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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
 
(Mark One)
 Quarterly Report under Section 13 OR 15(d) of the Securities Exchange Act of 1934
For quarterly period ended September 30, 2020
or
 Transition Report under Section 13 OR 15(d) of the Securities Exchange Act of 1934
For the transition period from              to             

Commission file Number: 0-10546 
LAWSON PRODUCTS, INC.
(Exact name of registrant as specified in its charter)

Delaware 36-2229304
(State or other jurisdiction of
incorporation or organization)
 (I.R.S. Employer
Identification No.)
8770 W. Bryn Mawr Avenue, Suite 900,Chicago,Illinois 60631
(Address of principal executive offices) (Zip Code)
(773) 304-5050
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading SymbolName of each exchange on which registered
Common stock, $1.00 par valueLAWSNASDAQ Global Select Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer¨Accelerated filer
Non-accelerated filer
¨ (Do not check if a smaller reporting company)
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ¨  
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
The number of shares outstanding of the registrant’s common stock, $1 par value, as of October 15, 2020 was 9,030,327.
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“Safe Harbor” Statement under the Securities Litigation Reform Act of 1995:

This Quarterly Report on Form 10-Q contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties. The terms “may,” “should,” “could,” “anticipate,” “believe,” “continues,” “estimate,” “expect,” “intend,” “objective,” “plan,” “potential,” “project” and similar expressions are intended to identify forward-looking statements. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. These statements are based on management’s current expectations, intentions or beliefs and are subject to a number of factors, assumptions and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. Factors that could cause or contribute to such differences or that might otherwise impact the business include:

the effect of the COVID-19 virus on the overall economy, demand for our products, our supply chain, our employees and our operating results;
the effect of general economic and market conditions;
the ability to generate sufficient cash to fund our operating requirements;
the ability to meet the covenant requirements of our line of credit;
the market price of our common stock may decline;
inventory obsolescence;
work stoppages and other disruptions at transportation centers or shipping ports;
changing customer demand and product mixes;
increases in energy costs, tariffs and the cost of raw materials, including commodity prices;
decreases in demand from oil and gas customers due to lower oil prices;
disruptions of our information and communication systems;
cyber attacks or other information security breaches;
failure to recruit, integrate and retain a talented workforce including productive sales representatives;
the inability to successfully make or integrate acquisitions into the organization;
foreign currency fluctuations
failure to manage change within the organization;
highly competitive market;
changes that affect governmental and other tax-supported entities;
violations of environmental protection or other governmental regulations;
negative changes related to tax matters;
Luther King Capital's significant influence over the Company given its ownership percentage; and
all other factors discussed in the Company’s “Risk Factors” set forth in its Annual Report on Form 10-K for the year ended December 31, 2019 and in this Quarterly Report on Form 10-Q for the period ended September 30, 2020.

The Company undertakes no obligation to update any such factors 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.

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PART I - FINANCIAL INFORMATION

ITEM 1 - FINANCIAL STATEMENTS
Lawson Products, Inc.
Condensed Consolidated Balance Sheets
(Dollars in thousands, except share data)
September 30,December 31,
20202019
ASSETS(Unaudited)
Current assets:
Cash and cash equivalents$17,193 $5,495 
Restricted cash802 802 
Accounts receivable, less allowance for doubtful accounts of $680 and $593, respectively
47,902 38,843 
Inventories, net62,218 55,905 
Miscellaneous receivables and prepaid expenses5,943 5,377 
Total current assets134,058 106,422 
Property, plant and equipment, net16,596 16,546 
Goodwill36,428 20,923 
Deferred income taxes20,289 21,711 
Intangible assets, net18,727 12,335 
Cash value of life insurance15,400 14,969 
Right of use assets9,513 11,246 
Other assets258 277 
Total assets$251,269 $204,429 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accrued acquisition liability$32,476 $ 
Accounts payable22,466 13,789 
Lease obligation4,509 3,830 
Accrued expenses and other liabilities30,808 39,311 
Total current liabilities90,259 56,930 
Revolving line of credit 2,271 
Security bonus plan11,540 11,840 
Deferred compensation9,847 6,370 
Lease obligation6,693 9,504 
Deferred tax liability6,154 6,188 
Other liabilities5,522 3,325 
Total liabilities130,015 96,428 
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 - 9,231,598 and 9,190,171 shares, respectively
Outstanding - 9,025,617 and 9,043,771 shares, respectively
9,232 9,190 
Capital in excess of par value19,508 18,077 
Retained earnings101,386 86,496 
Treasury stock – 205,981 and 146,400 shares, respectively
(7,953)(5,761)
Accumulated other comprehensive loss(919)(1)
Total stockholders’ equity121,254 108,001 
Total liabilities and stockholders’ equity$251,269 $204,429 
See notes to condensed consolidated financial statements.
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Lawson Products, Inc.
Condensed Consolidated Statements of Income and Comprehensive Income
(Dollars in thousands, except per share data)
(Unaudited)
 
Three Months Ended
September 30,
Nine Months Ended
September 30,
 2020201920202019
Total revenue$90,277 $94,779 $253,458 $282,219 
Cost of goods sold43,052 44,205 118,999 131,679 
Gross profit47,225 50,574 134,459 150,540 
Operating expenses:
Selling expenses19,155 21,255 55,445 64,864 
General and administrative expenses26,069 22,873 57,806 72,063 
Operating expenses45,224 44,128 113,251 136,927 
Operating income2,001 6,446 21,208 13,613 
Interest expense(142)(138)(329)(481)
Other income (expense), net615 (13)15 798 
Income before income taxes
2,474 6,295 20,894 13,930 
Income tax expense736 1,521 6,004 3,703 
Net income$1,738 $4,774 $14,890 $10,227 
Basic income per share of common stock
$0.19 $0.53 $1.65 $1.14 
Diluted income per share of common stock
$0.19 $0.51 $1.60 $1.09 
Weighted average shares outstanding:
Basic weighted average shares outstanding9,017 8,974 9,017 8,971 
Effect of dilutive securities outstanding313 415 312 399 
Diluted weighted average shares outstanding
9,330 9,389 9,329 9,370 
Comprehensive income:
Net income$1,738 $4,774 $14,890 $10,227 
Other comprehensive income, net of tax
Adjustment for foreign currency translation398 (427)(918)965 
Net comprehensive income$2,136 $4,347 $13,972 $11,192 









See notes to condensed consolidated financial statements.
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Lawson Products, Inc.
Condensed Consolidated Statements of Changes in Stockholders’ Equity
(Dollars in thousands)
(Unaudited)

Common StockCapital in Excess of Par ValueAccumulated Other Comprehensive Income (Loss)Total Stockholders' Equity
Outstanding Shares$1 Par ValueRetained EarningsTreasury Stock
Balance at January 1, 20209,043,771 $9,190 $18,077 $86,496 $(5,761)$(1)$108,001 
Net income— — — 12,533 — — 12,533 
Treasury shares repurchased(47,504)— — — (1,756)— (1,756)
Adjustment for foreign currency translation— — — — — (2,494)(2,494)
Stock-based compensation— — 451 — — — 451 
Balance at March 31, 20208,996,267 9,190 18,528 99,029 (7,517)(2,495)116,735 
Net income— — — 619 — — 619 
Adjustment for foreign currency translation— — — — — 1,178 1,178 
Stock-based compensation— — 498 — — — 498 
Shares issued11,144 11 3 — — — 14 
Balance at June 30, 20209,007,411 $9,201 $19,029 $99,648 $(7,517)$(1,317)$119,044 
Net income— $— $— $1,738 $— $— $1,738 
Treasury shares repurchased(12,077)— — — (436)— (436)
Adjustment for foreign currency translation— — — — — 398 398 
Stock-based compensation— — 510 — — — 510 
Shares issued30,283 31 (31)— — —  
Balance at September 30, 20209,025,617 $9,232 $19,508 $101,386 $(7,953)$(919)$121,254 


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Lawson Products, Inc.
Condensed Consolidated Statements of Changes in Stockholders’ Equity
(Dollars in thousands)
(Unaudited)
Common StockCapital in Excess of Par ValueAccumulated Other Comprehensive Income (Loss)Total Stockholders' Equity
Outstanding Shares$1 Par ValueRetained EarningsTreasury Stock
Balance at January 1, 2019
8,955,930 $9,006 $15,623 $77,338 $(1,234)$(1,560)$99,173 
Change in accounting principle (1)
— — — 1,937 — — 1,937 
Net income
— — — 4,146 — — 4,146 
Adjustment for foreign currency translation
— — — — — 675 675 
Stock-based compensation
— — 666 — — — 666 
Shares issued
6,520 6 (6)— — —  
Balance at March 31, 2019
8,962,450 9,012 16,283 83,421 (1,234)(885)106,597 
Net income
— — — 1,307 — — 1,307 
Adjustment for foreign currency translation— — — — — 717 717 
Stock-based compensation
— — 711 — — — 711 
Shares issued
20,712 21 (21)— — —  
Balance at June 30, 2019
8,983,162 $9,033 $16,973 $84,728 $(1,234)$(168)$109,332 
Net income— $— $— $4,774 $— $— $4,774 
Treasury shares repurchased(35,830)— — — (1,361)— (1,361)
Adjustment for foreign currency translation
— — — — — (427)(427)
Stock-based compensation— — 663 — — — 663 
Shares issued9,649 10 (10)— — —  
Balance at September 30, 20198,956,981 $9,043 $17,626 $89,502 $(2,595)$(595)$112,981 

(1)    The Company adopted the ASC No.842, Leases (ASC 842) on January 1, 2019 using the modified retrospective approach. See Note 7 - Leases for further details.


See notes to condensed consolidated financial statements.
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Table of Contents
Lawson Products, Inc.
Condensed Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)

 Nine Months Ended September 30,
 20202019
Operating activities:
Net income$14,890 $10,227 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization4,660 4,401 
Stock-based compensation(2,767)7,621 
Deferred income taxes1,454 3,252 
Changes in operating assets and liabilities, net of acquisition
Accounts receivable(2,128)(7,785)
Inventories1,101 (1,593)
Prepaid expenses and other assets(725)(2,433)
Accounts payable and other liabilities3,097 (6,193)
Other441 544 
Net cash provided by operating activities$20,023 $8,041 
Investing activities:
Purchases of property, plant and equipment$(1,311)$(1,392)
Cash paid for acquisition(2,300) 
Net cash used in investing activities$(3,611)$(1,392)
Financing activities:
Net payments on revolving line of credit$(2,271)$(8,628)
Repurchase treasury shares(2,192)(1,361)
Payment of financing lease principal(192)(192)
Proceeds from stock option exercises15 16 
Net cash used in financing activities$(4,640)$(10,165)
Effect of exchange rate changes on cash and cash equivalents$(74)$259 
Increase (decrease) in cash, cash equivalents and restricted cash11,698 (3,257)
Cash, cash equivalents and restricted cash at beginning of period6,297 12,683 
Cash, cash equivalents and restricted cash at end of period$17,995 $9,426 
Cash and cash equivalents$17,193 $8,626 
Restricted cash802 800 
Cash, cash equivalents and restricted cash$17,995 $9,426 
Supplemental disclosure of cash flow information
Net cash paid for income taxes3,733 458 
Net cash paid for interest295 499 
See notes to condensed consolidated financial statements.
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Notes to Condensed Consolidated Financial Statements

Note 1 — Basis of Presentation and Summary of Significant Accounting Policies

The accompanying unaudited condensed consolidated financial statements of Lawson Products, Inc. (the “Company”) have been prepared in accordance with generally accepted accounting principles for interim financial information, the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not contain all disclosures required by generally accepted accounting principles. Reference should be made to the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. In the opinion of the Company, all normal recurring adjustments have been made that are necessary to present fairly the results of operations for the interim periods. Operating results for the three and nine month periods ended September 30, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020.

The Company has two operating segments. The first segment, the Lawson operating segment, distributes maintenance, repair and operations ("MRO") products to customers primarily through a network of sales representatives offering vendor managed inventory ("VMI") service to customers throughout the United States and Canada. The second segment, The Bolt Supply House Ltd. ("Bolt Supply") operating segment, distributes MRO products primarily through its branches located in Western Canada. Bolt Supply had 14 branches in operation at the end of the third quarter 2020.


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Note 2 - Acquisition

On August 31, 2020, the Company acquired Partsmaster from NCH Corporation. Partsmaster is a leading maintenance, MRO solutions provider that serves approximately 16,000 customers with over 200 sales representatives. The acquisition was made primarily to expand the Company's sales coverage, expand product lines, add experienced sales representatives, and leverage the Company's infrastructure.

The purchase price was $35.3 million in cash and the assumption of certain liabilities. The Company paid $2.3 million of the purchase price in cash at closing and will pay the remaining $33.0 million in May 2021. The payment obligation has been discounted to present value and is recognized as an accrued acquisition liability of $32.5 million in the Company's condensed consolidated balance sheet. Payment has been guaranteed under the Purchase Agreement, and includes the issuance of a $33.0 million irrevocable standby letter of credit. The Company will satisfy the payment obligation with cash on hand and, to the extent necessary, any remaining portion using its existing credit facility.

The purchase price of the acquisition was allocated to the fair value of Partsmaster’s assets and liabilities on the acquisition date. The fair market value appraisals of the majority of the assets and liabilities were determined by a third party valuation firm using management estimates and assumptions including intangible assets of $5.0 million for customer relationships and $2.8 million for trade names, and their estimated useful lives of 10 and 5 years, respectively. The $16.0 million allocated to goodwill reflects the purchase price less the fair market value of the identifiable net assets.

The appropriate fair values of the assets acquired and liabilities assumed are based on preliminary estimates and assumptions. These preliminary estimates and assumptions could change significantly during the purchase price measurement period as the Company finalizes the valuations of the assets acquired and liabilities assumed.

Partsmaster contributed $5.4 million of revenue and $0.4 million of operating income in the third quarter 2020 post-acquisition.

A summary of the initial purchase price allocation of the acquisition is as follows (Dollars in thousands):

Cash paid and payable and liabilities assumed
Cash paid and payable$34,711 
Accounts payable and accrued expenses4,076 
Deferred compensation2,938 
$41,725 
Fair value of assets acquired
Goodwill$15,952 
Inventories7,809 
Accounts receivable7,656 
Customer relationships4,961 
Trade names2,775 
Property, plant and equipment2,201 
Other assets371 
$41,725 

The following table contains unaudited pro forma revenue and net income for Lawson Products assuming the Partsmaster acquisition closed on January 1, 2019.

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(Dollars in thousands)
Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
Revenue
   Actual$90,277 $94,779 $253,458 $282,219 
   Pro forma101,222 109,174 298,546 332,234 
Net income
   Actual$1,738 $4,774 $14,890 $10,227 
   Pro forma1,982 4,598 16,312 10,166 

The pro forma disclosures in the table above include adjustments for amortization of intangible assets, implied interest expense and acquisition costs to reflect results as if the acquisition of Partsmaster had closed on January 1, 2019 rather than on the actual acquisition date. This pro forma information utilizes certain estimates, is presented for illustrative purposes only and is not intended to be indicative of the actual results of operation. In addition, future results may vary significantly from the results reflected in the pro forma information. The unaudited pro forma financial information does not reflect the impact of future positive or negative events that may occur after the acquisition, such as anticipated cost savings from operating synergies.

Note 3 - Revenue Recognition

As part of the Company's revenue recognition analysis, it concluded that it has two separate performance obligations, and accordingly, two separate revenue streams: products and services. Under the definition of a contract as defined by ASC 606, the Company considers contracts to be created at the time an order to purchase product is agreed upon regardless of whether or not there is a written contract.

Performance Obligations

Lawson has two operating segments; the Lawson segment and the Bolt Supply segment.

The Lawson segment has two distinct performance obligations offered to its customers: a product performance obligation and a service performance obligation. Although the Company has identified that it offers its customers both a product and a service obligation, the customer only receives one invoice per transaction with no price breakout between these obligations. The Company does not price its offerings based on any breakout between these obligations.

The Lawson segment, including the recent Partsmaster acquisition, offers a vendor managed inventory ("VMI") service proposition to its customers. A portion of these services, primarily related to stocking of product and maintenance of the MRO inventory, is provided a short period of time after control of the purchased product has been transferred to the customer. Since some components of VMI service have not been provided at the time the control of the product transfers to the customer, that portion of expected consideration is deferred until the time that those services have been provided.

The Bolt Supply segment does not provide VMI services for its customers or provide services in addition to product sales to customers.

In previous financial statements, the Company presented the disaggregated components of total revenue: product revenue and service revenue, along with the cost of sales associated with each of these revenue streams as the service revenues exceeded 10% of consolidated sales. Since the Company qualifies as a smaller reporting company, the Company has elected to discontinue disclosure of the disaggregated components of revenue and cost of sales in its condensed consolidated statements of income and comprehensive income and in the related notes to the condensed consolidated financial statements. This presentation decision is effective beginning with this Quarterly Report on Form 10-Q for the period ended September 30, 2020. For the three and nine months ended September 30, 2019, service revenue of $10.3 million and $29.9 million, respectively, were reported as service revenue which have now been combined as reported within total revenue.



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Disaggregated revenue by geographic area follows:
Three Months Ended September 30,Nine Months Ended September 30,
(Dollars in thousands)2020201920202019
United States$72,030 $75,160 $202,709 $225,327 
Canada18,247 19,619 50,749 56,892 
Consolidated total$90,277 $94,779 $253,458 $282,219 

Disaggregated revenue by product type follows:
Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
Fastening Systems22.3 %24.1 %22.7 %24.0 %
Specialty Chemicals13.3 %11.7 %11.7 %11.6 %
Fluid Power12.6 %15.1 %13.2 %15.2 %
Cutting Tools and Abrasives12.2 %13.1 %13.1 %13.1 %
Electrical10.0 %10.4 %10.2 %10.8 %
Safety7.0 %4.7 %6.4 %4.7 %
Aftermarket Automotive Supplies7.0 %7.6 %7.1 %7.9 %
Welding and Metal Repair1.4 %1.3 %1.4 %1.5 %
Other14.2 %12.0 %14.2 %11.2 %
Consolidated Total100.0%100.0%100.0%100.0%

Note 4 — Restricted Cash

The Company has agreed to maintain $0.8 million in a money market account as collateral for an outside party that is providing certain commercial card processing services for the Company. The Company is restricted from withdrawing this balance without the prior consent of the outside party during the term of the agreement.

Note 5 — Inventories, Net

Inventories, net, consisting primarily of purchased goods which are offered for resale, were as follows:
 (Dollars in thousands)
 September 30, 2020December 31, 2019
Inventories, gross$67,083 $60,500 
Reserve for obsolete and excess inventory(4,865)(4,595)
Inventories, net$62,218 $55,905 

Note 6 - Goodwill

Goodwill activity for the first nine months of 2020 and 2019 is included in the table below:
 (Dollars in thousands)
Nine Months Ended September 30,
20202019
Beginning balance$20,923 $20,079 
Acquisition15,952 — 
Adjustment to original acquisition allocation (12)
Impact of foreign exchange(447)515 
Ending balance$36,428 $20,582 

The Company performed a quantitative impairment test on the Bolt goodwill as of March 31, 3020 and June 30, 2020. As of June 30, 2020 the Bolt reporting unit's fair value exceeded its carrying value by approximately $5.4 million or 16%. As of
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June 30, 2020 goodwill allocated to the Bolt operating unit was $12.8 million. Related to the Lawson reporting unit, the Company performed a qualitative assessment as of March 31, 2020 and June 30, 2020 and determined that it was more likely than not the fair value of the reporting unit exceeded the carrying value of the reporting unit. The Company determined that no triggering event occurred in the third quarter.

Although the Company believes the projected future operating results and cash flows and related estimates regarding the values were based on reasonable assumptions, it is reasonably possible that estimates made may be materially and adversely impacted in the near term as a result of the COVID-19 pandemic, including impairment losses related to goodwill.

Note 7 - Intangible Assets

The gross carrying amount and accumulated amortization by intangible asset class were as follows:
 (Dollars in thousands)
September 30, 2020December 31, 2019
Gross Carrying AmountAccumulated AmortizationNet Carrying ValueGross Carrying AmountAccumulated AmortizationNet Carrying Value
Trade names$11,022 $(2,436)$8,586 $8,422 $(2,020)$6,402 
Customer relationships12,181 (2,040)10,141 7,337 (1,404)5,933 
$23,203 $(4,476)$18,727 $15,759 $(3,424)$12,335 

Amortization expense of $1.1 million and $1.0 million related to intangible assets was recorded in General and administrative expenses for the nine months ended September 30, 2020 and 2019, respectively.

As of September 30, 2020, there were no events or circumstances that indicate the carrying value may not be recoverable and thus no recoverability test was required.

Note 8 - Leases

The Company leases property used for distribution centers, office space, and Bolt branch locations throughout the US and Canada, along with various equipment located in distribution centers and corporate headquarters. The Company is also a lessor of its Decatur, Alabama property previously used in conjunction with a discontinued operation.

The expenses and income generated by the leasing activity of Lawson as lessee for the three months ended September 30, 2020 and September 30, 2019 are as follows (Dollars in thousands):
Lease TypeClassificationThree Months Ended September 30, 2020Three Months Ended September 30, 2019
Consolidated Operating Lease Expense (1)
Operating expenses$1,262 $1,190 
  Consolidated Financing Lease AmortizationOperating expenses63 $60 
  Consolidated Financing Lease InterestInterest expense8 10 
Consolidated Financing Lease Expense71 70 
Sublease Income (2)
Operating expenses  
Net Lease Cost$1,333 $1,260 

(1) Includes short term lease expense, which is immaterial
(2) Sublease income from sublease of a portion of the Company headquarters. The sublease was terminated in June 2019 and the Company has no other subleases.

The expenses and income generated by the leasing activity of Lawson as lessee for the nine months ended September 30, 2020 and September 30, 2019 are as follows (Dollars in thousands):

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Lease TypeClassificationNine Months Ended September 30, 2020Nine Months Ended September 30, 2019
Consolidated Operating Lease Expense (1)
Operating expenses$3,630 $3,532 
  Consolidated Financing Lease AmortizationOperating expenses165 159
  Consolidated Financing Lease InterestInterest expense22 23 
Consolidated Financing Lease Expense187 182 
Sublease Income (2)
Operating expenses (160)
Net Lease Cost$3,817 $3,554 

(1) Includes short term lease expense, which is immaterial
(2) Sublease income from sublease of a portion of the Company headquarters. The sublease was terminated in June 2019 and the Company has no other subleases.

The value of the net assets and liabilities generated by the leasing activity of Lawson as lessee as of September 30, 2020 and December 31, 2019 are as follows (Dollars in thousands):
Lease TypeSeptember 30,
2020
December 31,
2019
Total Right Of Use ("ROU") operating lease assets (1)
$8,938 $10,592 
Total ROU financing lease assets (2)
575 654 
Total lease assets$9,513 $11,246 
Total current operating lease obligation$4,276 $3,591 
Total current financing lease obligation233 239 
Total current lease obligations$4,509 $3,830 
Total long term operating lease obligation$6,414 $9,133 
Total long term financing lease obligation279 371 
Total long term lease obligation$6,693 $9,504 

(1) Operating lease assets are recorded net of accumulated amortization of $5.1 million and $2.4 million as of September 30, 2020 and December 31, 2019, respectively
(2) Financing lease assets are recorded net of accumulated amortization of $0.4 million and $0.2 million as of September 30, 2020 and December 31, 2019, respectively

The value of the lease liabilities generated by the leasing activities of Lawson as lessee as of September 30, 2020 were as follows (Dollars in thousands):
Maturity Date of Lease LiabilitiesOperating LeasesFinancing LeasesTotal
Year one$4,599 $254 $4,853 
Year two3,780 153 3,933 
Year three1,733 101 1,834 
Year four720 35 755 
Year five175 2 177 
Subsequent years471  471 
Total lease payments11,478 545 12,023 
Less: Interest788 33 821 
Present value of lease liabilities$10,690 $512 $11,202 

(1)    Minimum lease payments exclude payments to landlord for real estate taxes and common area maintenance $0.7 million

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The weighted average lease terms and interest rates of the leases held by Lawson as of September 30, 2020 are as follows:
Lease TypeWeighted Average Term in YearsWeighted Average Interest Rate
Operating Leases3.15.08%
Financing Leases2.75.37%

The cash outflows of the leasing activity of Lawson as lessee for the nine months ending September 30, 2020 are as follows (Dollars in thousands):
Cash Flow SourceClassificationAmount
Operating cash flows from operating leasesOperating activities$3,072 
Operating cash flows from financing leasesOperating activities22 
Financing cash flows from financing leasesFinancing activities192 

Note 9 — Credit Agreement

In the fourth quarter of 2019, the Company entered into a five-year credit agreement led by J.P. Morgan Chase Bank N.A, as administrative agent and including CIBC Bank USA and Bank of America, N.A. as other lenders. The credit agreement matures on October 11, 2024 and provides for $100.0 million of revolving commitments. The credit agreement allows borrowing capacity to increase to $150.0 million subject to meeting certain criteria and additional commitments from its lenders.

The Credit Agreement consists of borrowings as alternate base rate loans, Canadian prime rate loans, Eurodollar loans, and Canadian dollar offered rate loans as the Company requests. The applicable interest rate spread is determined by the type of borrowing used and the Total Net Leverage Ratio as of the most recent fiscal quarter as defined in the Credit Agreement.

The covenants associated with the Credit Agreement restrict the ability of the Company to, among other things: incur additional indebtedness and liens, make certain investments, merge or consolidate, engage in certain transactions such as the disposition of assets and sales-leaseback transactions, and make certain restricted cash payments such as dividends in excess of defined amounts contained within the Credit Agreement. In addition to these items and other customary terms and conditions, the Credit Agreement requires the Company to comply with certain financial covenants as follows:

a)    The Company is required to maintain an EBITDA to Fixed Charge Coverage Ratio of at least 1.15 to 1.00 for any period of four consecutive fiscal quarters ending on the last day of any fiscal quarter; and

b)    The Company is required to maintain a Total Net Leverage Ratio of no more than 3.25 to 1.00 on the last day of any fiscal quarter. The maximum Total Net Leverage Ratio will be allowed to increase to 3.75 to 1.00 after certain permitted acquisitions.

The Credit Agreement also includes events of default for, among others, non-payment of obligations under the Credit Agreement, change of control, cross default to other indebtedness in an aggregate amount in excess of $5.0 million, failure to comply with covenants, and insolvency.

In addition to other customary representations, warranties and covenants, the results of the financial covenants are provided below:
Quarterly Financial CovenantsRequirementActual
EBITDA to fixed charges ratio1.15 : 1.004.73 : 1.00
Total net leverage ratio3.25 : 1.000.71 : 1.00

The Company was in compliance with all covenants as of September 30, 2020.

During the third quarter of 2020 the Company entered into an amendment to the Credit Agreement which among other items increased the letter of credit basket from $15.0 million to $40.0 million until August 31, 2021 and authorized the Company to incur indebtedness in an amount up to $36.0 million for the acquisition of Partsmaster.

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The Company had no outstanding borrowings under its Credit Agreement and $66.0 million of availability under its revolving line of credit facility. The weighted average interest rate was 2.64% and 4.54% for the nine months ended September 30, 2020 and 2019, respectively.

Note 10 - Accrued Acquisition Liability

On August 31, 2020, Lawson acquired Partsmaster from NCH Corporation. As part of the purchase price the Company agreed to pay $33.0 million in May 2021. The payment obligation has been discounted to present value using an implied interest rate of 1.8% and is recognized as a current liability of $32.5 million in the Company's condensed consolidated balance sheet. Payment has been guaranteed under the Purchase Agreement which includes the issuance of a $33.0 million irrevocable standby letter of credit. The accrued acquisition liability is included as outstanding debt in the quarterly financial covenant calculations.


Note 11 - Stock Repurchase Program

In the second quarter of 2019, the Board of Directors authorized a program in which the Company may repurchase up to $7.5 million of the Company's common stock from time to time in open market transactions, privately negotiated transactions or by other methods. In the first quarter of 2020 the Company purchased 47,504 shares of common stock at an average purchase price of $36.93 under the repurchase program. No shares were repurchased in the second or third quarters of 2020 under the Company stock repurchase plan.

Note 12 — Severance Reserve

Changes in the Company’s reserve for severance as of September 30, 2020 and 2019 were as follows:
 (Dollars in thousands)
 Nine Months Ended September 30,
 20202019
Balance at beginning of period$909 $359 
Charged to earnings1,520 1,542 
Payments(1,239)(925)
Balance at end of period$1,190 $976 

Note 13 — Stock-Based Compensation

The Company recorded stock-based compensation income of $2.8 million and expense of $7.6 million for the first nine months of 2020 and 2019, respectively. A portion of stock-based compensation is related to the change in the market value of the Company's common stock. Stock-based compensation liability of $10.4 million as of September 30, 2020 and $14.9 million as of December 31, 2019 is included in Accrued expenses and other liabilities.

A summary of stock-based awards issued during the nine months ended September 30, 2020 follows:

Restricted Stock Units ("RSUs")
The Company issued 6,847 RSUs to key employees that cliff vest on December 31, 2022. The Company issued 2,500 RSUs to an executive that cliff vest on March 2, 2023 and 3,000 RSUs that cliff vest on March 9, 2023. The Company issued 10,965 RSUs to certain members of the Company's Board of Directors with a vesting date of May 12, 2021. Each RSU is exchangeable for one share of the Company's common stock at the end of the vesting period.

Market Stock Units ("MSUs")
The Company issued 22,284 MSUs to key employees that cliff vest on December 31, 2022. MSUs are exchangeable for the Company's common stock at the end of the vesting period. The number of shares of common stock that will be issued upon vesting, ranging from zero to 33,426, will be determined based upon the trailing sixty-day average closing price of the Company's common stock on December 31, 2022.
Performance Awards ("PAs")
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The Company issued 10,852 PAs to key employees that cliff vest on December 31, 2022. PAs are exchangeable for the Company's common stock ranging from zero to 16,278, or the equivalent amount in cash, based upon the achievement of certain financial performance metrics.

No stock options were excluded from the computation of diluted earnings per share for the three months ended September 30, 2020 or the nine months ended September 30, 2019.

Note 14 — Income Taxes

The Company recorded income tax expense of $6.0 million, a 28.7% effective tax rate for the nine months ended September 30, 2020. The effective tax rate is higher than the U.S. statutory tax rate due primarily to state taxes, recording of reserves for uncertain tax positions, and an inclusion for Global Intangible Low Taxed Income. Income tax expense of $3.7 million, a 26.6% effective tax rate was recorded for the nine months ended September 30, 2019. This effective tax rate was higher than the U.S. statutory rate due primarily to state taxes, income in higher tax jurisdictions and an inclusion for Global Intangible Low Tax Income.

The Company and its subsidiaries are subject to U.S. Federal income tax, as well as income tax of multiple state and foreign jurisdictions. As of September 30, 2020, the Company is subject to U.S. Federal income tax examinations for the years 2017 through 2019 and income tax examinations from various other jurisdictions for the years 2013 through 2019.

Earnings from the Company’s foreign subsidiaries are considered to be indefinitely reinvested. A distribution of these non-U.S. earnings in the form of dividends or otherwise may subject the Company to foreign withholding taxes and U.S. federal and state taxes.

Note 15 — Contingent Liabilities

In 2012, the Company identified that a site it owns in Decatur, Alabama, contains hazardous substances in the soil and groundwater as a result of historical operations prior to the Company's ownership. The Company retained an environmental consulting firm to further investigate the contamination including the measurement and monitoring of the site and the site was enrolled in the Alabama Department of Environmental Management (“ADEM") voluntary cleanup program.

The remediation plan was approved by ADEM in 2018. The plan consists of chemical injections throughout the affected area, as well as subsequent monitoring of the area for three consecutive periods. The injection process was completed in the first quarter of 2019 and the environmental consulting firm is monitoring the affected area. The Company utilized its remaining liability balance in the third quarter of 2020. there may be some additional nominal filing fees that are charged to the Company by the environmental consulting firm and ADEM, however these amounts are expected to be immaterial and will be expensed as incurred. The Company does not expect to capitalize any amounts related to the remediation plan.

Note 16 — Related Party Transaction

During the three and nine months ended September 30, 2020 the Company purchased approximately $0.7 million and $0.9 million, respectively, of inventory from a company owned by an immediate relative of a Board member at fair market value. The Company paid substantially all of the amount owed in the third quarter and therefore immaterial remaining liabilities exist as of September 30, 2020.
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Note 17 – Segment Information

The Company operates in two reportable segments. The businesses have been determined to be separate reportable segments because of differences in their financial characteristics and the methods they employ to deliver product to customers. The operating segments are reviewed by the Company’s chief operating decision maker responsible for reviewing operating performance and allocating resources. The Lawson segment primarily relies on its large network of sales representatives to visit the customer at the customers' work location and provide VMI service and produce sales orders for product that is then shipped to the customer. Given the nature of the acquired Partsmaster business, it is included in the Lawson segment for reporting purposes. The Bolt Supply segment primarily sells product to customers through its branch locations. Bolt Supply had 14 branches in operation at the end of the third quarter of 2020.

Financial information for the Company's reportable segments follows:

Three Months Ended
September 30,
Nine Months Ended
September 30,
2020201920202019
Revenue
Lawson$79,806 $83,461 $224,511 $250,895 
   Bolt Supply10,471 11,318 28,947 31,324 
      Consolidated total$90,277 $94,779 $253,458 $282,219 
Gross profit
Lawson$43,038 $46,148 $123,031 $138,524 
Bolt Supply4,187 4,426 11,428 12,016 
Consolidated total$47,225 $50,574 $134,459 $150,540 
Operating income
   Lawson$1,112 $5,377 $19,003 $11,490 
   Bolt Supply889 1,069 2,205 2,123 
      Consolidated total2,001 6,446 21,208 13,613 
Interest expense(142)(