FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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[ X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter period ended September 30, 2004
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[ ] TRANSITION REPORT OR PURSUANT TO SECTION 13 OR 15(DF) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file no. 0-10546
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LAWSON PRODUCTS, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 36-2229304
- --------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1666 EAST TOUHY AVENUE, DES PLAINES, ILLINOIS
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60018
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(Address of principal executive offices)
(Zip Code)
(847) 827-9666
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(Registrant's telephone number, including area code)
Not applicable
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes X No
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. 9,346,280 SHARES, $1 PAR VALUE,
AS OF OCTOBER 15, 2004.
PART I - FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
LAWSON PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA) SEPTEMBER 30 DECEMBER 31,
2004 2003
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(UNAUDITED)
ASSETS
- ------
Current Assets:
Cash and cash equivalents $ 28,049 $ 21,399
Marketable securities 2,810 2,156
Accounts receivable, less allowance for doubtful accounts 50,411 47,972
Inventories 62,238 59,817
Miscellaneous receivables and prepaid expenses 8,365 11,439
Deferred income taxes 1,538 1,975
Total Current Assets 153,411 144,758
-------------- --------------
Property, plant and equipment, less allowances for depreciation and
amortization 40,259 42,946
Deferred income taxes 13,815 13,201
Goodwill, less accumulated amortization 28,649 28,649
Other assets 18,498 17,389
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Total Assets $ 254,632 $ 246,943
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current Liabilities:
Accounts payable $ 8,778 $ 8,240
Accrued expenses and other liabilities 27,394 27,176
Current portion of long term debt 1,544 1,462
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Total Current Liabilities 37,716 36,878
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Accrued liability under security bonus plans 21,079 20,823
Long term debt 404 1,573
Other 14,961 14,318
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36,444 36,714
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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-(2004- 9,342,380 shares; 2003- 9,493,511 shares) 9,342 9,494
Capital in excess of par value 3,311 2,667
Retained earnings 168,063 161,831
Accumulated other comprehensive income (244) (641)
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Total Stockholders' Equity 180,472 173,351
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Total Liabilities and Stockholders' Equity $ 254,632 $ 246,943
============== ==============
See notes to condensed consolidated financial statements.
2
LAWSON PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE FOR THE
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------- --------------------------------
2004 2003 2004 2003
-------------- -------------- -------------- --------------
Net sales $ 107,380 $ 99,301 $ 312,481 $ 292,485
Cost of goods sold 40,667 35,349 114,724 104,931
-------------- -------------- -------------- --------------
Gross profit 66,713 63,952 197,757 187,554
Selling, general and administrative expenses 58,401 56,661 171,191 166,431
Other charges ---- 398 ---- 1,644
-------------- -------------- -------------- --------------
Operating income 8,312 6,893 26,566 19,479
Investment and other income 776 660 1,886 1,407
Interest expense (40) (65) (151) (72)
-------------- -------------- -------------- --------------
Income before income taxes 9,048 7,488 28,301 20,814
Provision for income taxes 3,462 3,124 10,872 8,551
-------------- -------------- -------------- --------------
Net income $ 5,586 $ 4,364 $ 17,429 $ 12,263
============== ============== ============== ==============
Net income per share of common stock:
Basic $ 0.59 $ 0.46 $1.85 $ 1.29
============== ============== ============== ==============
Diluted $ 0.59 $ 0.46 $1.84 $ 1.29
============== ============== ============== ==============
Cash dividends declared per
share of common stock $ 0.18 $ 0.16 $0.54 $ 0.48
============== ============== ============== ==============
Weighted average shares outstanding:
Basic 9,390 9,492 9,440 9,492
============== ============== ============== ==============
Diluted 9,422 9,511 9,468 9,510
============== ============== ============== ==============
See notes to condensed consolidated financial statements.
3
LAWSON PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(AMOUNTS IN THOUSANDS)
FOR THE
NINE MONTHS ENDED
SEPTEMBER 30,
2004 2003
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Operating activities:
Net income $ 17,429 $ 12,263
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 5,011 5,041
Changes in operating assets and liabilities (4,636) (3,723)
Other 2,525 2,813
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Net Cash Provided by Operating Activities 20,329 16,394
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Investing activities:
Additions to property, plant and equipment (1,306) (3,124)
Purchases of marketable securities (6,230) (3,418)
Proceeds from sale of marketable securities 5,576 2,858
Other 100 146
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Net Cash Used in Investing Activities (1,860) (3,538)
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Financing activities:
Purchases of treasury stock (6,355) (127)
Proceeds from revolving line of credit ---- 4,000
Payments on revolving line of credit ---- (4,000)
Payments on long term debt
(1,086) (341)
Dividends paid (5,110) (4,555)
Other 732 (52)
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Net Cash Used in Financing Activities (11,819) (5,075)
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Increase in Cash and Cash Equivalents 6,650 7,781
Cash and Cash Equivalents at Beginning of Period 21,399 7,591
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Cash and Cash Equivalents at End of Period $ 28,049 $ 15,372
============== ==============
See notes to condensed consolidated financial statements.
4
PART I - NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
A) As contemplated by the Securities and Exchange Commission, the accompanying
consolidated financial statements and footnotes have been condensed and,
therefore, do not contain all disclosures required by generally accepted
accounting principles. Reference should be made to Lawson Products, Inc.'s (the
"Company") Annual Report on Form 10-K for the year ended December 31, 2003. The
Condensed Consolidated Balance Sheet as of September 30, 2004, the Condensed
Consolidated Statements of Income for the three and nine month periods ended
September 30, 2004 and 2003 and the Condensed Consolidated Statements of Cash
Flows for the nine month periods ended September 30, 2004 and 2003 are
unaudited. In the opinion of the Company, all adjustments (consisting only of
normal recurring accruals) have been made, which are necessary to present fairly
the results of operations for the interim periods. Operating results for the
three and nine month periods ended September 30, 2004 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2004.
B) Total comprehensive income and its components, net of related tax, for the
third quarter and nine months of 2004 and 2003 are as follows (in thousands):
Three months ended September 30,
2004 2003
---- ----
Net income $5,586 $4,364
Foreign currency translation adjustments 499 32
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Comprehensive income $6,085 $4,396
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Nine months ended September 30,
2004 2003
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Net income $17,429 $12,263
Foreign currency translation adjustments 397 1,123
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Comprehensive income $17,826 $13,386
======= =======
The components of accumulated other comprehensive income, net of related tax, at
September 30, 2004 and December 31, 2003 are as follows (in thousands):
2004 2003
---- ----
Foreign currency translation adjustments $ (244) $ (641)
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Accumulated other comprehensive income $ (244) $ (641)
======== ========
C) Earnings per Share
The calculation of dilutive weighted average shares outstanding for the three
and nine months ended September 30, 2004 and 2003 are as follows (in thousands):
Three months ended September 30,
2004 2003
---- ----
Basic weighted average shares outstanding 9,390 9,492
Dilutive impact of options outstanding 32 19
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Dilutive weighted average shares outstanding 9,422 9,511
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Nine months ended September 30,
2004 2003
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Basic weighted average shares outstanding 9,440 9,492
Dilutive impact of options outstanding 28 18
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Dilutive weighted average shares outstanding 9,468 9,510
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5
D) Revolving Line of Credit
In March 2001 the Company entered into a $50 million revolving line of credit.
The revolving line of credit matures five years from the closing date and
carries an interest rate of prime minus 150 basis points floating or LIBOR plus
75 basis points, at the Company's option. Interest is payable quarterly on prime
borrowings and at the earlier of quarterly or maturity with respect to the LIBOR
contracts.
The line of credit contains certain financial covenants regarding interest
coverage, minimum stockholders' equity and working capital, all of which the
Company was in compliance with at September 30, 2004. The Company had no
borrowings outstanding under the line at September 30, 2004, and December 31,
2003.
E) Severance and Related Charges
The table below shows an analysis of the Company's reserves for severance and
related expenses for the first nine months of 2004 and 2003:
Nine months ended September 30,
In thousands 2004 2003
- ------------ ---- ----
Balance at beginning of year $2,476 $ 876
Charged to earnings -- 1,644
Cash paid (1,003) (504)
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Balance at September 30 $1,473 $2,016
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F) Intangible Assets
Intangible assets subject to amortization, included within other assets, were as
follows (in thousands):
September 30, 2004
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Net
Gross Accumulated Carrying
Balance Amortization Amount
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Trademarks and tradenames $1,747 $ 922 $ 825
Customer Lists 953 392 561
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$2,700 $1,314 $1,386
====== ====== ======
December 31, 2003
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Net
Gross Accumulated Carrying
Balance Amortization Amount
------- ------------ ------
Trademarks and tradenames $1,747 $ 851 $ 896
Customer Lists 953 368 585
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$2,700 $1,219 $1,481
====== ====== ======
Trademarks and tradenames are being amortized over a weighted average 15.14
years. Customer lists are being amortized over 13.96 years. Amortization expense
for intangible assets is expected to be $116,000 for 2004 and $83,000 for each
of the next four years.
6
G) Accounting for Stock-Based Compensation
The Company adopted FASB Statement No. 148, "Accounting for Stock Based
Compensation - Transition and Disclosure," which requires interim financial
disclosure to show the effect on net income and earnings per share as required
by FASB Statement No. 123, "Accounting for Stock-Based Compensation." These
disclosures are as follows:
Three Months Ended September 30
-------------------------------
In thousands 2004 2003
- --------------------------------------------------------------------------------
Net income-as reported $ 5,586 $ 4,364
Deduct: Total stock based employee compensation
expense determined under fair value method, net
of tax 0 (6)
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Net income-pro forma $ 5,586 $ 4,358
======== ========
Basic and diluted earnings per share-as reported $ .59 $ .46
Nine Months Ended September 30
------------------------------
In thousands 2004 2003
- --------------------------------------------------------------------------------
Net income-as reported $ 17,429 $ 12,263
Deduct: Total stock based employee compensation
expense determined under fair value method, net
of tax (4) (16)
-------- --------
Net income-pro forma $ 17,425 $ 12,247
======== ========
Basic earnings per share-as reported $ 1.85 $ 1.29
Diluted earnings per share-as reported 1.84 1.29
The Company's incentive stock plan provides for the issuance of Stock
Performance Rights (SPRs). These SPRs vest at 20% per year and entitle the
recipient to receive a cash payment equal to the excess of the market value of
the Company's common stock and the SPR price when the SPRs are surrendered. The
Company records an accrued liability based on the number of outstanding vested
SPRs and the market value of the Company's common stock. The compensation
expense accrual increased $689,000 in the first nine months of 2004 compared to
a $136,000 reduction in the first nine months of 2003. The increase in the
compensation expense accrual for the first nine months of 2004 is primarily due
to an increase in the Company's stock price. No additional SPRs were issued
during the first nine months of 2004.
H) Segment Reporting
The Company has four reportable segments: Maintenance, Repair and Replacement
distribution in the U.S. (MRO-US), International Maintenance, Repair and
Replacement distribution in Canada (MRO-CAN), Original Equipment Manufacturer
distribution and manufacturing in the U.S.(OEM-US), International Original
Equipment Manufacturer distribution in the United Kingdom and Mexico(OEM-INTL).
The operations of the Company's MRO distribution segments distribute a wide
range of MRO parts to repair and maintenance organizations by the Company's
force of independent field sales agents, and inside sales personnel.
The operations of the Company's OEM segments manufacture and distribute
component parts to OEM manufacturers through a network of independent
manufacturers representatives as well as internal sales personnel.
The Company's reportable segments are distinguished by the nature of products
distributed and sold, types of customers, manner of servicing customers, and
geographical location.
The Company evaluates performance and allocates resources to reportable segments
primarily based on operating income.
7
Financial information for the Company's reportable segments consisted of the
following:
Three Months Ended September 30
------------------------------------
In thousands 2004 2003
- ------------------------------------------------------------------------------
Net sales
MRO-US $ 80,778 $ 77,488
MRO-CAN 5,157 4,651
OEM-US 17,064 13,403
OEM-INTL 4,381 3,759
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Consolidated total $ 107,380 $ 99,301
========= =========
Operating income (loss)
MRO-US $ 7,306 $ 6,626
MRO-CAN 512 434
OEM-US 678 336
OEM-INTL (184) (503)
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Consolidated total $ 8,312 $ 6,893
========= =========
The reconciliation of segment profit to consolidated income before income taxes
consisted of the following:
Three Months Ended September 30
------------------------------------
In thousands 2004 2003
- ------------------------------------------------------------------------------
Total operating income
from Reportable segments $ 8,312 $ 6,893
Investment and other income 776 660
Interest expense (40) (65)
--------- ---------
Income before income taxes $ 9,048 $ 7,488
========= =========
Nine Months Ended September 30
------------------------------------
In thousands 2004 2003
- ------------------------------------------------------------------------------
Net sales
MRO-US $ 235,157 $ 227,861
MRO-CAN 15,752 13,938
OEM-US 48,130 40,999
OEM-INTL 13,442 9,687
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Consolidated total $ 312,481 $ 292,485
========= =========
Operating income (loss)
MRO-US $ 23,403 $ 18,838
MRO-CAN 1,651 1,448
OEM-US 1,779 479
OEM-INTL (267) (1,286)
--------- ---------
Consolidated total $ 26,566 $ 19,479
========= =========
8
The reconciliation of segment profit to consolidated income before income taxes
consisted of the following:
Nine Months Ended September 30
--------------------------------------
In thousands 2004 2003
- --------------------------------------------------------------------------------
Total operating income $ 26,566 $ 19,479
from reportable segments
Investment and other income 1,886 1,407
Interest expense (151) (72)
----------- ---------
Income before income taxes $ 28,301 $ 20,814
=========== ========
Asset information related to the Company's reportable segments consisted of the
following:
September 30, December 31,
In thousands 2004 2003
- --------------------------------------------------------------------------------
Total Assets
MRO-US $ 171,153 $ 168,783
MRO-CAN 18,099 17,137
OEM-US 38,865 36,076
OEM-INTL 11,162 9,771
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Total for reportable segments 239,279 231,767
Corporate 15,353 15,176
--------- ---------
Consolidated total $ 254,632 $ 246,943
========= =========
At September 30, 2004 and December 31, 2003, the carrying value of goodwill
within each reportable segment was as follows (in thousands):
MRO-US $ 22,104
MRO-CAN 4,294
OEM-US 2,251
--------
Consolidated total $ 28,649
========
I) Impact of Recently Issued Accounting Standards
In January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 46, "Consolidation of Variable Interest Entities (FIN 46)."
FIN 46 explains how to identify variable interest entities (VIE) and how an
enterprise assesses its interest in a VIE to decide whether to consolidate the
VIE. It requires existing unconsolidated VIEs to be consolidated if the Company
is the primary beneficiary. The Company adopted FIN 46 as of July 1, 2003, which
has resulted in the consolidation of the Company's investment in a limited
partnership, which owns an office building in Chicago, Illinois. In conjunction
with the consolidation of its investment, the Company has recorded the long-term
debt of the VIE, which represents a mortgage payable relative to the building,
of approximately $1.9 million at September 30, 2004. The interest rate of the
mortgage payable is 7.315%, with a maturity date of January 1, 2006. The
building and land have a net carrying value of approximately $4.2 million, which
are included in property, plant and equipment. The remaining assets, none of
which are significant, are recorded in other assets.
9
Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
Lawson Products, Inc.
We have reviewed the condensed consolidated balance sheet of Lawson Products,
Inc. and subsidiaries as of September 30, 2004 and the related condensed
consolidated statements of income for the three-month and nine-month periods
ended September 30, 2004 and 2003, and the condensed consolidated statements of
cash flows for the nine-month periods ended September 30, 2004 and 2003. These
financial statements are the responsibility of the Company's management.
We conducted our review in accordance with standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with auditing
standards of the Public Company Accounting Oversight Board, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the condensed consolidated interim financial statements referred to
above for them to be in conformity with U.S. generally accepted accounting
principles.
We have previously audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated balance
sheet of Lawson Products, Inc. as of December 31, 2003, and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for the year then ended, not presented herein, and in our report dated
February 25, 2004, we expressed an unqualified opinion on those consolidated
financial statements. In our opinion, the information set forth in the
accompanying condensed consolidated balance sheet as of December 31, 2003, is
fairly stated in all material respects, in relation to the consolidated balance
sheet from which it has been derived.
/s/ ERNST & YOUNG LLP
Chicago, Illinois
October 15, 2004
10
"Safe Harbor" Statement under the Securities Litigation Reform Act of 1995: This
Quarterly Report on Form 10-Q contains certain forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995 that involve
risks and uncertainties. The terms "may," "should," "could," "anticipate,"
"believe," "continues", "estimate," "expect," "intend," "objective," "plan,"
"potential," "project" and similar expressions are intended to identify
forward-looking statements. These statements are not guarantees of future
performance and involve risks, uncertainties and assumptions that are difficult
to predict. These statements are based on management's current expectations,
intentions or beliefs and are subject to a number of factors, assumptions and
uncertainties that could cause actual results to differ materially from those
described in the forward-looking statements. Factors that could cause or
contribute to such differences include, but are not limited to, those related to
general economic conditions and market conditions in the original equipment
manufacturers and maintenance, repair and replacement distribution industries in
North America and to a lesser extent, the United Kingdom, the Company's ability
to obtain new customers and manage growth, material or labor cost increases,
competition in the Company's business, operating margin risk due to competitive
pricing and operating efficiencies, successful integration of acquisitions, the
Company's dependence on key personnel and the length of economic downturns in
the Company's markets. In the event of continued economic downturn, the Company
could experience additional customer bankruptcies, reduced volume of business
from its existing customers and lost volume due to plant shutdowns or
consolidations by the Company's customers other factors that may be referred to
or noted in the Company's reports filed with the Securities and Exchange
Commission from time to time. 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.
11
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS
REVENUES AND GROSS PROFIT
- -------------------------
Net sales for the three-month period ended September 30, 2004 increased 8.1% to
$107.4 million, from $99.3 million in the same period of 2003. Combined
Maintenance, Repair and Replacement distribution (MRO-US and MRO-CAN) net sales
rose $3.8 million in the third quarter, to $85.9 million from $82.1 million in
the same period of 2003. Sales increases were achieved in both the U.S. and
Canadian MRO segments for the three-month period. The sales increase in the U.S.
was principally attributable to the addition of new customers and increased
penetration of existing customers. Although sales unit volume increased slightly
in Canada, the Company benefited from foreign exchange rate fluctuations.
Combined Original Equipment Manufacturer (OEM-US and OEM-INTL) net sales
increased $4.3 million in the third quarter, to $21.4 million from $17.1 million
in the same period of 2003. Sales were higher in the U.S. and internationally
for the three-month period. The sales gain in both the U.S. and international
segments was attributable to higher unit sales from existing customers and the
addition of new customers. The favorable impact of foreign exchange fluctuations
also accounted for a portion of the sales increase achieved by the international
segment.
For the nine-month period ended September 30, 2004, net sales increased 6.8% to
$312.5 million, from $292.5 million in the comparable period of 2003. Combined
Maintenance, Repair and Replacement distribution (MRO-US and MRO-CAN) net sales
increased $9.1 million for the nine-month period, to $250.9 million from $241.8
million in the same period of 2003. Consistent with the third quarter, sales
increases were achieved in both the U.S. and Canadian MRO segments for the
nine-month period, with the sales increase in the U.S. principally attributable
to the addition of new customers and increased penetration of existing
customers, and in Canada, the majority of the sales increase was attributable to
favorable foreign exchange fluctuations. Net sales for the combined Original
Equipment Manufacturer (OEM-US and OEM-INTL) segment increased $10.9 million in
the first nine months, to $61.6 million from $50.7 million in the same period of
2003. Sales were higher in the U.S. and internationally for the nine-month
period. Similar to the third quarter, the sales gain in both the U.S. and
international segments was attributable to higher unit sales from existing
customers and the addition of new customers as well as the favorable impact of
foreign exchange fluctuations.
Gross profit margins for the three-month periods ended September 30, 2004 and
2003 were 62.1% and 64.4%, respectively. In conjunction with OEM segment sales
growth results discussed above, price competition in the domestic OEM market
resulted in third quarter 2004 OEM segment gross profit margins of 25.6%
compared to 28.4% in the prior year period. In those same periods, MRO gross
profit margins declined slightly, from 71.9% in 2003 to 71.2% in 2004. The rapid
OEM segment sales growth in the 2004 three-month period compared to the same
2003 period has had the effect of reducing consolidated gross profit margins
over these periods.
For the nine-month periods ended September 30, 2004 and 2003, gross profit
margins were 63.3% and 64.1%, respectively. MRO segment gross profit margins
improved from 71.6% in 2003 to 72.3% in 2004 for these periods. Increases in
average selling prices as a result of price increases implemented in June 2004
are the primary driver of slightly higher MRO gross profit margins in the
year-to-date September, 2004 period compared to the prior year. As discussed
above, sales growth in the OEM segment has had the effect of slightly reducing
overall gross profit margins for the nine-month period ended September 2004
compared to the prior year period.
12
OPERATING EXPENSES AND OPERATING INCOME
- ---------------------------------------
Operating expenses were $58.4 million and $57.1 million for the quarters ended
September 30, 2004 and 2003, respectively. The $1.3 million dollar increase in
quarterly operating expenses for 2004 over the prior year quarter is primarily
related to higher employee compensation costs. As a result of the sales
increases and productivity improvements over these periods, operating expenses
as a percent of sales declined from 57.5% in the 2003 period to 54.4% of sales
in the 2004 period.
For the nine months ended September 30, 2004 and 2003, operating expenses were
$171.2 million and $168.1 million, respectively. The $3.1 million increase in
total operating costs for year-to-date September 2004 over 2003 is primarily
related to higher information technology development costs ($1.3 million),
employee compensation costs ($1.5 million) and various other items ($0.3
million).
As a result of the Company's ability to leverage its operating cost
infrastructure, operating expenses as a percent of sales for these nine-month
periods declined from 57.5% of sales in 2003 to 54.8% of sales in 2004.
Operating income for the three-month period ended September 30, 2004 increased
20.6% to $8.3 million, from $6.9 million in the comparable period of 2003. This
$1.4 million increase in operating income is attributable to net sales
increases, offset by the lower gross profit margins and the operating expense
increases discussed above. As a result of the Company's ability to leverage its
operating cost infrastructure, operating income as a percent of sales for the
three-month periods increased from 6.6% of sales in 2003 to 7.7% of net sales in
2004.
For the nine-month period ended September 30, 2004, operating income increased
36.4% to $26.6 million, from $19.5 million in the similar period of 2003. The
$7.1 million increase in operating income over these periods is driven by the
same factors discussed for the three-month periods above. As a percentage of net
sales, year-to-date September, 2004 operating income was 8.5% in 2004 compared
to 6.7% in 2003 as a result of the Company's leverage and management of
operating expenses while achieving higher net sales.
INVESTMENT AND OTHER INCOME
- ---------------------------
Investment and other income consists primarily of rental and interest income.
For the quarters ended September 30, 2004 and 2003, investment and other income
was $0.8 million and $0.7 million, respectively.
For the nine-month periods ended September 30, 2004 and 2003, investment and
other income was $1.9 million and $1.4 million, respectively. The increase in
2004 is primarily attributable to the consolidation of the Company's investment
in a limited partnership (please refer to Note I) beginning in the third quarter
of 2003.
INTEREST EXPENSE
- ----------------
Interest expense is primarily attributable to interest paid relative to a
mortgage payable for the building owned by the limited partnership referred to
in Note I.
PROVISION FOR INCOME TAXES
- --------------------------
The effective tax rates for the three months ended September 30, 2004 and 2003
were 38.3% and 41.7%, respectively. For the nine-month periods ended September
30, 2004 and 2003, the effective tax rates were 38.4% and 41.1% respectively.
The decline in the effective tax rates for the quarter and year-to-date periods
is principally due to substantially reduced OEM segment losses internationally
in 2004. These losses have declined from $0.5 million to $0.2 million for the
three months ended September 2003 and 2004, respectively, and declined from $1.3
million to $0.3 million for the nine-month periods ended September 30, 2003 and
2004, respectively. No tax benefit was provided to the Company in either year.
However, the reduction in losses has had the effect of lowering the overall
effective tax rate. The impact of the lower losses was 1.4% and 1.7%,
respectively for the quarter and year-to-date periods.
Also, a reduction of the tax provision in the third quarter of 2004 was recorded
relative to a contribution of inventory to a charitable organization. This
benefit lowered the effective tax rate for the quarter and year-to-date periods
by 1.4% and 0.5%, respectively.
13
NET INCOME
- ----------
Net income for the third quarter of 2004 increased 28.0%, to $5.6 million ($.59
per diluted share), compared to $4.4 million ($.46 per diluted share) in the
similar period of 2003. The $1.2 million increase in net income is the result of
the $1.4 million increase in operating income and lower effective tax rates
discussed above.
For the nine-month period ended September 30, 2004, net income rose 42.1%, to
$17.4 million ($1.84 per diluted share), from $12.6 million ($1.29 per diluted
share) in the comparable period of 2003. The $4.8 million increase in net income
is the result of the $7.1 million increase in operating income and reduced
effective tax rates discussed above.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Net cash provided by operations for the nine months ended September 30, 2004 and
2003 was $20.3 million and $16.4 million, respectively. In 2004, net cash
provided by operations was positively impacted by higher net income and
negatively impacted by an increase in net operating assets, primarily accounts
receivable and inventories.
In 2003, an increase in net operating assets and slightly lower operating
liabilities negatively impacted net cash provided by operations.
Working capital at September 30, 2004 was $115.7 million as compared to $107.9
million at December 31, 2003. At September 30, 2004 the current ratio was 4.1 to
1 as compared to 3.9 to 1 at December 31, 2003.
Additions to property, plant and equipment were $1.3 million and $3.1 million,
respectively, for the nine months ended September 30, 2004 and 2003. Capital
expenditures in 2004 were incurred for the purchase of equipment. In 2003,
additions to property, plant and equipment were incurred primarily for the
purchase of manufacturing machinery, improvement of existing facilities and for
the purchase of related equipment. Requirements for plant expansion and
manufacturing equipment in 2003 accounted for the significant difference between
2003 and the approximate $2.0 million expected for additions in 2004.
The Company increased the cash dividend to $.18 per share on common shares. This
was a 12.5% increase over the previous $.16 per share on common shares paid each
quarter in 2003.
During the first nine months of 2004, the Company purchased 179,841 shares of
its own common stock for approximately $6,355,000, pursuant to the 2000 Board
authorization to purchase up to 500,000 shares. In the first nine months of
2003, the Company purchased 4,600 shares of its own common stock for
approximately $127,000 pursuant to the 2000 Board authorization noted above. All
shares purchased as of September 30, 2004 have been retired. Funds to purchase
these shares were provided by investments and net cash provided by operations.
There is no expiration date relative to this authorization.
On October 13, 2004, the Company announced that its Board of Directors
authorized a stock repurchase program to purchase up to 500,000 shares of its
common stock in addition to that previously authorized. There is no expiration
date relative to this authorization.
Net cash provided by operations, current investments and the $50,000,000
unsecured line of credit are expected to be sufficient to finance the Company's
future growth, cash dividends and capital expenditures.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in market risk at September 30, 2004 from
that reported in the Company's Annual Report on Form 10-K for the year ended
December 31, 2003.
14
ITEM 4. CONTROLS AND PROCEDURES
The Company's 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 Company's disclosure controls and procedures (as defined in the
Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) are effective to
ensure that information required to be disclosed in the reports that the Company
files or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms. There have been no
significant changes in our internal controls over financial reporting or in
other factors that could significantly affect these controls subsequent to the
date of the previous mentioned evaluation.
15
PART II - OTHER INFORMATION
-----------------
ITEMS 1, 3, 4 AND 5 ARE INAPPLICABLE AND HAVE BEEN OMITTED FROM THIS REPORT.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Total Number (b) Average Total Number of Shares Maximum Number (or
approximate Dollar
of Shares Price Paid Purchased as Part of Value) of Shares that
Publicly Announced may Yet Be Purchased Under
Period Purchased per Share Plans or Programs the Plans or Programs
- ------------------------------------------------------------------------------------------------------------------
01/01/04 - 01/31/04 --- --- --- $286,399
02/01/04 - 02/29/04 8,242 $29.76 8,242 $278,157
03/01/04 - 03/31/04 20,305 $30.07 20,305 $257,852
04/01/04 - 04/30/04 24,057 $32.85 24,057 $233,795
05/01/04 - 05/31/04 27,781 $33.58 27,781 $206,014
06/01/04 - 06/30/04 11,049 $34.85 11,049 $194,965
07/01/04 - 07/31/04 15,636 $36.97 15,636 $179,329
08/01/04 - 08/31/04 30,022 $36.32 30,022 $149,307
09/01/04 - 09/30/04 42,749 $40.28 42,749 $106,558
- ----------------------------------------------------------------------------------------------------------------
Total 179,841 $35.34 179,841 $106,558
- ----------------------------------------------------------------------------------------------------------------
On May 16, 2000, the Board of Directors of the Company authorized the purchase
of up to 500,000 shares of its own common stock. On October 13, 2004, the
Company announced that its Board of Directors authorized a stock repurchase
program to purchase up to an additional 500,000 shares of its common stock.
There is no expiration date relative to either authorization.
ITEM 6. EXHIBITS.
15 Letter from Ernst & Young LLP Regarding Unaudited
Interim Financial Information
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
16
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LAWSON PRODUCTS, INC.
(REGISTRANT)
Dated November 9, 2004 /s/ Robert J. Washlow
-----------------
Robert J. Washlow
Chief Executive Officer and
Chairman of the Board
Dated November 9, 2004 /s/ Thomas Neri
-----------
Thomas Neri
Executive Vice President,
Chief Financial Officer, and
Treasurer
17
Exhibit 15
October 15, 2004
Board of Directors
Lawson Products, Inc.
We are aware of the incorporation by reference in the Registration Statement
(Form S-8 No. 33-17912 dated November 4, 1987) of Lawson Products, Inc. of our
report dated October 15, 2004 relating to the unaudited condensed consolidated
interim financial statements of Lawson Products, Inc. which are included in its
Form 10-Q for the quarter ended September 30, 2004.
Pursuant to Rule 436(c) of the Securities Act of 1933 our report is not part of
the registration statement prepared or certified by accountants within the
meaning of Section 7 or 11 of the Securities Act of 1933.
/s/ ERNST & YOUNG LLP
Chicago, Illinois
Exhibit 31.1
CERTIFICATIONS
--------------
I, Robert J. Washlow, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Lawson Products,
Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and have:
a. Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating
to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
c. Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant's
fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer(s) and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
a. All significant deficiencies and material weaknesses in the
design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the
registrant's ability to record, process, summarize and report
financial information; and
b. Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: November 9, 2004
/s/ Robert J. Washlow
- ---------------------
Robert J. Washlow
Chief Executive Officer
Exhibit 31.2
CERTIFICATIONS
--------------
I, Thomas Neri, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Lawson Products,
Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and have:
(a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating
to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly
during the period in which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant's
fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer(s) and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the
registrant's ability to record, process, summarize and report
financial information; and
(b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: November 9, 2004
/s/ Thomas Neri
- ---------------
Thomas Neri
Executive Vice President, Finance, Planning and Corporate Development;
Chief Financial Officer; and Treasurer
Exhibit 32
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION
906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Lawson Products, Inc. (the "Company")
on Form 10-Q for the period ending September 30, 2004 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), the
undersigned Chief Executive Officer and Chief Financial Officer of the Company
hereby certify, pursuant to 18 U.S.C. ss.1350, as adopted pursuant to ss.906 of
the Sarbanes-Oxley Act of 2002 that based on their knowledge: 1) the Report
fully complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934, and 2) the information contained in the Report fairly
presents, in all material respects, the financial condition and results of
operations of the Company as of and for the periods covered in the Report.
/s/ Robert J. Washlow
- -------------------------------------------------
Robert J. Washlow, Chief Executive Officer
/s/ Thomas Neri
- -------------------------------------------------
Thomas Neri, Executive Vice President, Finance,
Planning and Corporate Development;
Chief Financial Officer; and Treasurer
November 9, 2004
The foregoing certification is being furnished to the Securities and Exchange
Commission as an exhibit to the Form 10-Q and shall not be considered filed as
part of the Form 10-Q.