UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark one)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
for the fiscal year ended December 31, 2004
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
for the transition period from _____________ to ____________
Commission file number: 0-10546
LAWSON PRODUCTS, INC.
(Exact Name of Registrant as Specified in Charter)
DELAWARE 36-2229304
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1666 EAST TOUHY AVENUE, DES PLAINES, ILLINOIS 60018
(Address of principal executive offices)
Registrant's telephone number, including area code: (847) 827-9666
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of Each Class on which registered
------------------- -------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $1.00 PAR VALUE
(Title of class)
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 X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and will
not be contained, to the best of Registrant's 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. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No__
The aggregate market value of the Registrant's voting stock held by
non-affiliates (based upon the per share closing price of $38.15) on June 30,
2004 was approximately $186,824,000.
As of March 1, 2005, 9,189,513 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 registrant's 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
PAGE
PART I ........................................................................................................2
ITEM 1. BUSINESS...................................................................................2
ITEM 2. PROPERTIES.................................................................................6
ITEM 3. LEGAL PROCEEDINGS..........................................................................6
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........................................6
PART II ........................................................................................................7
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES.............................................................7
ITEM 6. SELECTED FINANCIAL DATA....................................................................8
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION......9
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK................................13
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...............................................14
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE......31
ITEM 9A. CONTROLS AND PROCEDURES...................................................................31
ITEM 9B. OTHER INFORMATION.........................................................................32
PART III.......................................................................................................33
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT........................................33
ITEM 11. EXECUTIVE COMPENSATION....................................................................33
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS.......................................................................33
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................................................34
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES........................................................34
PART IV ........................................................................................................34
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES................................................34
SIGNATURES......................................................................................................37
EXHIBIT INDEX...................................................................................................39
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"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 management's current expectations,
intentions or beliefs and are subject to a number of factors, assumptions and
uncertainties that could cause actual results to differ materially from those
described in the forward-looking statements. Factors that could cause or
contribute to such differences or that might otherwise impact the business
include, but are not limited to, the following risk factors:
o Lawson's business strategy requires the Company to carry a significant
amount of inventory in order to meet rapid processing of customer
orders. This strategy increases the likelihood that portions of
Lawson's inventory may become obsolete.
o Disruptions of Lawson's information systems could adversely affect the
Company. The Company depends upon our information systems to help
process orders, to manage inventory and accounts receivable
collections, to purchase, sell and ship products, to maintain
cost-effective operations, and to service customers. Any disruption in
the operation of Lawson's information systems could have a material
adverse effect on the Company.
o There is an ongoing risk that orders may be cancelled or rescheduled
due to fluctuations in Lawson's customers' business needs or
purchasing budgets. The cancellation or rescheduling of orders may
cause operating results to fluctuate.
o A limited number of the Company's stockholders can exert significant
influence over the Company. As of February 1, 2005, the Port family
collectively beneficially owned 50.9% of the outstanding shares of
common stock. The 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.
o The Company operates in highly competitive markets. Some of the
Company's competitors have a greater variety of merchandise, financial
resources, services, personnel resources and competitive pricing than
Lawson.
o Those related to general economic conditions and market conditions in
the markets and industries the Company serves. In the event of
economic downturn Lawson could experience customer bankruptcies,
reduced volume of business from its existing customers and lost volume
due to customer plant shutdowns or consolidations.
o The risks of war, terrorism, and similar hostilities may adversely
affect operating results. In addition to having an impact on general
economic conditions, events such as the attacks of September 11, 2001
and the recent conflict in Iraq may adversely affect revenues and
Lawson's ability to service customers.
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.
PART I
ITEM 1. BUSINESS.
Lawson Products, Inc. ("Lawson" or the "Company") was incorporated in Illinois
in 1952 and reincorporated in Delaware in 1982. The Company has four reportable
segments: (i) maintenance, repair and replacement distribution in the U.S.; (ii)
international maintenance, repair and replacement distribution in Canada; (iii)
original equipment manufacturer distribution and manufacturing in the U.S. and
(iv) international original equipment manufacturer distribution in the United
Kingdom and Mexico. Please see Note O in the Notes to the Consolidated Financial
Statements, included elsewhere in this Annual Report on Form 10-K, for
additional information regarding segment results and sales by geographic
regions.
OVERVIEW
Lawson is an international distributor and marketer of systems,
services and products to the industrial, commercial and institutional
maintenance, repair and replacement ("MRO") marketplace. The Company also
manufactures, sells and distributes specialized component parts to the original
equipment marketplace ("OEM"), including automotive, appliance, aerospace,
construction and transportation industries.
Lawson markets its products primarily through a network of
approximately 1,800 independent sales agents. In addition, Lawson also markets
its products through inside sales representatives.
PRODUCTS
The Company is a seller and distributor of systems, services and
products to the MRO and OEM marketplaces. The Company also manufactures and
distributes production and specialized component parts to the OEM marketplace.
The Company offers over 900,000 expendable maintenance, repair and replacement
products. These products may be divided into three broad categories: Fasteners,
Fittings and Related Parts, such as screws, nuts, rivets and other fasteners;
Industrial Supplies, such as hoses and hose fittings, lubricants, cleansers,
adhesives and other chemicals, as well as files, drills, welding products and
other shop supplies; and Automotive and Equipment Maintenance Parts, such as
primary wiring, connectors and other electrical supplies, exhaust and other
automotive parts. The Company estimates that these categories of products
accounted for the following percentages of its total consolidated net sales for
2004, 2003 and 2002, respectively:
PERCENTAGE OF
CONSOLIDATED
NET SALES
------------------------
2004 2003 2002
---- ---- ----
Fasteners, Fittings and Related Parts................ 44% 43% 44%
Industrial Supplies.................................. 47 48 47
Automotive and Equipment Maintenance Parts........... 9 9 9
---- -- --
100% 100% 100%
Substantially all of the Company's MRO products are manufactured by
others and must meet the Company's specifications. Approximately 90% of the
Company's products are sold under the Company labels. Substantially all MRO
products distributed by the Company are purchased by the Company in bulk and
subsequently repackaged in smaller quantities. The Company regularly uses a
large number of suppliers and has no long-term or fixed price contracts with any
of them. Most of the Company's MRO products are purchased from several sources,
and the Company believes that the loss of any single supplier would not
significantly affect its operations. No single supplier accounted for more than
3% of the Company's purchases in 2004.
-2-
In the OEM business, the Company sources most products based on
customer specifications through a variety of domestic and international
suppliers. A portion of OEM products are manufactured by the Company, primarily
precision engineered machine parts. In addition to customer-oriented products,
the OEM business provided supply chain management services such as in-plant
inventory management and automatic re-stock programs.
MARKETS
The Company's principal markets are as follows:
In-Plant and Building Maintenance. This market includes facilities
engaged in a broad range of manufacturing and processing activities, as well as
institutions such as hospitals, universities, school districts and government
units. The Company estimates that approximately 42% of 2004 net sales were made
to customers in this market.
Heavy Duty Equipment Maintenance. Customers in this market include
operators of trucks, buses, agricultural implements, construction and road
building equipment, mining, logging and drilling equipment and other
off-the-road equipment. The Company estimates that approximately 24% of 2004 net
sales were made to customers in this market.
Original Equipment Manufacturers. This market includes supplying
production lines engaged in a broad range of manufacturing and processing
activities with component parts. The Company estimates that approximately 18% of
2004 net sales were made to customers in this market.
Vehicle Maintenance and Transportation. Customers in this market
include automobile service center chains, independent garages, automobile
dealers, car rental agencies and other fleet operators. The Company estimates
that approximately 16% of 2004 net sales were made to customers in this market.
At December 31, 2004, the Company had approximately 295,000 customers,
the largest of which accounted for approximately 1% of net sales during 2004.
Sales were made through a force of approximately 1,800 independent sales
representatives. Independent sales representatives are compensated on a
commission basis and are responsible for repayment of commissions on their
respective uncollectible accounts. Sale force management includes 44 regional
managers who coordinate regional marketing efforts. The Company had
approximately 1,390 employees at December 31, 2004.
The Company's products are sold in all 50 states, the District of
Columbia, Mexico, Puerto Rico, Canada and the United Kingdom. The Company
believes that an important factor in its success is its ability to service
customers promptly. During the past five years, more than 99.2% of all orders
for stocked inventory were shipped to the customer within 24 hours after an
order was received by the Company. This rapid delivery is facilitated by
computer controlled order entry and inventory control systems in each general
distribution center. Sales Representatives in the field are equipped with
technology to automatically transmit customer orders. Customer orders are
delivered by common carriers.
INVENTORY
The Company is required to carry significant amounts of inventory in
order to meet its high standards of rapid processing of customer orders. The
Company has historically funded its working capital requirements internally.
Such internally generated funds, along with a $50 million unsecured revolving
line of credit, are expected to finance the Company's future growth and working
capital requirements.
DISTRIBUTION AND MANUFACTURING FACILITIES
The Company's MRO products are primarily stocked in and distributed
from ten general distribution centers located in: Addison, Illinois; Reno,
Nevada; Farmers Branch, Texas; Suwanee, Georgia; Fairfield, New Jersey;
Mississauga, Ontario, Canada; Bradley Stoke (Bristol) England and Guadalajara,
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Mexico; Vernon Hills, Illinois and Charlotte, North Carolina. OEM products are
primarily stocked in and distributed primarily from five centers located in Des
Plaines, Illinois; Memphis, Tennessee; Lenexa, Kansas; Portage, Wisconsin and
Cincinnati, Ohio. Certain OEM products are manufactured at the Company's plant
in Decatur, Alabama. In the opinion of the Company, all existing facilities are
in good condition and are well maintained. All are being used substantially to
capacity on a single shift basis, except the manufacturing facility in Decatur,
Alabama which operates two shifts and the inbound facility in Des Plaines,
Illinois, which operates two shifts. Further expansion of warehousing capacity
may require new or expanded warehouses, some of which may be located in new
geographical areas.
INTERNATIONAL OPERATIONS
Approximately 9% of the Company's net sales came from international
sales, primarily in Canada, the United Kingdom and Mexico.
Canadian operations are conducted at the Company's 85,000 square foot
general distribution center in Mississauga, Ontario, a suburb of Toronto. These
operations constituted approximately 5% of the Company's net sales during 2004.
Operations in the United Kingdom are conducted under the name of
Assembly Component Systems Limited from a 10,000 square foot general
distribution center in Bradley Stoke (Bristol) England. These operations
constituted approximately 2% of the Company's net sales during 2004.
Operations in Mexico are conducted under the name of Lawson Products de
Mexico, S de R.L. de C.V. from a 10,000 square foot facility in Guadalajara,
Mexico. These operations constituted approximately 2% of the Company's net sales
during 2004.
COMPETITION
The Company encounters intense competition from several national
distributors and manufacturers and a large number of regional and local
distributors. Due to the nature of its business and the absence of reliable
trade statistics, the Company cannot estimate its position in relation to its
competitors. However, the Company recognizes that some competitors may have
greater financial and personnel resources, handle more extensive lines of
merchandise, operate larger facilities and price some merchandise more
competitively than the Company. Although the Company believes that the prices of
its products are competitive, it endeavors to meet competition primarily through
the quality of its product line, its response time and its delivery systems.
-4-
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers all of whose terms of office expire on May 10,
2005, are as follows:
YEAR FIRST
NAME AND PRESENT ELECTED TO OTHER OFFICES HELD
POSITION WITH COMPANY AGE PRESENT OFFICE DURING THE PAST FIVE YEARS
- --------------------- --- -------------- --------------------------
Robert J. Washlow 60 1999 Mr. Washlow has been Chairman of the Board and Chief
Chairman of the Board, Executive Officer since August 1999. Prior thereto,
Chief Executive Officer Mr. Washlow was Executive Vice President-Corporate
and Director Affairs beginning in 1998 and served as Secretary
beginning in 1985. Mr. Washlow was a member of the
Office of the President from 1999 to 2003.
Sidney L. Port 94 2003 Mr. Port has been Vice Chairman of the Board since
Vice Chairman of the Board of 2003. Prior thereto, Mr. Port was Chairman of the
Directors and Director Executive Committee of the Board of Directors for
more than five years.
Jeffrey B. Belford 58 2004 Mr. Belford became Chief Operating Officer in 1999
President and Chief Operating Officer and President in 2004. Mr. Belford was a member of
the Office of the President from 1999 to 2003.
Prior to 1999, Mr. Belford was Executive Vice
President - Operations.
Roger F. Cannon 56 2004 Mr. Cannon was elected Vice President, Field Sales
Executive Vice President, Field Sales Strategy and Development in 2004. He was a member
Strategy and Development of the Office of the President from 1999 to 2003.
Prior to 1999, Mr. Cannon was Executive Vice President,
Sales - Marketing from 1997-1999, and Vice President
Central Field Sales from 1991-1997.
Thomas J. Neri 53 2004 Mr. Neri was elected Executive Vice President,
Executive Vice President, Finance, Finance, Planning and Corporate Development; Chief
Planning and Corporate Development; Financial Officer and Treasurer in 2004. Prior
Chief Financial Officer and Treasurer thereto, Mr. Neri was a business consultant from
2000 to 2003. From 1993 to 2000, Mr. Neri was
President and Publisher of Pioneer Newspapers, Inc.,
a subsidiary of Hollinger International, a publicly
held international publishing company.
Neil E. Jenkins 55 2004 Mr. Jenkins was elected Executive Vice President in
Executive Vice President; Secretary 2004. From 2000 to 2003 Mr. Jenkins served as
and General Counsel Secretary and General Counsel of the Company.
Jerome Shaffer 77 2004 Mr. Shaffer was elected Vice President and Special
Vice President and Special Advisor to Advisor to the Chief Executive Officer in 2004. For
the Chief Executive Officer and more than five years prior thereto, Mr. Shaffer was
Director Vice President and Treasurer of the Company. Mr.
Shaffer has been a director of the Company since 1987.
-5-
Joseph L. Pawlick 62 2003 Mr. Pawlick was elected Senior Vice President,
Senior Vice President, Accounting Accounting in 2003. From 1999 to 2003, Mr. Pawlick
was the Chief Financial Officer of the Company.
Prior to 1999, Mr. Pawlick was Vice President,
Controller and Assistant Secretary of the Company
since 1987.
AVAILABLE INFORMATION
The Company's internet address is: www.lawsonproducts.com. The Company makes
available free of charge through its website its annual report on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to
those reports filed or furnished pursuant to Section 13(a) or 15(d) of the
Exchange Act and Section 16 reports as soon as reasonably practicable after such
documents are electronically filed with the Securities and Exchange Commission.
Our internet website and the information contained therein or incorporated
therein are not intended to be incorporated into this Annual Report on Form
10-K.
ITEM 2. PROPERTIES.
The Company owns two facilities located in Des Plaines, Illinois,
(152,600 and 27,000 square feet, respectively). These buildings contain the
Company's main administrative activities and an inbound warehouse facility that
principally supports the Addison, Illinois facility and all Lawson distribution
facilities for the MRO businesses. The Company also leases a facility in Des
Plaines, Illinois (114,000 square feet). This building contains administrative
and warehouse activities. Additional administrative, warehouse and distribution
facilities owned by the Company are located in Addison, Illinois (90,000 square
feet); Fairfield, New Jersey (61,000 square feet); Reno, Nevada (97,000 square
feet); Suwanee, Georgia (105,000 square feet); Farmers Branch, Texas (54,500
square feet); and Mississauga, Ontario, Canada (85,000 square feet). The Company
also leases administrative office space (25,300 square feet) in Independence,
Ohio. Chemical products are distributed from an owned facility in Vernon Hills,
Illinois (105,400 square feet) and welding products are distributed from an
owned facility located in Charlotte, North Carolina (40,000 square feet).
Administrative, warehouse and distribution facilities in Bradley Stoke (Bristol)
England (10,000 square feet) are leased by the Company. Administrative and
distribution facilities in Guadalajara, Mexico (10,000 square feet) are leased
by the Company. Production components are distributed from leased facilities in
Des Plaines, Illinois (21,400 square feet) Memphis, Tennessee, (26,300 square
feet), Lenexa, Kansas (40,500 square feet), Portage, Wisconsin (18,000 square
feet) and Cincinnati, Ohio (7,000 square feet). The Company owns a facility in
Decatur, Alabama (61,000 square feet) from which it manufacturers and
distributes production components. From time to time, the Company leases
additional warehouse space near its present facilities. Management believes that
the current facilities are adequate to meet its needs. See Item 1, "Business -
Distribution and Manufacturing Facilities" for further information regarding the
Company's properties.
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.
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.
-6-
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES.
The Company's Common Stock is traded on the NASDAQ National Market
System under the symbol of "LAWS." The approximate number of stockholders of
record at December 31, 2004 was 746. The following table sets forth the high and
low closing sale prices as reported on the NASDAQ National Market System during
the last two years for the periods presented. The table also indicates the cash
dividends for each outstanding share of common stock paid by the Company during
such periods.
2004 2003
----------------------------------- ------------------------------------
CASH DIVIDENDS CASH DIVIDENDS
HIGH LOW PAID PER SHARE HIGH LOW PAID PER SHARE
---- --- -------------- ---- --- --------------
First Quarter $34.49 $28.61 $.18 $30.81 $23.04 $ .16
Second Quarter 38.15 32.67 .18 28.48 24.40 .16
Third Quarter 41.63 35.85 .18 29.87 25.76 .16
Fourth Quarter 51.25 41.46 .18 34.74 27.47 .16
The following table provides information about purchases that the
Company made during the quarter ended December 31, 2004 of equity securities
that are registered by the Company pursuant to Section 12 of the Exchange Act.
MAXIMUM NUMBER (OR
TOTAL NUMBER OF SHARES APPROXIMATE DOLLAR VALUE)
TOTAL NUMBER OF PURCHASED AS PART OF OF SHARES THAT MAY YET BE
SHARES AVERAGE PRICE PUBLICLY ANNOUNCED PURCHASED UNDER THE PLANS
PERIOD PURCHASED PAID PER SHARE PLANS OR PROGRAMS OR PROGRAMS
---------------- ----------------- ------------------------ ----------------------------
October 1, 2004
through October
31, 2004......... 15,768 $41.70 15,768 590,790
November 1,
2004 through
November 30, 2004 13,940 $46.28 13,940 576,850
December 1, 2004
through December
31, 2004......... 39,687 $50.24 39,687 537,163
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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 is for, and as of the end of each of, the years in the five-year
period ended December 31, 2004, are derived from the audited Financial
Statements of the Company.
(dollars in thousands, except per share data)
PERCENT
2004 CHANGE 2003 2002 2001 2000
----------- -------- ----------- ----------- ----------- -----------
Net Sales(1) $419,652 7.9% $389,091 $387,456 $379,407 $348,967
Income Before Income Taxes(2) 33,438 34.3% 24,892 23,189 17,142 47,566
Net Income(3) 21,425 32.3% 16,196 12,447 8,787 28,136
Per Share of Common Stock:
Basic Net Income $2.28 33.3% $1.71 $1.30 $0.91 $2.85
Diluted Net Income 2.27 33.5% 1.70 1.30 0.91 2.85
Total Assets 260,550 5.5% 246,943 225,831 234,206 222,721
Noncurrent Liabilities 37,271 1.5% 36,714 31,765 40,520 28,946
Stockholders' Equity 180,332 4.0% 173,351 162,343 159,898 159,912
Return on Average Equity (percent) 12.0 25.0% 9.6 7.7 5.4 18.6
Return on Assets (percent) 8.2 25.4% 6.6 5.5 3.8 12.6
Stockholders' Equity per share(4) 19.16 4.9% 18.26 16.96 16.51 16.22
Cash Dividends Declared 0.72 9.1% 0.66 0.64 0.64 0.60
Basic Weighted Average Shares
0utstanding 9,410 (0.9)% 9,492 9,570 9,685 9,860
Diluted Weighted Average Shares
Outstanding 9,430 (0.9)% 9,511 9,596 9,708 9,874
- ---------------
1 Net sales for 2004, 2003, 2002 and 2001 were also positively impacted by the
acquisition of the North American Industrial Products and Kent Automotive
Divisions of Premier Farnell PLC in March 2001.
2 During 2003 the Company recorded a $2,789 pretax loss related to the sale of
Lawson Products Limited, the Company's former UK subsidiary. In 2001, income
before taxes included charges of $11,881 related to the write-off of
capitalized software and implementation costs related to an enterprise
information system project which the Company decided to discontinue as well
as a promotional program related to the acquisition of Premier Operations.
During 2000, the Company recorded a gain of $3,502 as a result of the sale of
the Company's interest in a real estate investment.
3 In 2003, the income tax expense included a $2,157 reduction to reflect the
partial utilization of a capital loss generated by the sale of the Company's
former UK subsidiary. In 2003 and 2002, the Company recorded $1,477 and $421
respectively, after tax, of charges for compensation arrangements related to
management personnel reductions. The Company adopted SFAS No. 142 as of
January 1, 2002. Therefore, the Company discontinued amortization of goodwill
for 2002 and thereafter. Net income for 2001 was reduced by $731 related to
goodwill amortization. In 2001, the Company recorded charges for the
write-off of capitalized software and implementation costs related to an
enterprise information system project which the Company decided to
discontinue as well as a promotional program related to the acquisition of
Premier operations. Together, these charges reduced net income by $7,159.
During 2000, the Company recorded a gain of $2,136 as a result of the sale of
the Company's interest in a real estate investment.
4 These per share amounts were computed using basic weighted average shares
outstanding for all periods presented.
-8-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.
SUMMARY OF FINANCIAL PERFORMANCE
2004 % OF SALES 2003 % OF SALES 2002 % OF SALES
- ------------------------------- -------------- ------------- -------------- ------------- -------------- -------------
(Dollars in thousands, except per share data)
Net sales $419,652 100.0% $389,091 100.0% $387,456 100.0%
Cost of goods sold 155,971 37.2 141,124 36.3 137,129 35.4
-------- ----- -------- ----- -------- -----
Gross Profit 263,681 62.8 247,967 63.7 250,327 64.6
Operating expenses 232,870 55.5 225,226 57.9 228,516 59.0
-------- ----- -------- ----- -------- -----
Operating income 30,811 7.3 22,741 5.8 21,811 5.6
Other 2,627 0.6 2,151 0.6 1,378 0.4
-------- ----- -------- ----- -------- -----
Income before taxes 33,438 8.0 24,892 6.4 23,189 6.0
Income tax expense 12,013 2.9 8,696 2.2 10,742 2.8
-------- ----- -------- ----- -------- -----
Net Income $21,425 5.1% $16,196 4.2% $12,447 3.2%
======== ===== ======== ===== ======== =====
Diluted earnings per share $2.27 $1.70 $1.30
Total assets 260,550 246,943 225,831
Return on assets 8.2% 6.6% 5.5%
Stockholders' equity (%) 180,332 173,351 162,343
Return on avg. equity (%) 12.0% 9.6% 7.7%
Lawson achieved solid financial results in 2004, including record sales of
approximately $420 million. The Company effectively managed costs, resulting in
strong operating income leverage and earnings growth. For 2004, net income per
share increased by 33.5% to $2.27 per share from $1.70 per share in 2003.
Management's discussion and analysis of operating results below focuses on the
MRO and OEM businesses. These businesses represent the domestic and
international segments of the respective businesses. For additional information
on the Company's segment reporting, refer to Note O--Segment Reporting in the
Notes to Consolidated Financial Statements.
YEAR ENDED DECEMBER 31, 2004 COMPARED TO YEAR ENDED DECEMBER 31, 2003
Revenues and Gross Profit
- -------------------------
Net sales increased by $30.6 million to $419.7 million in 2004 compared to
$389.1 million in 2003, a 7.9% increase.
The following table presents the Company's net sales results for its MRO and OEM
businesses for the past two years:
2004 2003
---- ----
MRO $337.9 $321.0
OEM 81.8 68.1
------------ -------------
$419.7 $389.1
============ =============
MRO sales grew by $16.9 million or 5.3% in 2004. Increases in average unit
selling prices were the primary driver of MRO sales growth in 2004. Changes in
product sales mix and the effects of selling price increases contributed to the
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increase in average unit selling prices in 2004. MRO sales increase was also due
to enhanced account penetration, growth in government programs, and an improved
business climate.
OEM sales grew by $13.7 million or 20.1% in 2004 compared to 2003, driven by
domestic and international growth. The OEM business added new customers and
increased sales to existing customers in 2004.
Gross profit increased by $15.7 million or 6.3%, to $263.7 million in 2004
compared to $248.0 million in 2003. As a percent of sales, gross profit
decreased to 62.8% in 2004 from 63.7% in 2003. The decline in overall gross
profit margins is primarily related to the rapid sales growth in the OEM lower
margin segment. As discussed above, OEM segment sales increased at a 20.1% rate
in 2004 compared to 5.3% in the MRO segment, having the effect of reducing
consolidated gross profit margins compared to 2003.
MRO segment gross profit margins increased from 71.3% in 2003 to 71.8 % in 2004.
As a result of price increases implemented in 2004, average selling prices
increased and drove gross profit margins higher.
Operating Expenses and Operating Income
- ---------------------------------------
Operating expenses increased by 3.4% or $7.6 million to $232.9 million in 2004
compared to $225.2 million in 2003. The increase in operating expenses is
primarily the result of higher compensation costs, including a $2.6 million
charge for Stock Appreciation Rights, reflecting the accounting for the impact
of the 51.8% increase in Lawson's stock price from $33.07 at December 31, 2003
to $50.19 at December 31, 2004. Other compensation costs increased, including
sales commissions, as a result of higher MRO sales in 2004.
As a percentage of sales, operating expenses decreased from 57.9% in 2003 to
55.5% in 2004, primarily as the result of productivity improvements and the
Company's ability to leverage its operating cost infrastructure over a larger
revenue base.
Operating income increased by 35.5% in 2004 to $30.8 million. This increase is
the result of net sales increases and improved operating expense leverage,
offset somewhat by lower consolidated gross profit margins.
Other Income and Expense
- ------------------------
Other income consists primarily of rental income from the Company's investment
in a real estate partnership, as well as other miscellaneous income and
expenses. For 2004, other income increased by $0.5 million as a result of life
insurance death benefits paid to the Company.
Provision for Income Taxes
- --------------------------
The effective tax rates for 2004 and 2003 were 35.9% and 34.9%, respectively. In
2004, the effective tax rate included the impact of $1.9 million of tax free
proceeds from executive life insurance. In 2003, the effective tax rate included
the effect of a $2.2 million tax provision reduction to reflect the partial
utilization of a capital loss carryback generated by the 2003 sale of the
Company's MRO business in the United Kingdom.
Net Income
- ----------
Net income increased by $5.2 million or 32.3% to $21.4 million in 2004 from
$16.2 million in 2003. The factors that affected net income comparisons have
been discussed above. Per share net income comparisons were positively impacted
by the Company's share repurchase program.
YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002
Revenues and Gross Profit
- -------------------------
The following table presents the Company's net sales results for its MRO and OEM
businesses for 2003 and 2002:
-10-
2003 2002
---- ----
MRO $321.0 $323.4
OEM 68.1 64.1
------------- ------------
$389.1 $387.5
Net sales increased by $ 1.6 million, or 0.4 % in 2003 compared to 2002. The
table above illustrates that OEM sales increased $ 4.0 million (6.2%) in 2003
while MRO sales declined $ 2.4 million (0.7 %). In the OEM segment, the Company
increased key account penetration and expanded its international business.
Overall, international sales growth in the OEM segment offset a slight decline
in U.S. OEM sales in 2003. The MRO segment continued to face difficult market
conditions in 2003, particularly in the United States. MRO sales gains in Canada
for 2003 were offset by sales declines in domestic MRO business in 2003.
Gross profit decreased by $2.3 million, or 0.9%, to $248.0 million during 2003
from $250.3 million in 2002. This decrease resulted partially from product mix,
as the Company sold a lower percentage of MRO products as a percentage of total
sales in 2003 as compared to 2002. In 2003, MRO gross profit was 71.3% of sales,
compared to 72.4% in 2003. OEM gross profit margins increased in 2003 to 28.8%
of sales, compared to 25.3% in 2002.
Operating Expenses and Operating Income
- ---------------------------------------
Operating expenses decreased by $3.3 million, or 1.4%, to $225.2 million (57.9%
of sales) in 2003 from $228.5 million (59.0% of sales) in 2002. The decline in
operating expenses was attributable to the Company's continuing efforts to
contain and reduce costs. Lower sales agent compensation and benefit costs more
than offset increases in other expenses, principally wages and a loss of
approximately $2.8 million in connection with the sale of the MRO operations of
the Company's former UK subsidiary. The decrease in sales agent compensation and
benefits resulted principally from the expiration of a special promotional
program ending in the second quarter of 2002.
Operating income increased by $0.9 million, or 4.3%, to $22.7 million in 2003
from $21.8 million in 2002. The increase resulted primarily from lower operating
expenses noted above, partially offset by lower gross profit and higher other
charges.
Other Income and Expense
- ------------------------
Other income consists primarily of rental income. For 2003, other income
increased by $0.8 million primarily due to the consolidation of the Company's
investment in a real estate partnership beginning in July of 2003.
Provision for Income Taxes
- --------------------------
The effective income tax rates were approximately 34.9% and 46.3%, respectively,
for 2003 and 2002. The decrease in the effective tax rate was primarily
attributable to a $2.2 million reduction of the income tax provision to reflect
the partial utilization of a capital loss carryback generated by the 2003 sale
of Lawson Products Limited, the Company's former subsidiary in the United
Kingdom.
Net Income
- ----------
Net income increased by $3.7 million, or 30.1%, to $16.2 million during 2003
from $12.5 million in 2002, while income per share increased 31.0% to $1.70 in
2003 from $1.30 in 2002. The principal factors affecting net income and earnings
per share were lower income taxes and higher operating income, as discussed
above. Per share net income for 2003 and 2002 was positively impacted by the
Company's share repurchase program.
LIQUIDITY AND CAPITAL RESOURCES
-11-
Cash flows from operations and an unused $50 million unsecured line of credit
(entered into in February 2001) have been sufficient to fund operating
requirements, cash dividends and capital improvements. Cash flows from
operations and the line of credit are also expected to finance the Company's
future growth.
Cash flows provided by operations for 2004, 2003 and 2002 were $25.8 million,
$27.9 million and $29.7 million, respectively. The decline in 2004 was
principally attributable to increasing operating assets, primarily accounts
receivable and inventory, more than offsetting the $ 5.2 million increase in net
income. The decline in 2003 from 2002 was due primarily to increasing operating
assets, primarily accounts receivable and cash value of life insurance more than
offsetting the $3.7 million increase in net income. Working capital at December
31, 2004 and 2003 was approximately $ 115.0 million and $ 107.9 million,
respectively. At December 31, 2004 the current ratio was 3.7 to 1 as compared to
3.9 to 1 at December 31, 2003.
Over the past three years, the Company has made the following purchases of its
common stock:
Year Purchased Shares Purchased Cost (In millions) Year Authorized by Board
- ---------------- ------------------- ------------------ ------------------------
2004 249,236 $9.6 2000
2003 20,186 0.6 2000
2002 196,250 5.6 1999/2000
In October 2004, the Company's Board of Director's authorized the purchase of up
to 500,000 shares of the Company's common stock in addition to that previously
authorized. There is no expiration relative to this authorization. At December
31, 2004, 500,000 shares were available for purchase pursuant to the 2004
authorization and 37,163 shares were available for purchase pursuant to the 2000
Board authorization. Funds to purchase these shares were provided by investments
and cash flows from operations.
Additions to property, plant and equipment were $ 3.8 million, $5.7 million and
$6.7 million, respectively, for 2004, 2003 and 2002. Capital expenditures were
principally related to improvement of existing facilities and the purchase of
related equipment as well as the development of software. For 2004, the Company
incurred lower facility expansion expenditures as compared to prior years.
Future contractual obligations consisted of the following at December 31, 2004:
(In thousands) 2010 and
2005 2006 2007 2008 2009 thereafter Total
- --------------------------------------- --------- --------- --------- --------- -------- ----------- ----------
Rents $3,502 $2,936 $2,488 $1,685 $1,482 $2,256 $14,349
Mortgage payable 1,573 - - - - - 1,573
Deferred compensation 733 614 349 326 155 13,007 15,184
Security bonus plan (1) - - - - - 21,528 21,528
- --------------------------------------- --------- --------- --------- --------- -------- ----------- ----------
Total contractual cash $5,808 $3,550 $2,837 $2,011 $1,637 $36,791 $52,634
obligations
- --------------------------------------- --------- --------- --------- --------- -------- ----------- ----------
(1) Payments to beneficiaries of the security bonus plan are made on a lump sum basis at time of retirement.
No such obligations exist at December 31, 2004.
BUSINESS DISPOSALS
Sale of MRO Operations in United Kingdom: During the fourth quarter of 2003, the
Company completed the sale of its United Kingdom MRO subsidiary. As stated
above, in connection with the sale of this operation, the Company incurred a
loss of $2.8 million, including inventory write-offs of $1.8 million. The
Company's OEM customers in the United Kingdom will be serviced through a newly
formed entity, Assembly Component Systems Limited.
CRITICAL ACCOUNTING POLICIES
The Company has disclosed its 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.
-12-
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 customer's 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 Company's 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 customer's ability to meet its financial
obligations), the estimates of the recoverability of amounts due the Company
could be revised by a material amount.
Inventories - Slow Moving and Obsolescence: The Company carries significant
amounts of inventories, which is a part of the Company's strategy as a
competitive advantage in its ability to fulfill the vast majority of our
customers' orders the same day received. However, this strategy also increases
the chances that portions of the inventory have decreased in value below their
carrying cost. To reduce inventory to a lower of cost or market value, the
Company records a reserve for slow-moving and obsolete inventory. The Company
defines obsolete as those inventory parts on hand which the Company plans to
discontinue to offer to its customers. Slow-moving inventory is monitored by
examining reports of parts which have not been sold for extended periods. The
Company records the reserve needed based on its historical experience of how
much the selling prices must be reduced to move these obsolete and slow-moving
products. If experience or market conditions change, estimates of the reserves
needed could be revised by a material amount.
Impact of Inflation and Changing Prices: The Company has historically been able
to pass on to its customers most increases in product costs. Accordingly, gross
margins have not been materially impacted. The impact from inflation has
historically been more significant on the Company's fixed and semi-variable
operating expenses, primarily wages and benefits, although to a lesser degree in
recent years due to moderate inflation levels.
Although the Company expects that future costs of replacing warehouse and
distribution facilities will rise due to inflation, such higher costs are not
anticipated to have a material effect on future earnings.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company, through its foreign subsidiaries, distributes products in
Canada, the United Kingdom and Mexico. As a result, the Company is from time to
time exposed to market risk relating to the impact of foreign currency exchange
rates. A hypothetical 10% adverse movement in exchange rates would increase
income by $38,000 in 2004 to offset the loss by the foreign subsidiaries.
The Company had no loans outstanding as of December 31, 2004 under its
revolving line of credit.
-13-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The following information is presented in this report:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2004 and 2003.
Consolidated Statements of Income for the Years ended December
31, 2004, 2003 and 2002.
Consolidated Statements of Changes in Stockholders' Equity for
the Years ended December 31, 2004, 2003 and 2002.
Consolidated Statements of Cash Flows for the Years ended
December 31, 2004, 2003 and 2002.
Notes to Consolidated Financial Statements.
Schedule II
-14-
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors
Lawson Products, Inc.
We have audited the accompanying consolidated balance sheets of Lawson Products,
Inc. and subsidiaries as of December 31, 2004 and 2003, and the related
consolidated statements of income, changes in stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 2004. 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 Company's 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 auditing standards generally accepted
in the 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. and subsidiaries at December 31, 2004 and 2003, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2004, 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.
As discussed in Note B to the financial statements, in 2003 the Company changed
its method of accounting for its investment in a real estate partnership.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of Lawson
Products, Inc. and subsidiaries internal control over financial reporting as of
December 31, 2004, 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 10, 2005 expressed an unqualified opinion
thereon.
/s/Ernst & Young LLP
Chicago, Illinois
March 10, 2005
-15-
LAWSON PRODUCTS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands) DECEMBER 31,
---------------------------------------------
2004 2003
------------------ ------------------
Assets
Current assets:
Cash and cash equivalents $ 28,872 $ 23,555
Accounts receivable, less allowance for doubtful
accounts
(2004 -$1,986, 2003 - $2,121) 52,129 47,972
Inventories 65,687 59,817
Miscellaneous receivables 2,081 4,773
Prepaid expenses 7,479 6,666
Deferred income taxes 1,729 1,975
------------------------ --------------------
Total Current Assets 157,977 144,758
------------------------ --------------------
Property, plant and equipment, at cost, less allowances for
depreciation and amortization (2004 - $58,837; 2003 - $58,692) 42,452 44,905
------------------------ --------------------
Other assets:
Cash value of life insurance 15,089 13,201
Deferred income taxes 14,779 13,201
Goodwill, less accumulated amortization 28,649 28,649
Other intangible assets, less accumulated amortization
(2004 - $1,335; 2003 - $1,219) 1,365 1,481
Other 239 748
------------------------ --------------------
60,121 57,280
------------------------ --------------------
$ 260,550 $ 246,943
======================== ====================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 8,746 $ 8,240
Accrued expenses and other 32,628 27,176
Current portion of long term debt 1,573 1,462
------------------------ --------------------
Total Current Liabilities 42,947 36,878
------------------------ --------------------
Noncurrent liabilities and deferred credits:
Accrued liability under security bonus plans 21,528 20,823
Long term debt -- 1,573
Deferred compensation and other liabilities 15,743 14,318
------------------------ --------------------
37,271 36,714
------------------------ --------------------
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 - 2004- 9,280,935 shares; 2003 - 9,493,511 9,281 9,494
shares
Capital in excess of par value 3,467 2,667
Retained earnings 167,187 161,831
------------------------ --------------------
179,935 173,992
Accumulated other comprehensive income (loss) 397 (641)
------------------------ --------------------
Stockholders' equity 180,332 173,351
------------------------ --------------------
$ 260,550 $ 246,943
======================== ====================
See notes to consolidated financial statements
-16-
LAWSON PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
2004 2003 2002
---------------- --------------- --------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Net sales $ 419,652 $389,091 $387,456
Cost of goods sold 155,971 141,124 137,129
-------------------------------------------------------
Gross profit 263,681 247,967 250,327
Selling, general and administrative expenses 231,762 221,189 226,571
Other charges -- 2,459 360
Provision for doubtful accounts 1,108 1,578 1,585
-------------------------------------------------------
Operating Income 30,811 22,741 21,811
-------------------------------------------------------
Interest and dividend income 122 194 53
Interest expense (184) (131) (154)
Other income - net 2,689 2,088 1,479
-------------------------------------------------------
2,627 2,151 1,378
-------------------------------------------------------
Income Before Income Taxes 33,438 24,892 23,189
Income tax expense 12,013 8,696 10,742
-------------------------------------------------------
Net Income $ 21,425 $ 16,196 $ 12,447
=======================================================
Net Income Per Share of Common Stock:
Basic $ 2.28 $ 1.71 $ 1.30
=======================================================
Diluted $ 2.27 $ 1.70 $ 1.30
=======================================================
See notes to consolidated financial statements
-17-
LAWSON PRODUCTS, INC.
CHANGES IN STOCKHOLDERS' EQUITY
CONSOLIDATED STATEMENTS
ACCUMULATED
COMMON CAPITAL OTHER
(DOLLARS IN THOUSANDS) STOCK, IN EXCESS OF RETAINED COMPREHENSIVE COMPREHENSIVE
$1 PAR VALUE PAR VALUE EARNINGS INCOME (LOSS) INCOME
------------ ------------- ---------------- ------------------ ----------
Balance at January 1, 2002 $9,629 $913 $151,554 $(2,198) $ --
Net income 12,447 12,447
Other comprehensive loss, net of tax:
Adjustment for foreign currency translation 165 165
-------------
Comprehensive income for the year $ 12,612
=============
Cash dividends declared (6,115)
Stock issued under employee stock plans 61 1,510
Purchase and retirement of common stock (196) (36) (5,391)
- ------------------------------------------ ------------------- -------------- ----------------- ------------------ ----------------
Balance at December 31, 2002 9,494 2,387 152,495 (2,033)
- ------------------------------------------ ------------------- -------------- ----------------- ------------------ ----------------
Net income 16,196 $ 16,196
Other comprehensive income, net of tax:
Adjustment for foreign currency 1,392 1,392
-------------
translation
Comprehensive income for the year $ 17,588
=============
Cash dividends declared (6,265)
Stock issued under employee stock plans 20 285
Purchase and retirement of common stock (20) (5) (595)
- ------------------------------------------ ------------------- -------------- ----------------- ------------------ ----------------
Balance at December 31, 2003 9,494 2,667 161,831 (641)
- ------------------------------------------ ------------------- -------------- ----------------- ------------------ ----------------
Net income 21,425 $ 21,425
Other comprehensive income, net of tax:
Adjustment for foreign currency 1,038 1,038
-------------
translation
Comprehensive income for the year $ 22,463
=================
Cash dividends declared (6,751)
Stock issued under employee stock plans 36 884
Purchase and retirement of common stock (249) (84) (9,318)
- ------------------------------------------ ------------------- -------------- ----------------- ------------------ ----------------
Balance at December 31, 2004 $9,281 $3,467 $167,187 $397
- ------------------------------------------ ------------------- -------------- ----------------- ------------------ ----------------
See notes to consolidated financial statement
-18-
LAWSON PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands) YEAR ENDED DECEMBER 31,
---------------------------------------------------------
2004 2003 2002
---------------- --------------- -----------------
Operating activities
Net income $ 21,425 $ 16,196 $ 12,447
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 5,299 5,359 5,506
Amortization 1,393 1,744 1,321
Provision for allowance for doubtful accounts 1,108 1,578 1,585
Deferred income taxes (1,775) (476) (2,177)
Deferred compensation and security bonus plans 5,060 5,466 2,704
Payments under deferred compensation
and security bonus plans (2,832) (2,099) (1,635)
Income from investments in real estate --- (360) (600)
Changes in operating assets and liabilities:
Accounts receivable (5,265) (5,888) 1,165
Inventories (5,870) 4,902 1,692
Prepaid expenses and other assets (89) (2,678) 5,557
Accounts payable and accrued expenses 5,998 3,176 1,958
Other 1,383 991 129
-----------------------------------------------------
Net Cash Provided by Operating Activities 25,835 27,911 29,652
-----------------------------------------------------
Investing activities
Additions to property, plant and equipment (3,784) (5,734) (6,655)
Other 250 286 756
-----------------------------------------------------
Net Cash Used in Investing Activities ( 3,534) (5,448) (5,899)
-----------------------------------------------------
Financing Activities
Proceeds from revolving line of credit --- 4,000 36,500
Payments on revolving line of credit --- (4,000) (50,500)
Payments on mortgage payable (1,462) (805) ---
Purchases of common stock (9,651) (620) (5,623)
Proceeds from exercise of stock options 920 305 1,571
Dividends paid (6,791) (6,075) (6,138)
-----------------------------------------------------
Net Cash Used in Financing Activities (16,984) (7,195) (24,190)
-----------------------------------------------------
Increase (Decrease) in Cash and Cash Equivalents 5,317 15,268 (437)
Cash and Cash Equivalents at Beginning of Year 23,555 8,287 8,724
-----------------------------------------------------
Cash and Cash Equivalents at End of Year $ 28,872 $23,555 $ 8,287
=====================================================
See notes to consolidated financial statements
-19-
LAWSON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS)
NOTE A - DESCRIPTION OF BUSINESS
Lawson Products, Inc. is an international seller and distributor of
systems, services and products to the industrial, commercial and institutional
maintenance, repair and replacement marketplace. The Company also manufactures,
sells and distributes production and specialized component parts to the original
equipment marketplace ("OEM").
NOTE B - SUMMARY OF MAJOR ACCOUNTING POLICIES
Principles of Consolidation: The accompanying consolidated financial
statements include the accounts and transactions of the Company and its wholly
owned and majority owned subsidiaries. All intercompany accounts and
transactions have been eliminated in consolidation.
Revenue Recognition: Sales and associated cost of goods sold are
recognized when products are shipped and title passes to customers.
Shipping and Handling Fees and Costs: Costs related to shipping and
handling fees are included on the Income Statement in the caption Selling,
general and administrative expenses and totaled $11,565, $11,159 and $11,898 in
2004, 2003 and 2002, respectively.
Use of Estimates: The 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.
Investment in Real Estate Partnership: The Company's investment in real
estate, representing a limited partnership interest, was carried on the basis of
the equity method until June 30, 2003. 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. An
officer and member of the Board of Directors of the Company is the 1.5% general
partner. (See Note I) The operations of the partnership consist of rental of the
building under a long-term lease and the servicing of the non-recourse mortgage.
The activities are insignificant for separate disclosure.
Inventories: Inventories which consist of principally finished goods
are stated at the lower of cost (first-in, first-out method) or market. (See
Note E)
Property, Plant and Equipment: Provisions for depreciation and
amortization are computed by the straight-line method for buildings using useful
lives of 20 to 30 years and by the double declining balance method for machinery
and equipment, furniture and fixtures and vehicles using useful lives of 3 to 10
years.
Investment Tax Credits: Investment tax credits on assets leased to
others are deferred and amortized over the useful life of the related asset.
Cash Equivalents: The Company considers all highly liquid investments
with a maturity of three months or less when purchased to be cash equivalents.
Stock Options: Stock options are accounted for under Accounting
Principles Board Opinion No. 25 (APB 25), "Accounting For Stock Issued to
Employees." Under APB 25, the Company uses the intrinsic value method where no
compensation expense is recognized because the exercise price of the stock
options granted equals the market price of the underlying stock at the date of
grant.
The following table shows the effect on net income and earnings per
share if the Company had applied the fair value recognition provision of FASB
Statement No. 123, "Accounting for Stock-Based Compensation."
2004 2003 2002
- --------------------------------------------------------------------------------
Net income - as reported $ 21,425 $16,196 $12,447
Deduct: Total stock based
employee compensation
expense determined under
fair value method, net of tax (6) (27) (38)
- --------------------------------------------------------------------------------
Net income - pro forma 21,419 16,169 12,409
Basic earnings per share - as reported 2.28 1.71 1.30
Diluted earnings per share - as reported 2.27 1.70 1.30
-20-
Basic earnings per share - pro forma 2.28 1.70 1.30
Diluted earnings per share - pro forma 2.27 1.70 1.29
For purposes of pro forma disclosures, the estimated fair value of
options granted is amortized as an expense over the option's vesting period. The
pro forma effect on net income is not representative of the pro forma effect on
net income in future years because grants made in 1996 and later years have an
increasing vesting period.
Goodwill and Other Intangibles: Goodwill represents the cost of
business acquisitions in excess of the fair value of identifiable net tangible
assets acquired. (See Note G)
Foreign Currency Translation: The financial statements of foreign
entities have been translated in accordance with Statement of Financial
Accounting Standards No. 52 and, accordingly, unrealized foreign currency
translation adjustments are reflected as a component of stockholders' equity.
Realized foreign currency transaction gains and losses were not significant for
the years ended December 31, 2004, 2003 and 2002.
Income Per Share: Basic EPS is computed by dividing net income by the
weighted average number of common shares outstanding during the period. Diluted
EPS reflects the potential dilution from the exercise or conversion of
securities into common stock, such as stock options.
Reclassifications: Certain amounts have been reclassified in the 2003
and 2002 financial statements to conform with the 2004 presentation.
NOTE C - BUSINESS COMBINATION
Sale of Lawson Products Limited, UK Subsidiary:
In the fourth quarter of 2003, the Company sold its UK subsidiary, Lawson
Products Limited, engaged primarily in the business of MRO sales, to a third
party for approximately $647. The purchase price is in the form of a note
payable to the Company over two years. Prior to the sale, the Company
transferred certain assets and liabilities related to the OEM portion of this
business to a newly formed subsidiary, Assembly Components Systems Limited. The
sale of Lawson Products Limited resulted in a pre-tax loss of approximately
$2,789, largely related to inventory write-offs and termination costs associated
with the sale. This loss is classified in Selling, general and administrative
expenses in the statement of income. This business was part of the Company's OEM
International distribution segment.
The sale also generated approximately $22,441 in capital losses for tax
purposes. The Company was able to carryback $6,163 of the capital loss to offset
capital gains in prior years tax returns. The effect of the carryback resulted
in $2,157 of tax benefit in 2003 for financial statement purposes. A valuation
allowance has been provided for the remainder of the capital loss due to the
uncertainty of utilization.
NOTE D - OTHER CHARGES
In 2003, the Company recorded charges totaling $2,459 for severance
payable to several members of management. Benefits of $1,175 and $422 were paid
in 2004 and 2003 respectively. The remaining benefits will be paid through 2006.
During 2002, the Company recorded a charge of $568 for severance
payable to several members of management and a $208 adjustment to the reserve
resulting from a severance settlement. Benefits of $92 and $155 were paid in
2004 and 2003 respectively. The remaining benefits will be paid in future years.
-21-
The table below shows an analysis of the Company's reserves for other charges:
Severance
Description of Item and Related
Expenses
- -----------------------------------------------
Balance January 1, 2002 $1,458
Charged to earnings 2002 568
Cash paid in 2002 (942)
Non-cash utilization ---
Adjustment to reserves (208)
- -----------------------------------------------
Balance December 31, 2002 876
Charged to earnings 2003 2,459
Cash paid in 2003 (859)
- -----------------------------------------------
Balance December 31, 2003 2,476
Cash paid in 2004 (1,434)
- -----------------------------------------------
Balance December 31, 2004 $1,042
===============================================
NOTE E - INVENTORIES
The following is a summary of inventories and reserve for excess and
obsolete inventory.
2004 2003
- --------------------------------------------------------------------------------
Inventories $ 68,759 $ 64,958
Reserve for excess and obsolete inventory (3,072) (5,141)
- --------------------------------------------------------------------------------
$ 65,687 $ 59,817
================================================================================
NOTE F - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of:
2004 2003
- --------------------------------------------------------------------------------
Land $ 8,472 $ 8,389
Buildings and improvements 51,839 51,556
Machinery and equipment 30,084 30,143
Furniture and fixtures 5,611 5,749
Vehicles 359 432
Capitalized software 4,372 6,771
Construction in progress 552 557
- -------------------------------------------------------------------------------
101,289 103,597
Accumulated Depreciation and amortization (58,837) (58,692)
- -------------------------------------------------------------------------------
$ 42,452 $ 44,905
===============================================================================
-22-
NOTE G- GOODWILL AND OTHER INTANGIBLES
The Company adopted FASB statement No. 142 "Goodwill and Other
Intangibles" as of January 1, 2002. The Company performed its annual impairment
test in the fourth quarter of 2004 and determined the Company's goodwill was not
impaired.
Intangible assets subject to amortization were as follows:
Gross Accumulated Net Carrying
December 31, 2004 Balance Amortization Amount
- --------------------------------------------------------------------------------
Trademarks and tradenames $1,747 $935 $812
Customer lists 953 400 553
- --------------------------------------------------------------------------------
$2,700 $1,335 $1,365
================================================================================
Gross Accumulated Net Carrying
December 31, 2003 Balance Amortization Amount
- --------------------------------------------------------------------------------
Trademarks and tradenames $1,747 $851 $896
Customer lists 953 368 585
- --------------------------------------------------------------------------------
$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, all of which was included in the MRO distribution segment, for the
intangible assets was $116, $518 and $377 in 2004, 2003 and 2002, respectively.
Amortization expense for each of the next five years is estimated to be $83 per
year.
NOTE H - ACCRUED EXPENSES AND OTHER
Accrued expenses and other liabilities consist of the following:
2004 2003
- ---------------------------------------------- --------------- -----------------
Salaries, commissions and other compensation $11,369 $ 6,802
Accrued other charges 1,042 2,476
Accrued and withheld taxes, other than income
taxes 2,644 2,591
Accrued profit sharing contributions 3,626 3,448
Accrued stock performance rights 2,081 654
Accrued self-insured health benefits 1,560 1,800
Cash dividends payable 1,670 1,709
Other 8,636 7,696
- ---------------------------------------------- --------------- -----------------
$32,628 $27,176
============================================== =============== =================
NOTE I - LONG TERM DEBT
On July 1, 2003, the Company adopted FIN No. 46 which has resulted in the
Company's consolidated of an 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 long-term debt, which represents a
non-recourse mortgage payable relative to the building. The interest rate of the
non-recourse mortgage payable is 7.315%, with a maturity date of December 31,
2005. The building and the land have a net carrying value of $4,184, which are
included in property, plant and equipment. The remaining assets, none of which
are significant, are recorded in other assets.
The Company's mortgage obligations in effect at December 31, 2004 and 2003, with
respect to this office building, amounted to approximately $1,573 and $3,035,
respectfully. Mortgage payments are payable as follows: 2005-$1,573. Interest
expense related to the mortgage totaled $171 and $124 in 2004 and 2003,
respectfully.
On February 21, 2001, the Company entered into a $50 million unsecured
multi-currency line of credit. The Company had no loans outstanding under the
line at December 31, 2004 and 2003. Amounts outstanding under the line carry
-23-
interest at 1.5% below the prime rate or .75% over LIBOR. The line matures on
February 21, 2006. The line requires the Company to meet certain covenants, all
of which were met on December 31, 2004. The Company paid interest of $0, $7 and
$220, respectively, in 2004, 2003 and 2002.
NOTE J - STOCK PLANS
The Incentive Stock Plan (Plan), provides for the issuance of shares of Common
Stock to non-employee directors, officers and key employees pursuant to stock
options, stock performance rights (SPRs), stock purchase agreements and stock
awards. As of December 31, 2004, 519,327 shares of Common Stock were available
for issuance under the Plan.
In 2003 and 2002, the Company granted SPRs pursuant to the Plan. These SPRs have
exercise prices ranging from $24.64 to $33.15 per share. 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. Compensation expense for the SPRs in 2004, 2003 and 2002
was $2,620, $410 and $244, respectively.
Additional information with respect to SPRs is summarized as follows:
Average SPR
Exercise Price # of SPR's
- ------------------------------------------- ------------------ -----------------
Outstanding January 1, 2002 (1) $ 26.90 230,350
Granted (2) 30.74 18,000
- ------------------------------------------- ------------------ -----------------
Outstanding December 31, 2002 27.18 248,350
Granted (3) 27.85 31,500
Exercised 26.77 (1,900)
- ------------------------------------------- ------------------ -----------------
Outstanding December 31, 2003 27.26 277,950
Exercised 26.76 (66,450)
Canceled 27.45 (22,500)
- ------------------------------------------- ------------------ -----------------
Outstanding December 31, 2004 $ 27.41 189,000
=========================================== ================== =================
(1) Includes 84,560 SPRs vested at December 31, 2004
(2) Includes 5,200 SPRs vested at December 31, 2004
(3) Includes 1,000 SPRs vested at December 31, 2004
The Plan permits the grant of incentive stock options, subject to
certain limitations, with substantially the same terms as non-qualified stock
options. Non-employee directors are not eligible to receive incentive stock
options. Stock options are not exercisable within six months from date of grant
and may not be granted at prices less than the fair market value of the shares
at the dates of grant. Benefits may be granted under the Plan through December
16, 2006.
Additional information with respect to the Plan is summarized as
follows:
Average Price Option Shares
- ------------------------------------------- ------------------ -----------------
Outstanding January 1, 2002 $22.87 172,990
Granted --- ---
Exercised 22.73 (50,954)
Canceled or expired --- ---
- ------------------------------------------- ------------------ -----------------
Outstanding December 31, 2002 22.93 122,036
Canceled --- ---
Exercised 22.50 (19,686)
Canceled or expired --- ---
- ------------------------------------------- ------------------ -----------------
Outstanding December 31, 2003 23.01 102,350
Granted --- ---
Exercised 23.62 (31,350)
Canceled or expired 22.70 (21,450)
- ------------------------------------------- ------------------ -----------------
Outstanding December 31, 2004 $22.75 49,550
=========================================== ================== =================
Weighted Average
Exercisable options at: Price Option Shares
- ------------------------------------------- ------------------ -----------------
December 31, 2004 $22.75 49,550
December 31, 2003 $22.99 99,600
December 31, 2002 $22.90 114,286
-24-
As of December 31, 2004, the Company had the following outstanding options:
Exercise Price $22.44 - $22.50 $23.56 $26.75
- --------------------------------------- ---------------- ------------ ----------
Options Outstanding 40,550 8,000 1,000
Weighted Average Exercise Price $22.49 $23.56 $26.75
Weighted Average Remaining Life 1.9 5.4 3.3
Options Exercisable 40,550 8,000 1,000
Weighted Average Exercise price $22.49 $23.56 $26.75
Disclosure of pro forma information regarding net income and net income
per share is required by FASB Statement No. 123, "Accounting for Stock-Based
Compensation," and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement. The fair
value of these options was estimated at the date of grant using the
Black-Scholes options pricing model.
No options were granted in 2004, 2003 or 2002. See Note B Stock Options
for impact of options granted prior to 2001 on pro forma earnings per share.
NOTE K - PROFIT SHARING AND SECURITY BONUS PLANS
The Company and certain subsidiaries have a profit sharing plan for
office and warehouse personnel. The amounts of the companies' annual
contributions are determined by the board of directors subject to limitations
based upon operating results.
The plan also has a 401(k) defined contribution saving feature. This
feature, available to all participants, was provided to give employees a pre-tax
investment vehicle to save for retirement. The Company does not match the
contributions made by plan participants.
The Company and its subsidiaries also have in effect security bonus
plans for the benefit of their regional managers and independent sales
representatives, under the terms of which participants are credited with a
percentage of their yearly earnings. Of the aggregate amounts credited to
participants' accounts, 25% vests 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 profit sharing and security bonus plans aggregated
$5,979, $5,301and $5,689 for the years ended December 31, 2004, 2003 and 2002,
respectively.
NOTE L - INCOME TAXES
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. In addition,
deferred income taxes include net operating loss carryforwards of foreign
subsidiaries which do not expire. The Company also has a capital loss related to
the 2003 sale of the Company's UK MRO business. A valuation allowance was
recorded for a portion of the $22,441 capital loss due to the uncertainty of the
Company's ability to realize the capital loss against future capital gains prior
to expiration in 2008. Significant components of the Company's deferred tax
assets and liabilities as of December 31 are as follows:
Deferred Tax Assets: 2004 2003
- -------------------------------------------------- -------------- --------------
Compensation and benefits $16,185 $15,237
Inventory 3,447 3,011
Net operating loss carryforwards of subsidiaries 2,619 2,619
Capital Loss 5,580 5,697
Accounts receivable 762 669
Other - 345
- -------------------------------------------------- -------------- --------------
Total Deferred Tax Assets 28,593 27,578
Valuation allowance for deferred tax assets (8,199) (8,316)
- -------------------------------------------------- -------------- --------------
Net Deferred Tax Assets 20,394 19,262
- -------------------------------------------------- -------------- --------------
Deferred Tax Liabilities:
- -------------------------------------------------- -------------- --------------
Property, plant & equipment 1,191 2,381
Other 2,694 1,705
- -------------------------------------------------- -------------- --------------
Total Deferred Tax Liabilities 3,886 4,086
- -------------------------------------------------- -------------- --------------
Total Net Deferred Tax Assets $16,508 $15,176
================================================== ============== ==============
-25-
Net Deferred Tax Assets: 2004 2003
- -------------------------------------------------- -------------- --------------
Total Current Deferred Income Taxes $ 1,729 $ 1,975
Total Noncurrent Deferred Income Taxes 14,779 13,201
- -------------------------------------------------- -------------- --------------
Total Net Deferred Tax Assets $16,508 $15,176
================================================== ============== ==============
Net deferred tax assets include the tax impact of items in
comprehensive income of $(214) and $345 at December 31, 2004 and 2003,
respectively.
Income (loss) before income taxes for the years ended December 31, consisted of
the following:
2004 2003 2002
- ------------------------ ----------------- ----------------- -------------------
United States $32,182 $27,728 $27,906
Foreign 1,256 (2,836) (4,717)
- ------------------------ ----------------- ----------------- -------------------
$33,438 $24,892 $23,189
======================== ================= ================= ===================
The provisions for income taxes for the years ended December 31, consisted of
the following:
2004 2003 2002
- ---------------------------- -------------- --------------- ------------------
Current:
Federal $11,652 $7,422 $10,972
State 2,136 1,750 1,947
- ---------------------------- -------------- --------------- ------------------
13,788 9,172 12,919
Deferred benefit (1,775) (476) (2,177)
- ---------------------------- -------------- --------------- ------------------
$12,013 $8,696 $10,742
==============================================================================
The reconciliation between the effective income tax rate and the statutory
federal rate is as follows:
2004 2003 2002
- ------------------------------------- ------------- ------------- --------------
Statutory federal rate 35.0% 35.0% 35.0%
Increase (decrease) resulting from:
State income taxes, net of
federal income tax benefit 4.2 4.6 5.5
Foreign losses 1.2 6.7 9.3
Capital loss carryback --- (8.7) ---
Executive life insurance (2.0) (2.9) 2.1
Other items, net (2.5) 0.2 (5.6)
- ------------------------------------- ------------- ------------- --------------
Provision for income taxes 35.9% 34.9% 46.3%
===================================== ============= ============= ==============
Income taxes paid for the years ended December 31, 2004, 2003, and 2002
amounted to $12,097, $10,523 and $13,392, respectively.
NOTE M - COMMITMENTS
The Company's minimum rental commitments, principally for equipment,
under noncancelable leases in effect at December 31, 2004, amounted to
approximately $14,349. Such rentals are payable as follows:
2005 2006 2007 2008 2009 2010 and thereafter
- ----------- ---------- ---------- ---------- ------------- ---------------------
$3,502 $2,936 $2,488 $1,685 $1,482 $2,256
=========== ========== ========== ========== ============= =====================
Total rental expense for the years ended December 31, 2004, 2003 and
2002 amounted to $3,009, $3,977 and $3,669 respectively.
-26-
NOTE N - INCOME PER SHARE
The computation of basic and diluted earnings per share consisted of
the following:
Year ended December 31,
2004 2003 2002
- ---------------------------------------------- ----------------- ----------------- --------------
Numerator:
Net income $21,425 $16,196 $12,447
============================================== ================= ================= ==============
Denominator:
Denominator for basic income per
share - weighted average shares 9,410 9,492 9,570
Effect of dilutive securities:
Stock option plans 20 19 26
- ---------------------------------------------- ----------------- ----------------- --------------
Denominator for diluted
income per share -
adjusted weighted average shares 9,430 9,511 9,596
============================================== ================= ================= ==============
Basic income per share $2.28 $1.71 $1.30
============================================== ================= ================= ==============
Diluted income per share $2.27 $1.70 $1.30
============================================== ================= ================= ==============
NOTE O - 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), and
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 sales agents.
The operations of the Company's OEM segments manufacture and distribute
component parts to OEM manufacturers through a network of independent sales
agents as well as internal sales employees.
The Company's reportable segments are distinguished by the nature of
products distributed and sold, types of customers, manner of servicing them, and
geographical location.
The Company evaluates performance and allocates resources to reportable
segments primarily based on operating income. The accounting polices of the
reportable segments are the same as those described in the summary of
significant policies except that the Company records its federal and state
deferred tax assets and liabilities at corporate. Intersegment sales are not
significant.
Financial information for the Company's reportable segments consisted of the
following:
Year Ended December 31,
2004 2003 2002
- -------------------------------------- -------------------- -------------------- ------------------
Net sales
MRO - US $316,099 $302,047 $306,863
MRO - CAN 21,806 18,976 16,505
OEM - US 64,632 54,147 55,547
OEM - INTL 17,115 13,921 8,541
- -------------------------------------- -------------------- -------------------- ------------------
Consolidated total $419,652 $389,091 $387,456
- -------------------------------------- -------------------- -------------------- ------------------
Operating Income (loss)
MRO - US $ 27,112 $ 24,993 $ 23,828
MRO - CAN 2,313 1,494 1,051
OEM - US 2,326 537 2,490
OEM - INTL (940) (4,283) (5,558)
- -------------------------------------- -------------------- -------------------- ------------------
Consolidated total $ 30,811 $ 22,741 $ 21,811
- -------------------------------------- -------------------- -------------------- ------------------
Capital expenditures
MRO - US $ 2,798 $ 2,792 $ 4,634
MRO - CAN 323 1,234 944
OEM - US 561 1,565 869
OEM - INTL 102 143 208
-27-
- -------------------------------------- -------------------- -------------------- ------------------
Consolidated total $ 3,784 $ 5,734 $ 6,655
- -------------------------------------- -------------------- -------------------- ------------------
Depreciation and amortization
MRO - US $ 5,345 $ 5,592 $ 5,650
MRO - CAN 253 175 121
OEM - US 856 804 799
OEM - INTL 238 532 257
- -------------------------------------- -------------------- -------------------- ------------------
Consolidated total $ 6,692 $ 7,103 $ 6,827
- -------------------------------------- -------------------- -------------------- ------------------
Total assets
MRO - US $174,777 $168,783 $154,832
MRO - CAN 18,519 17,137 13,989
OEM - US 40,275 36,076 33,181
OEM - INTL 10,471 9,771 8,379
- -------------------------------------- -------------------- -------------------- ------------------
Segment total 244,042 231,767 210,381
- -------------------------------------- -------------------- -------------------- ------------------
Corporate 16,508 15,176 15,450
- -------------------------------------- -------------------- -------------------- ------------------
Consolidated total $260,550 $246,943 $225,831
- -------------------------------------- -------------------- -------------------- ------------------
Goodwill
MRO - US $ 22,104 $22,104 $22,104
MRO - CAN 4,294 4,294 4,294
OEM - US 2,251 2,251 2,251
OEM - INTL - - -
- -------------------------------------- -------------------- -------------------- ------------------
Consolidated total $ 28,649 $28,649 $28,649
====================================== ==================== ==================== ==================
The reconciliation of segment profit to consolidated income before income taxes
consisted of the following:
Year Ended December 31,
2004 2003 2002
- -------------------------------------- -------------------- -------------------- ------------------
Total operating income for
reportable segments $30,811 $22,741 $21,811
Interest and dividend income 122 194 53
Interest expense (184) (131) (154)
Other - net 2,689 2,088 1,479
- -------------------------------------- -------------------- -------------------- ------------------
Income before income taxes $33,438 $24,892 $23,189
====================================== ==================== ==================== ==================
Financial information related to the Company's operations by geographic area
consisted of the following:
Year Ended December 31,
2004 2003 2002
- -------------------------------------- -------------------- -------------------- ------------------
Net sales
United States $380,731 $356,194 $362,410
Canada 21,806 18,976 16,505
Other foreign countries 17,115 13,921 8,541
- -------------------------------------- -------------------- -------------------- ------------------
Consolidated total $419,652 $389,091 $387,456
====================================== ==================== ==================== ==================
Year Ended December 31,
2004 2003 2002
- -------------------------------------- -------------------- -------------------- ------------------
Long-lived assets
United States $62,677 $65,064 $62,157
Canada 8,269 8,199 7,139
Other foreign countries 155 291 376
- -------------------------------------- -------------------- -------------------- ------------------
Consolidated total $71,101 $73,554 $69,672
====================================== ==================== ==================== ==================
Net sales are attributed to countries based on the location of
customers. Long-lived assets consist of total property, plant and equipment and
goodwill.
-28-
NOTE P - SUMMARY OF UNAUDITED QUARTERLY RESULTS OF OPERATIONS
Unaudited quarterly results of operations for the years ended December 31, 2004
and 2003 are summarized as follows:
Quarter ended
2004 Mar. 31 Jun. 30 Sept. 30 Dec. 31
- --------------------------------------- --------------- -------------- ------------- ------------
(Dollars in thousands, except per
share data)
Net sales $100,658 $104,443 $107,380 $107,171
Cost of goods sold 35,261 38,796 40,667 41,247
Income before income taxes1 10,527 8,726 9,048 5,137
Provision for income taxes2 4,001 3,409 3,462 1,141
Net income 6,526 5,317 5,586 3,996
Net income per share of common stock
Basic and Diluted 0.69 0.56 0.59 0.43
Diluted weighted average shares
outstanding 9,515 9,475 9,422 9,343
Quarter ended
2003 Mar. 31 Jun. 30 Sept. 30 Dec. 31
- --------------------------------------- --------------- -------------- ------------- ------------
(Dollars in thousands, except per
share data)
Net sales $96,075 $97,109 $99,301 $96,606
Cost of goods sold 34,548 35,034 35,349 36,193
Income before income taxes3 6,621 6,705 7,488 4,078
Provision for income taxes4 2,863 2,564 3,124 145
Net income5 3,758 4,141 4,364 3,933
Net income per share of common stock
Basic and Diluted 0.40 0.44 0.46 0.41
Diluted weighted average shares
outstanding 9,511 9,506 9,511 9,519
1 The fourth quarter includes incentive compensation expense of $1,736
related to stock performance rights and a $881 increase to employee
compensation accruals.
2 The fourth quarter includes a $560 reduction of the tax provision to
reflect tax exempt income related to executive life insurance and
charitable contributions of inventory.
3 The fourth quarter includes a $2,789 pre tax loss related to the sale
of Lawson Products Limited, the Company's former UK subsidiary.
4 The fourth quarter includes a $2,157 reduction of the tax provision to
reflect the partial utilization of a capital loss generated by the sale
of the Company's former UK subsidiary.
5 The second, third and fourth quarters, respectively, included $751,
$240 and $486 of charges for compensation arrangements related to
management personnel reductions.
-29-
SCHEDULE II
LAWSON PRODUCTS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(In Thousands)
BALANCE AT CHARGED TO COSTS DEDUCTIONS - BALANCE AT END
DESCRIPTION BEGINNING OF PERIOD AND EXPENSES DESCRIBE (A) OF PERIOD
----------- ------------------- ------------ ------------ ---------
Allowance deducted from assets
to which it applies:
Allowance for doubtful
accounts:
Year ended December 31, 2004 $2,121 $1,108 $1,243 $1,986
Year ended December 31, 2003 1,830 1,578 1,287 2,121
Year ended December 31, 2002 1,803 1,585 1,558 1,830
Note A - Uncollected receivables written off, net of recoveries.
(In Thousands)
BALANCE AT CHARGED TO COSTS DEDUCTIONS - BALANCE AT END
DESCRIPTION BEGINNING OF PERIOD AND EXPENSES DESCRIBE (B) OF PERIOD
----------- ------------------- ------------ ------------ ---------
Reserve for excess and obsolete
inventory:
Year ended December 31, 2004 $5,141 $631 $2,700 $3,072
Year ended December 31, 2003 5,420 1,445 1,724 5,141
Year ended December 31, 2002 2,344 3,076 0 5,420
Note B - Disposal of excess and obsolete inventory
-30-
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 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, as amended, Rules 13a-15(e) and 15d-15(e))
were 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 was recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms.
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The Company's management is responsible for establishing and maintaining
adequate internal control over financial reporting, as such term is defined in
Exchange Act Rules 13a-15(f). The Company's management conducted an evaluation,
with the participation of the Company's chief executive officer and chief
financial officer, of the effectiveness of its internal control over financial
reporting based on the framework in Internal Control--Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
("COSO").
Based on this evaluation, described above under COSO criteria, the Company's
management concluded that our internal control over financial reporting was
effective as of December 31, 2004.
Ernst & Young LLP, the Company's independent registered public accounting firm,
have issued an attestation report on the Company's management assessment of the
effectiveness of the Company's internal control over financial reporting as of
December 31, 2004, which is included herein.
CHANGES IN INTERNAL CONTROLS
There were no changes in our internal control over financial reporting that
occurred during the our last fiscal quarter that have materially affected, or
are reasonably likely to materially affect, our internal control over financial
reporting.
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 management's assessment, included in the accompanying
consolidated financial statements, that Lawson Products, Inc. and subsidiaries
maintained effective internal control over financial reporting as of December
31, 2004 based on criteria established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission ("COSO"). 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.
Our responsibility is to express an opinion on management's assessment and an
opinion on the effectiveness of the Company's internal control over financial
reporting based on our audit.
-31-
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, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, 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 company's 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 company's 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 company's
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 management's assessment that Lawson Products, Inc. and
subsidiaries maintained effective internal control over financial reporting as
of December 31, 2004, is fairly stated, in all material respects based on the
COSO criteria. Also, in our opinion, Lawson Products, Inc. and subsidiaries
maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2004, based on the COSO criteria.
We have also audited, in accordance with standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of
Lawson Products, Inc. and subsidiaries as of December 31, 2004 and 2003 and the
related consolidated statements of income, changes in stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 2004 of
Lawson Products, Inc. and subsidiaries and our report dated March 10, 2005
expressed an unqualified opinion thereon.
/s/Ernst & Young LLP
Chicago, Illinois
March 10, 2005
ITEM 9B. OTHER INFORMATION
Not applicable.
-32-
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
a. Directors
---------
The information required by this Item is set forth in the Company's
Proxy Statement for the Annual Meeting of Stockholders to be held on May 10,
2005, under the caption "Election of Directors" and "Section 16(a), Beneficial
Ownership Reporting Compliance," which information is incorporated herein by
reference.
b Executive Officers
------------------
The information required by this Item is set forth under the caption
Item 1 - Business under "Executive Officers of the Registrant."
c. Audit Committee
---------------
Information on the Company's Audit Committee is contained under the
caption "Board of Directors Meetings and Committees" in the Company's Proxy
Statement for the Annual Meeting of Stockholders to be held on May 10, 2005,
which is incorporated herein by reference.
The Company had 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 401(h) of Regulation S-K, and that Mr. Saranow is
"independent" as the term is used in Item 7(d)(3)(iv) of Schedule 14A under the
Securities Exchange Act.
d. Code of Business Conduct
------------------------
The Company has adopted a Code of Ethics applicable to all employees.
This code is applicable to Senior Financial Executives including the principle
executive officer, principle financial officer and principle accounting officer
of the Company. The Company's Code of Ethics is available on the Company's web
site at www.lawsonproducts.com. The Company intends to post on its web site any
amendments to, or waivers from its Code of Ethics applicable to Senior Financial
Executives. The Company will provide shareholders with a copy of its Code of
Ethics without charge upon written request directed to the Company's Secretary
at the Company's address.
The Audit, Compensation and Nominating and Corporate Governance
committees have each adopted a charter for their respective committees. These
charters may be viewed on the Corporation's website, www.lawsonproducts.com, and
copies may be obtained by request to the Secretary of the Company at the
Company's address.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Item is set forth in the Company's
Proxy Statement for the Annual Meeting of Stockholders to be held on May 10,
2005, 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 Company's
Proxy Statement for the Annual Meeting of Stockholders to be held on May 10,
2005 under the captions "Securities Beneficially Owned by Principal Stockholders
-33-
and Management," and "Equity Compensation Plan Information", which information
is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item is set forth in the Company's
Proxy Statement for the Annual Meeting of stockholders to be held on May 10,
2005 under the caption "Election of Directors" and "Certain Relationships and
Related Transactions" which information is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required under this Item is set forth in the Company's Proxy
Statement for the Annual Meeting of stockholders to be held on May 10, 2005
under the caption "Fees Paid to Independent Auditors" which information is
incorporated herein by reference.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) (1) Financial Statements
--------------------
The following information is presented in this report:
Consolidated Balance Sheets as of December 31, 2004 and 2003.
Consolidated Statements of Income for the Years ended December
31, 2004, 2003 and 2002.
Consolidated Statements of Changes in Stockholders' Equity for
the Years ended December 31, 2004, 2003 and 2002.
Consolidated Statements of Cash Flows for the Years ended
December 31, 2004, 2003 and 2002.
Notes to Consolidated Financial Statements.
(2) Financial Statement Schedule
----------------------------
The following consolidated financial statement schedule of Lawson
Products, Inc. and subsidiaries is included in Item 15(d):
Schedule II - Valuation and Qualifying Accounts is submitted with this report.
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not submitted because
they are not applicable or are not required under Regulation S-X or because the
required information is included in the financial statements or notes thereto.
(3) Exhibits.
--------
3(a) Certificate of Incorporation of the Company, as amended,
incorporated herein by reference to Exhibit 3(a) to the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1988.
3(b) Amended and Restated By-laws of the Company, incorporated
herein by reference to Exhibit 3(b) to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31,
2003.
-34-
*10(c)(1) Lawson Products, Inc. Incentive Stock Plan, incorporated
herein by reference to Appendix A to the Company's Proxy
Statement for the Annual Meeting of Stockholders held on May
11, 1999.
*10(c)(2) Salary Continuation Agreement between the Company and Mr.
Sidney L. Port dated January 7, 1980 incorporated herein by
reference from Exhibit 10(c)(2) to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31,
1991.
*10(c)(3) Employment Agreement between the Company and Mr. Jerome
Shaffer, incorporated herein by reference from Exhibit
10(c)(9) to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1985.
*10(c)(3.1) First Amendment to Employment Agreement between the Company
and Mr. Jerome Shaffer, dated as of August 1, 1996,
incorporated herein by reference from Exhibit 10(c)(6.1) to
the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1996.
*10(c)(4) Employment Agreement between the Company and Jeffrey B.
Belford dated March 1, 2005, incorporated herein by reference
from Exhibit 10(c)(4) to the Company's Current Report on Form
8-K dated March 4, 2005.
*10(c)(5) Amended and Restated Executive Deferral Plan, incorporated
herein by reference from Exhibit 10(c)(7) to the Company's
Annual Report on Form 10-K for the fiscal year ended December
31, 1995.
*10(c)(6) Employment Agreement dated March 1, 2005 between the Company
and Roger F. Cannon, incorporated herein by reference to
Exhibit 10(c)(6) to the Company's Current Report on Form 8-K
dated March 4, 2005.
*10(c)(7) Agreement between the Company and Bernard Kalish dated July
31, 1999, incorporated herein by reference from Exhibit
10(c)(8) to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1999.
*10(c)(8) Lawson Products, Inc. Stock Performance Plan, incorporated
herein by reference from Exhibit 10(c)(8) to the Company's
Annual Report on Form 10-K for the fiscal year ended December
31, 2000.
*10(c)(9) Lawson Products, Inc. 2002 Stock Equivalents Plan for Non
Employee Directors, incorporated herein by reference from
Exhibit 10(c)(9) to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 2002.
*10(c)(10) Lawson Products, Inc. Long-Term Capital Accumulation Plan,
incorporated herein by reference from Exhibit 10(c)(10) to
the Company's Current Report on Form 8-K dated October 21,
2004.
*10(c)(11) Employment Agreement dated January 1, 2004 between the
Company and Robert Washlow, incorporated herein by reference
to Exhibit 10(c)(10) to the Company's Current Report on Form
8-K dated December 28, 2004.
*10(c)(12) Employment Agreement dated March 9, 2005 between the Company
and Thomas J. Neri, incorporated herein by reference to
Exhibit 10(c)(12) to the Company's Current Report on Form 8-K
dated March 14, 2005.
*10(c)(13) Employment Agreement dated March 9, 2005 between the Company
and Neil E. Jenkins, incorporated herein by reference to
Exhibit 10(c)(13) to the Company's Current Report on Form 8-K
dated March 14, 2005.
*10(c)(14) Form of Shareholder Value Appreciation Rights Award Agreement
- ------------------------------
*Indicates management employment contracts or compensatory plans or
arrangements.
-35-
*10(c)(15) Form of Restricted Stock Award and Acknowledgement
*10(c)(16) Form Letter regarding Stock Performance Rights
14 Code of Ethics of the Company, incorporated herein by
reference from Exhibit 14 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 2003.
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.
-36-
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.
Date: March 16, 2005
By: /s/ Robert J. Washlow
-------------------------------
Robert J. Washlow, Chairman of
the Board and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below this day of March 16, 2005, by the following
persons on behalf of the registrant and in the capacities indicated.
Signature Title
--------- -----
/s/ Robert J. Washlow Chairman of the Board,
- ------------------------------------ Chief Executive Officer and
Robert J. Washlow Director
(principal executive officer)
/s/ Thomas Neri Executive Vice President, Finance,
- --------------------------------- Planning and Corporate Development;
Thomas Neri Chief Financial Officer; and Treasurer
(principal financial officer)
/s/ Joseph L. Pawlick Senior Vice President-Accounting
- ---------------------------------
Joseph L. Pawlick (principal accounting officer)
/s/ Jerome Shaffer Vice President and Special Advisor to
- --------------------------------- the Chief Executive Officer and
Jerome Shaffer Director
/s/ James T. Brophy Director
- ---------------------------------
James T. Brophy
/s/ Ronald B. Port, M.D. Director
- ---------------------------------
Ronald B. Port, M.D.
/s/ Sidney L. Port Director
- ---------------------------------
Sidney L. Port
/s/ Robert G. Rettig Director
- ----------------------------------
Robert G. Rettig
/s/ Mitchell H. Saranow Director
- ---------------------------------
Mitchell H. Saranow
-37-
/s/ Lee S. Hillman Director
- ---------------------------------
Lee S. Hillman
/s/ Wilma J. Smelcer Director
- ---------------------------------
Wilma J. Smelcer
-38-
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------ ----------------------
3(a) Certificate of Incorporation of the Company, as amended,
incorporated herein by reference to Exhibit 3(a) to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1988.
3(b) Amended and Restated By-laws of the Company, incorporated
herein by reference to Exhibit 3(b) to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 2003.
*10(c)(1) Lawson Products, Inc. Incentive Stock Plan, incorporated herein
by reference to Appendix A to the Company's Proxy Statement for
the Annual Meeting of Stockholders held on May 11, 1999.
*10(c)(2) Salary Continuation Agreement between the Company and Mr. Sidney
L. Port, dated January 7, 1980, incorporated herein by reference
from Exhibit 10(c)(2) to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1991.
*10(c)(3) Employment Agreement between the Company and Mr. Jerome Shaffer,
incorporated herein by reference from Exhibit 10(c)(9) to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1985.
*10(c)(3.1) First Amendment to Employment Agreement between the Company and
Mr. Jerome Shaffer, dated as of August 1, 1996, incorporated
herein by reference from Exhibit 10(c)(6.1) to the Company's
Annual Report on Form 10-K for the fiscal year ended December
31, 1996.
*10(c)(4) Employment Agreement between the Company and Jeffrey B. Belford
dated March 1, 2005, incorporated herein by reference to Exhibit
10(c)(4) to the Company's Current Report on Form 8-K dated March
4, 2005.
*10(c)(5) Amended and Restated Executive Deferral Plan, incorporated
herein by reference from Exhibit 10(c)(7) to the Company's
Annual Report on Form 10-K for the fiscal year ended December
31, 1995.
*10(c)(6) Employment Agreement dated March 1, 2005 between the Company and
Roger F. Cannon, incorporated herein by reference to Exhibit
10(c)(6) to the Company's Current Report on Form 8-K dated March
4, 2005.
*10(c)(7) Agreement between the Company and Bernard Kalish dated July 31,
1999, incorporated herein by reference from Exhibit 10(c)(8) to
the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1999.
*10(c)(8) Lawson Products, Inc. Stock Performance Plan, incorporated
herein by reference from Exhibit 10(c)(8) to the Company's
Annual Report on Form 10-K for the fiscal year ended December
31, 2000.
*10(c)(9) Lawson Products, Inc. 2002 Stock Equivalents Plan for Non
Employee Directors, incorporated herein by reference from
Exhibit 10(c)(9) to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 2002.
*10(c)(10) Lawson Products, Inc. Long-Term Capital Accumulation Plan,
incorporated herein by reference from Exhibit 10(c)(10) to the
Company's Current Report on Form 8-K dated October 21, 2004.
*10(c)(11) Employment Agreement dated January 1, 2004 between the Company
and Robert Washlow, incorporated herein by reference to Exhibit
10(c)(10) to the Company's Current Report on Form 8-K dated
December 28, 2004.
*10(c)(12) Employment Agreement dated March 9, 2005 between the Company and
Thomas J. Neri, incorporated herein by reference to Exhibit
10(c)(12) to the Company's Current Report on Form 8-K dated
March 14, 2005.
-39-
*10(c)(13) Employment Agreement dated March 9, 2005 between the Company and
Neil E. Jenkins, incorporated herein by reference to Exhibit
10(c)(13) to the Company's Current Report on Form 8-K dated
March 14, 2005.
*10(c)(14) Form of Shareholder Value Appreciation Rights Award Agreement
*10(c)(15) Form of Restricted Stock Award and Acknowledgment
*10(c)(16) Form Letter regarding Stock Performance Rights
14 Code of Ethics of the Company, incorporated herein by reference
from Exhibit 14 to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 2003.
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.
-40-
AWARD AGREEMENT
---------------
This Agreement is entered into as of this ________day of ________,
______ by and between Lawson Products, Inc. ("Lawson") and ____________
("Participant").
WHEREAS, the Compensation Committee of the Board of Directors of Lawson
(the "Committee") has selected Participant to receive an award under the
Long-Term Capital Accumulation Plan of Lawson (the "Plan"); and
WHEREAS, Participant wishes to accept that award, subject to the terms
and conditions of the Plan and this Agreement;
NOW, THEREFORE, Lawson and Participant hereby agree as follows:
1. The award evidenced by this Agreement (the "Award") consists of
__________ (________) Shareholder Value Appreciation Rights ("SVARs") with an
effective date of __________. This Agreement supersedes and replaces all
previous oral or written communications between Lawson and Participant about any
award to Participant under the Plan.
2. All aspects of the SVARs evidenced by this Agreement (including but
not limited to vesting, valuation, payment and possible forfeiture) shall be
governed by this Agreement and by the Plan, a copy of which has been provided to
Participant and is hereby acknowledged by Participant, and the terms and
conditions of which are incorporated into this Agreement by reference.
3. Without limiting the scope of Section 2, above, Participant
acknowledges that:
(a) No payment shall be made with respect to the SVARs constituting
the Award unless and until the material terms of the Plan have been approved by
a majority vote of the shareholders of Lawson;
(b) As a condition to retaining the SVARs constituting the Award,
Participant shall be required to enter into an employment agreement with Lawson
including confidentiality and other restrictive covenants, as described in
Section 14 of the Plan;
(c) Any amount that would otherwise be payable to Participant or
his/her beneficiaries with respect to the SVARs constituting the Award shall be
subject to reduction in accordance with Section 13 of the Plan as a result of
the special excise tax rules described in Section 13 of the Plan; and
(d) The Committee may amend or terminate any or all of the
provisions of the Plan and any or all of the provisions this Agreement in
accordance with Section 24 of the Plan.
IN WITNESS WHEREOF, Participant and Lawson have executed this Agreement
as of the date set forth above.
LAWSON PRODUCTS, INC.
By:
- ---------------------------------- -----------------------------
Participant
LAWSON PRODUCTS, INC.
FORM OF
RESTRICTED STOCK AWARD AND ACKNOWLEDGEMENT
------------------------------------------
THIS RESTRICTED STOCK AWARD ("Award") is granted this _____ day of
________, ____, by Lawson Products, Inc., a Delaware corporation (the "Company")
to ___________ (the "Director").
WHEREAS, the Company is of the opinion that its interests will be
advanced by granting the Director a proprietary interest in it, thus providing
the Director with a more direct stake in its welfare and creating a closer
relationship between the Director's interests and those of the Company.
NOW, THEREFORE, in consideration of services rendered to the Company by
the Director and the services and other conditions required hereunder, the
Company hereby grants this Award to the Director on the terms expressed herein.
1. Stock Award. The Company hereby grants to Director an award of
______ shares of common stock of the Company (the "Award Shares"), subject to
the nontransferability provision set forth in Section 3, and the other terms and
conditions set forth herein. The Director hereby acknowledges and agrees to such
restriction and the other terms and conditions set forth herein.
2. Vesting. The Award Shares shall be fully vested on the date of
grant.
3. Restriction. The Director shall not sell, assign, transfer, convey,
pledge, hypothecate, encumber, donate or otherwise dispose of any of the Award
Shares under any conditions (and any attempted disposition shall be void and of
no force or effect whatsoever). Upon the earlier of (a) termination of the
Director's status as a member of the Board of Directors of the Company or (b)
after the third anniversary of the date hereof, such restriction shall lapse.
4. Voting; Dividends. The Director shall have all of the rights and
status of a stockholder of the Company in respect of the Award Shares, including
the right to vote such shares and to receive dividends or other distributions
thereon.
5. Adjustments and Certain Distributions. In the event that, prior to
the termination of the restriction hereunder on the Award Shares, the Company
shall change the number of issued shares of common stock without receipt of
consideration therefore (by stock split, stock dividend or similar action), all
stock received by Director in respect of the Award Shares that are then subject
to restriction hereunder shall also be held subject to such restriction.
6. Applicable Plan. These Award Shares are granted under and are
subject to the terms and conditions of the Lawson Products, Inc. 1999 Incentive
Stock Plan, as amended (the "Plan"). Any capitalized terms not defined herein
shall be subject to the definitions set forth in the Plan.
7. Prospectus. This document constitutes part of a prospectus covering
securities that have been registered under the Securities Act of 1933, as
amended. Copies of all documents incorporated by reference into the registration
statement shall be furnished by the Company upon written or oral request.
IN WITNESS WHEREOF, the Company has caused this Award to be granted on
the date first above written.
LAWSON PRODUCTS, INC.
By:
------------------------
ACKNOWLEDGED AND ACCEPTED:
- -------------------------------------------
--------------, -------
Re: Stock Performance Rights
Dear ______:
I am pleased to inform you that the Compensation Committee of the Board
of Directors of Lawson Products, Inc. (the "Company") has awarded to you a Stock
Performance Right ("SPR") under the Company's Amended Stock Performance Plan
("Plan") in recognition of your valued service to the Company and as an
inducement for your continued contribution to the profitability and success of
the Company. A complete copy of the Plan is available through the Secretary of
the Company.
The SPR will entitle you to a cash payment equal to the appreciation in
the fair market value of ________ shares of the Company's Common Stock over a
period of time. The fair market value of the Company's Common Stock is now
$______, (fair market value is the closing price for the Company's Common Stock,
as reported on NASDAQ, for the relevant date).
Your SPR will vest in five equal annual installments on the first,
second, third, fourth and fifth anniversaries of the date of its grant, provided
that you remain employed by, a member of the Board of Directors of, or a
consultant to, Lawson, as the case may be.
- -----------
- -----------
Page 2
The SPR will be fully vested in the event of (a) your death or
disability, or, if you are an employee of Lawson, your normal retirement, (b)
your retirement from the Board of Directors of Lawson, if you are a director, or
(c) upon a change of control (as defined in the Plan).
You may exercise your SPR, to the extent it is then vested, and receive
the appreciation in fair market value of the underlying Common Stock in cash at
any time on or before ten years from the date hereof, provided you are still
employed by, a member of the Board of Directors of, or a consultant to, the
Company, as the case may be. The notice of your exercise must be in writing and
delivered to the Secretary of the Company and will be effective (and the amount
of the appreciation to be paid will be fixed) upon receipt.
Any amount earned during the appreciation period will be paid to you
within 30 days of the date of your exercise, subject to withholding, if
applicable.
Your SPR does not entitle you to receive dividends, vote or exercise
any of the other rights of a holder of Common Stock of the Company.
In the event of a stock dividend, stock split, or other change in the
Company's Common Stock by reason of recapitalization, reorganization or like
transaction, the Company will make an appropriate adjustment in the number and
value of your SPR shares. However, no adjustment will be made if the number of
shares of outstanding Common Stock is changed as a result of a purchase of
shares by the Company for their fair value or as a result of the issuance of
additional shares of Common Stock for their fair value. For these purposes the
determination of the Company's Board of Directors that shares are acquired or
issued for their fair value will be final and conclusive.
If you die or become permanently disabled, or if you are an employee of
Lawson and you retire prior to exercise, or if you are a director of Lawson and
you retire from the Board of Directors, your SPR will become fully vested but
- -----------
- -----------
Page 3
must be exercised during the one-year period from the date of death, disability
or retirement. Unless you or your beneficiary elect to exercise the SPR and
receive payment earlier, you or your beneficiary will be deemed to exercise the
SPR on the last day of the one-year period and receive payment of the
appreciation, if any, measured to that date. You may designate one or more
beneficiaries by writing filed with the Secretary of the Company. Beneficiaries
may be named contingently or successively and may share in different proportions
if so designated.
If you are an employee of Lawson and your employment is terminated for
any reason other than death, disability or retirement, or if you are a
consultant to Lawson and your consultancy terminates for any reason other than
death or disability, your SPR will be deemed to be exercised on the date of
termination, but only to the extent then vested by its terms, and you will be
entitled to the appreciation in fair market value, if any, of the underlying
Common Stock measured to such date.
If you are an employee of or a consultant to Lawson, nothing in this
SPR shall confer on you any right to continue in the employ of or remain a
consultant to the Company or to interfere with the right of the Company to
terminate your relationship at any time.
The Company's obligation with respect to this right will not be funded
or secured in any manner, nor will your right to receive payments be assignable
or transferable, voluntarily or involuntarily, except as expressly provided
herein.
The Company shall be entitled to withhold the amount of any tax
attributable to any amount payable hereunder, if applicable.
This SPR will be construed in accordance with and governed by the laws
of the State of Delaware.
- -----------
- -----------
Page 4
If you have any questions with respect to this SPR, please feel free to
call me.
Very truly yours,
------------------------
EXHIBIT 21
SUBSIDIARIES OF THE COMPANY
JURISDICTION OF
NAME INCORPORATION
- ---- -------------
Lawson Products, Inc. New Jersey
Lawson Products, Inc. Texas
Lawson Products, Inc. Georgia
Lawson Products, Inc. Nevada
Lawson Products, Inc. (Ontario) Ontario, Canada
LPI Holdings, Inc. Illinois
Lawson Products de Mexico S. de RL. de C.v. Mexico
Drummond American Corporation Illinois
Cronatron Welding Systems, Inc. North Carolina
Allprocure.com, Inc.1 Missouri
Assembly Component Systems, Inc. Illinois
Automatic Screw Machine Products Company, Inc.2 Alabama
Assembly Component Systems Limited2 England
LP Service Co. Illinois
C.B. Lynn Company Illinois
Superior & Sedgwick Associates (a limited partnership) 3 Illinois
1 owned 65% by the Company
2 subsidiary of Assembly Component Systems, Inc.
3 owned 98.5% by the Company
EXHIBIT 23
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 33-17912) of our reports dated March 10, 2005, with respect to the
consolidated financial statements and schedule of Lawson Products, Inc., Lawson
Products, Inc. management's assessment of the effectiveness of internal control
over financial reporting, and the effectiveness of internal control over
financial reporting of Lawson Products, Inc., included in this Annual Report
(Form 10-K), for the year ended December 31, 2004.
/s/ Ernst & Young LLP
Chicago, Illinois
March 10, 2005
Exhibit 31.1
CERTIFICATIONS
--------------
I, Robert J. Washlow, certify that:
1. I have reviewed this Annual Report on Form 10-K 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 internal
control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) 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) Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under our
supervision, 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;
(c) 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
(d) 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: March 16, 2005
/s/ Robert J. Washlow
- -------------------------
Robert J. Washlow
Chief Executive Officer
Exhibit 31.2
CERTIFICATIONS
--------------
I, Thomas Neri, certify that:
1. I have reviewed this Annual Report on Form 10-K 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 internal
control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) 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) Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under our
supervision, 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;
(c) 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
(d) 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: March 16, 2005
/s/ Thomas Neri
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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 Annual Report of Lawson Products, Inc. (the
"Company") on Form 10-K for the period ending December 31, 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
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Thomas Neri
Executive Vice President, Finance, Planning and Corporate Development;
Chief Financial Officer; and Treasurer
March 16, 2005
A signed original of this written statement required by Section 906, or other
document authenticating, acknowledging, or otherwise adopting the signature that
appears in typed form within the electronic version of this written statement
required by Section 906, has been provided to Lawson Products, Inc. and will be
retained by Lawson Products, Inc. and furnished to the Securities and Exchange
Commission or its staff upon request.
The foregoing certification is being furnished to the Securities and Exchange
Commission as an exhibit to the Form 10-K and shall not be considered filed as
part of the Form 10-K.
