in selling, general and
administrative expenses for SPRs was $(843), $(427) and $2,482
for the years ended December 31, 2008, 2007 and 2006,
respectively. Cash paid out due to the exercise of SPRs was $49,
$51 and $1,236 for the years ended December 31, 2008, 2007
and 2006, respectively.
37
Lawson
Products, Inc.
Notes to
Consolidated Financial Statements
(Dollars
in thousands, except per share
data) (Continued)
Activity related to the Companys SPRs during the year
ended 2008 was as follows:
|
|
|
|
|
|
|
|
|
|
|
Number
|
|
|
Average
|
|
|
|
of SPRs
|
|
|
Exercise Price
|
|
|
Outstanding on December 31, 2007
|
|
|
209,250
|
|
|
$
|
34.17
|
|
Granted
|
|
|
151,500
|
|
|
|
25.82
|
|
Exercised
|
|
|
(28,250
|
)
|
|
|
27.10
|
|
Cancelled
|
|
|
(24,900
|
)
|
|
|
25.57
|
|
|
|
|
|
|
|
|
|
|
Outstanding on December 31, 2008
|
|
|
307,600
|
|
|
|
31.40
|
|
|
|
|
|
|
|
|
|
|
Exercisable on December 31, 2008
|
|
|
180,270
|
|
|
$
|
33.95
|
|
|
|
|
|
|
|
|
|
|
The SPRs outstanding had no aggregate intrinsic value as of
December 31, 2008 since all exercise prices exceeded the
market price of the Companys stock at that date.
Unrecognized compensation cost related to non-vested SPRs was
$590 at December 31, 2008, which will be recognized over a
weighted average period of 1.9 years. During the year ended
December 31, 2008, 39,467 SPRs vested. At December 31,
2008, the weighted average remaining contractual term was
7.2 years for all outstanding SPRs and 5.9 years for
the SPRs that are exercisable.
Stock
Options
As of December 31, 2008 and 2007, the Company had 5,000
fully vested outstanding stock options with an average exercise
price of $23.11 and an immaterial aggregate intrinsic value. The
options have a weighted average remaining contractual term of
1.3 years. There was no compensation expense related to
stock options in 2008, 2007 or 2006. The Companys stock
option plan expired in 2006.
38
Lawson
Products, Inc.
Notes to
Consolidated Financial Statements
(Dollars
in thousands, except per share
data) (Continued)
|
|
Note N
|
(Loss)
Earnings Per Share
|
The computation of basic and diluted (loss) earnings per share
consisted of the following (shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Weighted average shares
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding
|
|
|
8,522
|
|
|
|
8,522
|
|
|
|
8,878
|
|
Dilutive stock options outstanding
|
|
|
|
|
|
|
2
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average shares outstanding
|
|
|
8,522
|
|
|
|
8,524
|
|
|
|
8,880
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) Earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations before cumulative
effect of accounting change
|
|
$
|
(27,060
|
)
|
|
$
|
11,332
|
|
|
$
|
13,702
|
|
Loss from discontinued operations
|
|
|
(571
|
)
|
|
|
(703
|
)
|
|
|
(729
|
)
|
Cumulative effect of accounting change, net of tax
|
|
|
|
|
|
|
|
|
|
|
(361
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(27,631
|
)
|
|
$
|
10,629
|
|
|
$
|
12,612
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (loss) earnings per share of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations before cumulative
effect of accounting change
|
|
$
|
(3.18
|
)
|
|
$
|
1.33
|
|
|
$
|
1.54
|
|
Loss from discontinued operations
|
|
|
(0.06
|
)
|
|
|
(0.08
|
)
|
|
|
(0.08
|
)
|
Cumulative effect of accounting change, net of tax
|
|
|
|
|
|
|
|
|
|
|
(0.04
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(3.24
|
)
|
|
$
|
1.25
|
|
|
$
|
1.42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted (loss) earnings per share of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations before cumulative
effect of accounting change
|
|
$
|
(3.18
|
)
|
|
$
|
1.33
|
|
|
$
|
1.54
|
|
Loss from discontinued operations
|
|
|
(0.06
|
)
|
|
|
(0.08
|
)
|
|
|
(0.08
|
)
|
Cumulative effect of accounting change, net of tax
|
|
|
|
|
|
|
|
|
|
|
(0.04
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(3.24
|
)
|
|
$
|
1.25
|
|
|
$
|
1.42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The effect of future stock option exercises for the year ended
December 31, 2008 would have been anti-dilutive and,
therefore, was excluded from the computation of diluted earnings
per share.
|
|
Note O
|
Segment
Reporting
|
The Company has two reportable segments: MRO
and OEM. The Companys MRO segment is a distributor and
marketer of systems, services and products to the industrial,
commercial, institutional, and governmental maintenance repair
and operations marketplace. The Companys OEM segment
manufactures, sells 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.
39
Lawson
Products, Inc.
Notes to
Consolidated Financial Statements
(Dollars
in thousands, except per share
data) (Continued)
Financial information for the Companys reportable segments
from continuing operations consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Net sales
|
|
|
|
|
|
|
|
|
|
|
|
|
MRO
|
|
$
|
403,584
|
|
|
$
|
429,508
|
|
|
$
|
430,815
|
|
OEM
|
|
|
81,623
|
|
|
|
83,035
|
|
|
|
83,458
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated total
|
|
$
|
485,207
|
|
|
$
|
512,543
|
|
|
$
|
514,273
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
MRO
|
|
$
|
26,174
|
|
|
$
|
34,366
|
|
|
$
|
22,962
|
|
OEM
|
|
|
(3,175
|
)
|
|
|
4,196
|
|
|
|
5,227
|
|
Settlement and related costs
|
|
|
(31,666
|
)
|
|
|
(5,793
|
)
|
|
|
(3,224
|
)
|
Severance and other charges
|
|
|
(9,313
|
)
|
|
|
(12,328
|
)
|
|
|
(1,196
|
)
|
Impairment of goodwill
|
|
|
(2,251
|
)
|
|
|
|
|
|
|
|
|
Loss on sale of equipment
|
|
|
|
|
|
|
|
|
|
|
(806
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated total
|
|
|
(20,231
|
)
|
|
|
20,441
|
|
|
|
22,963
|
|
Interest and dividend income
|
|
|
47
|
|
|
|
255
|
|
|
|
513
|
|
Interest expense
|
|
|
(789
|
)
|
|
|
(910
|
)
|
|
|
(150
|
)
|
Other, net
|
|
|
273
|
|
|
|
286
|
|
|
|
1,794
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations before income taxes and
cumulative effect of accounting change
|
|
$
|
(20,700
|
)
|
|
$
|
20,072
|
|
|
$
|
25,120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
|
|
|
|
|
|
|
|
|
|
MRO
|
|
$
|
2,809
|
|
|
$
|
16,943
|
|
|
$
|
4,710
|
|
OEM
|
|
|
740
|
|
|
|
751
|
|
|
|
581
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated total
|
|
$
|
3,549
|
|
|
$
|
17,694
|
|
|
$
|
5,291
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
MRO
|
|
$
|
7,509
|
|
|
$
|
6,692
|
|
|
$
|
6,782
|
|
OEM
|
|
|
773
|
|
|
|
743
|
|
|
|
762
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated total
|
|
$
|
8,282
|
|
|
$
|
7,435
|
|
|
$
|
7,544
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
|
|
|
|
|
|
|
|
|
|
MRO
|
|
$
|
202,413
|
|
|
$
|
221,274
|
|
|
$
|
204,852
|
|
OEM
|
|
|
44,000
|
|
|
|
52,955
|
|
|
|
50,408
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment total
|
|
|
246,413
|
|
|
|
274,229
|
|
|
|
255,260
|
|
Corporate
|
|
|
24,287
|
|
|
|
24,570
|
|
|
|
23,879
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated total
|
|
$
|
270,700
|
|
|
$
|
298,799
|
|
|
$
|
279,139
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40
Lawson
Products, Inc.
Notes to
Consolidated Financial Statements
(Dollars
in thousands, except per share
data) (Continued)
Financial information related to the Companys continuing
operations by geographic area consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Net sales
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
455,028
|
|
|
$
|
482,491
|
|
|
$
|
485,591
|
|
Canada
|
|
|
30,179
|
|
|
|
30,052
|
|
|
|
28,682
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated total
|
|
$
|
485,207
|
|
|
$
|
512,543
|
|
|
$
|
514,273
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long lived assets
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
67,076
|
|
|
$
|
73,971
|
|
|
$
|
64,233
|
|
Canada
|
|
|
7,468
|
|
|
|
8,322
|
|
|
|
7,943
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated total
|
|
$
|
74,544
|
|
|
$
|
82,293
|
|
|
$
|
72,176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales are attributed to countries based on the location of
customers. Long-lived assets consist of total property, plant
and equipment, goodwill and other intangible assets.
|
|
Note P
|
Discontinued
Operations
|
The Company closed its operations in Mexico in 2007.
Accordingly, the Consolidated Balance Sheets and Consolidated
Statements of Operations reflect the assets and liabilities and
operating results as discontinued operations.
|
|
Note Q
|
Loss on
Sale of Equipment
|
In 2006, the Company incurred a loss of $0.8 million
($0.5 million, net of tax) on the sale of equipment related
to the Companys decision to outsource the manufacturing of
a product line in the Companys OEM business. Net book
value for the disposed equipment was approximately
$1.0 million.
|
|
Note R
|
Summary
of Unaudited Quarterly Results of Operations
|
Amounts related to freight charges billed to customers that were
originally recorded as a reduction to selling, general and
administrative expenses have been reclassified to net sales.
This reclassification had no effect on net income (loss). A
reconciliation of the amounts previously reported to the
reclassified amounts for the first three quarters of 2008 and
the four quarters of 2007 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
|
Gross Profit
|
|
|
|
Originally Reported
|
|
|
Adjustment
|
|
|
Reclassified
|
|
|
Originally Reported
|
|
|
Adjustment
|
|
|
Reclassified
|
|
|
Quarter ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008
|
|
$
|
124,567
|
|
|
$
|
797
|
|
|
$
|
125,364
|
|
|
$
|
70,292
|
|
|
$
|
797
|
|
|
$
|
71,089
|
|
June 30, 2008
|
|
|
126,310
|
|
|
|
838
|
|
|
|
127,148
|
|
|
|
72,606
|
|
|
|
838
|
|
|
|
73,444
|
|
March 31, 2008
|
|
|
125,004
|
|
|
|
866
|
|
|
|
125,870
|
|
|
|
73,262
|
|
|
|
866
|
|
|
|
74,128
|
|
December 31, 2007
|
|
|
122,935
|
|
|
|
651
|
|
|
|
123,586
|
|
|
|
72,000
|
|
|
|
651
|
|
|
|
72,651
|
|
September 30, 2007
|
|
|
127,913
|
|
|
|
725
|
|
|
|
128,638
|
|
|
|
76,457
|
|
|
|
725
|
|
|
|
77,182
|
|
June 30, 2007
|
|
|
129,178
|
|
|
|
731
|
|
|
|
129,909
|
|
|
|
76,697
|
|
|
|
731
|
|
|
|
77,428
|
|
March 31, 2007
|
|
|
129,669
|
|
|
|
741
|
|
|
|
130,410
|
|
|
|
75,827
|
|
|
|
741
|
|
|
|
76,568
|
|
41
Lawson
Products, Inc.
Notes to
Consolidated Financial Statements
(Dollars
in thousands, except per share
data) (Continued)
Unaudited quarterly results of operations for the years ended
December 31, 2008 and 2007 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 Quarter Ended
|
|
|
|
Dec. 31
|
|
|
Sep. 30
|
|
|
Jun. 30
|
|
|
Mar. 31
|
|
|
Net sales
|
|
$
|
106,825
|
|
|
$
|
125,364
|
|
|
$
|
127,148
|
|
|
$
|
125,870
|
|
Gross profit
|
|
|
60,337
|
|
|
|
71,089
|
|
|
|
73,444
|
|
|
|
74,128
|
|
(Loss) income from continuing operations
|
|
$
|
(5,417
|
)
|
|
$
|
3,068
|
|
|
$
|
(29,235
|
)
|
|
$
|
4,524
|
|
(Loss) income from discontinued operations
|
|
|
(8
|
)
|
|
|
10
|
|
|
|
(418
|
)
|
|
|
(155
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(5,425
|
)
|
|
$
|
3,078
|
|
|
$
|
(29,653
|
)
|
|
$
|
4,369
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (loss) income per share of common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(0.64
|
)
|
|
$
|
0.36
|
|
|
$
|
(3.43
|
)
|
|
$
|
0.53
|
|
Discontinued operations
|
|
|
|
|
|
|
|
|
|
|
(0.05
|
)
|
|
|
(0.02
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(0.64
|
)
|
|
$
|
0.36
|
|
|
$
|
(3.48
|
)
|
|
$
|
0.51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted (loss) income per share of common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(0.64
|
)
|
|
$
|
0.36
|
|
|
$
|
(3.43
|
)
|
|
$
|
0.53
|
|
Discontinued operations
|
|
|
|
|
|
|
|
|
|
|
(0.05
|
)
|
|
|
(0.02
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(0.64
|
)
|
|
$
|
0.36
|
|
|
$
|
(3.48
|
)
|
|
$
|
0.51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 Quarter Ended
|
|
|
|
Dec. 31
|
|
|
Sep. 30
|
|
|
Jun. 30
|
|
|
Mar. 31
|
|
|
Net sales
|
|
$
|
123,586
|
|
|
$
|
128,638
|
|
|
$
|
129,909
|
|
|
$
|
130,410
|
|
Gross profit
|
|
|
72,651
|
|
|
|
77,182
|
|
|
|
77,428
|
|
|
|
76,568
|
|
Income (loss) from continuing operations
|
|
$
|
4,216
|
|
|
$
|
2,410
|
|
|
$
|
(20
|
)
|
|
$
|
4,726
|
|
Loss from discontinued operations
|
|
|
(207
|
)
|
|
|
(11
|
)
|
|
|
(329
|
)
|
|
|
(156
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
4,009
|
|
|
$
|
2,399
|
|
|
$
|
(349
|
)
|
|
$
|
4,570
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income (loss) per share of common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.49
|
|
|
$
|
0.28
|
|
|
$
|
|
|
|
$
|
0.55
|
|
Discontinued operations
|
|
|
(0.02
|
)
|
|
|
|
|
|
|
(0.04
|
)
|
|
|
(0.02
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
0.47
|
|
|
$
|
0.28
|
|
|
$
|
(0.04
|
)
|
|
$
|
0.54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income (loss) per share of common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.49
|
|
|
$
|
0.28
|
|
|
$
|
|
|
|
$
|
0.55
|
|
Discontinued operations
|
|
|
(0.02
|
)
|
|
|
|
|
|
|
(0.04
|
)
|
|
|
(0.02
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
0.47
|
|
|
$
|
0.28
|
|
|
$
|
(0.04
|
)
|
|
$
|
0.54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42
Lawson
Products, Inc. and Subsidiaries
Schedule II Valuation and Qualifying
Accounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
Charged to
|
|
|
|
|
|
Balance at
|
|
|
|
Beginning of
|
|
|
Costs and
|
|
|
|
|
|
End of
|
|
Description
|
|
Period
|
|
|
Expenses
|
|
|
Deductions
|
|
|
Period
|
|
|
Allowance for doubtful accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2008
|
|
$
|
1,376
|
|
|
$
|
1,461
|
|
|
$
|
(1,157
|
)(1)
|
|
$
|
1,680
|
|
Year ended December 31, 2007
|
|
|
1,332
|
|
|
|
928
|
|
|
|
(884
|
)(1)
|
|
|
1,376
|
|
Year ended December 31, 2006
|
|
|
1,483
|
|
|
|
605
|
|
|
|
(756
|
)(1)
|
|
|
1,332
|
|
Allowance for excess and obsolete inventory:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2008
|
|
$
|
10,024
|
|
|
$
|
2,486
|
|
|
$
|
(2,443
|
)(2)
|
|
$
|
10,067
|
|
Year ended December 31, 2007
|
|
|
9,233
|
|
|
|
2,455
|
|
|
|
(1,664
|
)(2)
|
|
|
10,024
|
|
Year ended December 31, 2006
|
|
|
9,348
|
|
|
|
521
|
|
|
|
(636
|
)(2)
|
|
|
9,233
|
|
Valuation allowance for deferred tax assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2008
|
|
$
|
3,337
|
|
|
$
|
(483
|
)
|
|
$
|
|
|
|
$
|
2,854
|
|
Year ended December 31, 2007
|
|
|
1,318
|
|
|
|
2,763
|
|
|
|
(744
|
)(3)
|
|
|
3,337
|
|
Year ended December 31, 2006
|
|
|
1,318
|
|
|
|
|
|
|
|
|
|
|
|
1,318
|
|
|
|
|
(1) |
|
Uncollected receivables written off, net of recoveries and
translation adjustment. |
|
(2) |
|
Disposal of excess and obsolete inventory and translation
adjustment. |
|
(3) |
|
Net operating loss carryforward written off. |
|
|
ITEM 9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
|
None.
|
|
ITEM 9A.
|
CONTROLS
AND PROCEDURES.
|
Evaluation
of Disclosure Controls and Procedures
The Companys chief executive officer and chief financial
officer have concluded, based on their evaluation as of the end
of the period covered by this report, that the Companys
disclosure controls and procedures (as defined in
the Securities Exchange Act of 1934, as amended,
Rules 13a-15(e)
and
15d-15(e))
was effective to ensure that information required to be
disclosed by the Company (including its consolidated
subsidiaries) in the reports that the Company files or submits
under the Securities Exchange Act of 1934 were recorded,
processed, summarized and reported within the time periods
specified in the Securities and Exchange Commissions rules
and forms, and that such information is accumulated and
communicated to our management, including our chief financial
officer, as appropriate, to allow timely decisions regarding
financial disclosures.
Managements
Report on Internal Control over Financial Reporting
The report of management under Item 9A is contained in
Item 8 of this 2008 Annual Report on
Form 10-K
under the heading Managements Report on Internal
Control over Financial Reporting and is incorporated
herein by reference.
Changes
in Internal Controls
There were no changes in our internal control over financial
reporting that occurred during the last fiscal quarter that have
materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
43
Report of
Independent Registered Public Accounting Firm on Internal
Control Over Financial Reporting
The attestation report required under Item 9A is contained
in Item 8 of this 2008 Annual Report on
Form 10-K
under the heading Report of Independent Registered Public
Accounting Firm on Internal Control Over Financial
Reporting and is incorporated herein by reference.
|
|
ITEM 9B.
|
OTHER
INFORMATION.
|
Not applicable.
44
PART III
|
|
ITEM 10.
|
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
|
The information required by this Item is set forth in the
Companys Proxy Statement for the Annual Meeting of
Stockholders to be held on May 12, 2009, under the caption
Election of Directors and Section 16(a)
Beneficial Ownership Reporting Compliance, which
information is incorporated herein by reference.
The information required by this Item is set forth under the
caption Item 1 Business under Executive
Officers of the Registrant.
Information on the Companys Audit Committee is contained
under the caption Board of Directors Meetings and
Committees in the Companys Proxy Statement for the
Annual Meeting of Stockholders to be held on May 12, 2009,
which is incorporated herein by reference.
The Board of Directors has determined that Mitchell Saranow,
member of the Audit Committee of the Board of Directors,
qualifies as an audit committee financial expert as
defined in Item 407(d)(5)(ii) of
Regulation S-K,
and that Mr. Saranow is independent as the term
is defined in the listing standards of the NASDAQ Global Select
Market.
|
|
d.
|
Code
of Business Conduct
|
The Company has adopted a Code of Business Conduct applicable to
all employees and sales agents. The Companys Code of
Business Conduct is applicable to senior financial executives
including the principal executive officer, principal financial
officer and principal accounting officer of the Company. The
Companys Code of Business Conduct is available on the
Corporate Governance page in the Investor Relations section of
the Companys website at www.lawsonproducts.com. The
Company intends to post on its website any amendments to, or
waivers from its Code of Business Conduct applicable to senior
financial executives. The Company will provide any persons with
a copy of its Code of Business Conduct without charge upon
written request directed to the Companys Secretary at the
Companys address.
|
|
ITEM 11.
|
EXECUTIVE
COMPENSATION.
|
The information required by this Item is set forth in the
Companys Proxy Statement for the Annual Meeting of
Stockholders to be held on May 12, 2009, under the caption
Remuneration of Executive Officers, which
information is incorporated herein by reference.
|
|
ITEM 12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
|
The information required by this Item is set forth in the
Companys Proxy Statement for the Annual Meeting of
Stockholders to be held on May 12, 2009 under the caption
Securities Beneficially Owned by Principal Stockholders
and Management which information is incorporated herein by
reference.
45
Equity
Compensation Plan Information
The following table provides information as of December 31,
2008 regarding the number of shares of common stock that were
available for issuance under the Companys equity
compensation plans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Securities
|
|
|
|
Number of Securities
|
|
|
Weighted-Average
|
|
|
Remaining Available for Future
|
|
|
|
to be Issued Upon
|
|
|
Exercises Price of
|
|
|
Issuance Under Equity
|
|
|
|
Exercise of
|
|
|
Outstanding
|
|
|
Compensation Plans
|
|
|
|
Outstanding Options,
|
|
|
Options, Warrants
|
|
|
(Excluding Securities Reflected
|
|
Plan category
|
|
Warrants and Rights
|
|
|
and Rights
|
|
|
In The First Column)
|
|
|
Equity compensation plans approved by security holders
|
|
|
5,000
|
|
|
$
|
23.11
|
|
|
|
|
|
Equity compensation plans not approved by security holders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
5,000
|
|
|
$
|
23.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ITEM 13.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE.
|
The information required by this Item is set forth in the
Companys Proxy Statement for the Annual Meeting of
Stockholders to be held on May 12, 2009 under the caption
Election of Directors and Certain
Relationships and Related Transactions which information
is incorporated herein by reference.
|
|
ITEM 14.
|
PRINCIPAL
ACCOUNTING FEES AND SERVICES.
|
The information required under this Item is set forth in the
Companys Proxy Statement for the Annual Meeting of
Stockholders to be held on May 12, 2009 under the caption
Fees Paid to Independent Auditors which information
is incorporated herein by reference.
46
PART IV
|
|
ITEM 15.
|
EXHIBITS AND
FINANCIAL STATEMENT SCHEDULES.
|
(a) See Index to Financial Statements and Schedule II
in Item 8 on page 20.
(b) Exhibits
EXHIBIT INDEX
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description of Exhibit
|
|
|
3
|
.1
|
|
Certificate of Incorporation of the Company, as amended,
incorporated herein by reference to Exhibit 3(a) to the
Companys Annual Report on
Form 10-K
for the fiscal year ended December 31, 1988.
|
|
3
|
.2
|
|
Amended and Restated By-laws of the Company, incorporated herein
by reference to the Companys Current Report on
Form 8-K
dated September 15, 2008.
|
|
10
|
.1*
|
|
Lawson Products, Inc. Incentive Stock Plan, incorporated herein
by reference to Appendix A to the Companys Proxy
Statement for the Annual Meeting of Stockholders held on
May 11, 1999.
|
|
10
|
.2*
|
|
Amended and Restated Executive Deferral Plan, incorporated
herein by reference from Exhibit 10(c)(7) to the
Companys Annual Report on
Form 10-K
for the fiscal year ended December 31, 1995.
|
|
10
|
.3*
|
|
Lawson Products, Inc. Stock Performance Plan, incorporated
herein by reference from Exhibit 10(c)(8) to the
Companys Annual Report on
Form 10-K
for the fiscal year ended December 31, 2000.
|
|
10
|
.4*
|
|
Lawson Products, Inc. 2002 Stock Equivalents Plan for Non
Employee Directors, incorporated herein by reference from
Exhibit 10(c)(9) to the Companys Annual Report on
Form 10-K
for the fiscal year ended December 31, 2002.
|
|
10
|
.5*
|
|
Lawson Products, Inc. Long-Term Capital Accumulation Plan,
incorporated herein by reference from Exhibit 10(c)(10) to
the Companys Current Report on
Form 8-K
dated October 21, 2004.
|
|
10
|
.6*
|
|
Form of Shareholder Value Appreciation Rights Award Agreement,
incorporated by reference to Exhibit 10(c)(14) to the
Companys Annual Report on
Form 10-K
for the fiscal year ended December 31, 2004.
|
|
10
|
.7*
|
|
Form of Restricted Stock Award and Acknowledgment, incorporated
by reference to Exhibit 10(c)(15) to the Companys
Annual Report on
Form 10-K
for the fiscal year ended December 31, 2004.
|
|
10
|
.8*
|
|
Form Letter regarding Stock Performance Rights,
incorporated by reference to Exhibit 10(c)(16) to the
Companys Annual Report on
Form 10-K
for the fiscal year ended December 31, 2004.
|
|
10
|
.9*
|
|
Employment Agreement dated April 16, 2007 between the
Company and Mr. Thomas Neri, incorporated herein by
reference to Exhibit 10.1 to the Companys Current
Report on
Form 8-K
dated October 9, 2007.
|
|
10
|
.10*
|
|
Employment Agreement dated October 1, 2007 between the
Company and Mr. Neil Jenkins, incorporated herein by
reference to Exhibit 10.3 to the Companys Current
Report on
Form 8-K
dated October 9, 2007.
|
|
10
|
.11*
|
|
Executive Employment Agreement dated December 5, 2005
between the Company and Stewart Howley.
|
|
10
|
.12*
|
|
Employment Agreement dated February 29, 2008 between the
Company and Harry Dochelli.
|
|
10
|
.13*
|
|
Lawson Products, Inc. Long-Term Incentive Plan, incorporated
herein by reference to Exhibit 10.1 to the Companys
Current Report on
Form 8-K
dated May 13, 2008.
|
|
10
|
.14*
|
|
Executive Services Agreement dated June 23, 2008 between
the Company and Tatum, LLC.
|
|
10
|
.15
|
|
Deferred Prosecution Agreement, dated August 11, 2008
between the Company and the United States District Court,
Northern District of Illinois Eastern Division, incorporated by
reference to Exhibit 10.1 to the Companys
Form 10-Q
for the quarter ended June 30, 2008.
|
|
10
|
.16*
|
|
Form of Indemnification Agreement for Directors and Officers
incorporated herein by reference to the Companys Current
Report on
Form 8-K
dated September 15, 2008.
|
|
10
|
.17
|
|
First Amended and Restated Credit Agreement dated
November 7, 2008 between the Company and Bank of America,
N.A. Successor by Merger to LaSalle Bank National Association,
incorporated by reference to Exhibit 10.1 to the
Companys Current Report on
Form 8-K
dated November 7, 2008.
|
|
10
|
.18*
|
|
Amendment No. 1 to Lawson Products, Inc. Long-Term Capital
Accumulation Plan, incorporated by reference to
Exhibit 10.1 to the Companys Current Report on
Form 8-K
dated February 12, 2009.
|
47
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description of Exhibit
|
|
|
10
|
.19*
|
|
Form of Amended and Restated Award Agreement, incorporated by
reference to Exhibit 10.2 to the Companys Current
Report on
Form 8-K
dated February 12, 2009.
|
|
10
|
.20*
|
|
Amended and Restated Employment Agreement dated as of
February 12, 2009 by and between the Company and Thomas
Neri, incorporated by reference to Exhibit 10.3 to the
Companys Current Report on
Form 8-K
dated February 12, 2009.
|
|
10
|
.21*
|
|
Amended and Restated Employment Agreement dated as of
February 12, 2009 by and between the Company and Neil E.
Jenkins, incorporated by reference to Exhibit 10.4 to the
Companys Current Report on
Form 8-K
dated February 12, 2009.
|
|
10
|
.22*
|
|
Change in Control Agreement dated as of February 12, 2009
by and between the Company and Harry Dochelli, incorporated by
reference to Exhibit 10.5 to the Companys Current
Report on
Form 8-K
dated February 12, 2009.
|
|
10
|
.23*
|
|
Change in Control Agreement dated as of February 12, 2009
by and between the Company and Stewart Howley, incorporated by
reference to Exhibit 10.6 to the Companys Current
Report on
Form 8-K
dated February 12, 2009.
|
|
10
|
.24
|
|
First Amendment to First Amended and Restated Credit Agreement
and Security Agreement dated March 9, 2009 between the
Company and Bank of America, N.A. Successor by Merger to LaSalle
Bank National Association.
|
|
21
|
|
|
Subsidiaries of the Company.
|
|
23
|
|
|
Consent of Ernst & Young LLP.
|
|
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.
|
|
|
|
* |
|
Indicates management employment contracts or compensatory plans
or arrangements. |
48
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Thomas
J. Neri
Chief Executive Officer and Director
Date: March 11, 2009
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below this 11th day of
March, 2009, by the following persons on behalf of the
registrant and in the capacities indicated.
|
|
|
|
|
Signature
|
|
Title
|
|
|
|
|
/s/ Thomas
J. Neri
Thomas
J. Neri
|
|
Chief Executive Officer and Director
(principal executive officer)
|
|
|
|
/s/ F.
Terrence Blanchard
F.
Terrence Blanchard
|
|
Chief Financial Officer
(principal financial and accounting officer)
|
|
|
|
/s/ Ronald
B. Port
Ronald
B. Port
|
|
Chairman of the Board
|
|
|
|
/s/ James
T. Brophy
James
T. Brophy
|
|
Director
|
|
|
|
/s/ James
S. Errant
James
S. Errant
|
|
Director
|
|
|
|
/s/ Lee
S. Hillman
Lee
S. Hillman
|
|
Director
|
|
|
|
/s/ Thomas
S. Postek
Thomas
S. Postek
|
|
Director
|
|
|
|
/s/ Robert
G. Rettig
Robert
G. Rettig
|
|
Director
|
|
|
|
/s/ Mitchell
H. Saranow
Mitchell
H. Saranow
|
|
Director
|
|
|
|
/s/ Wilma
J. Smelcer
Wilma
J. Smelcer
|
|
Director
|
49