UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
|ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934|
For the fiscal year ended December 31, 2020
|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)
|(State or other jurisdiction of||(I.R.S. Employer|
incorporation or organization)
8770 W. Bryn Mawr Avenue, Suite 900, Chicago, Illinois 60631
(Address of principal executive offices)
Registrant’s telephone number, including area code:
Securities registered pursuant to Section 12(b) of the Act:
|Title of Each Class||Trading Symbol||Name of Each Exchange on Which Registered|
Common Stock, $1.00 par value
The NASDAQ Stock Market LLC
(NASDAQ Global Select Market)
Securities registered pursuant to Section 12(g) of the Act:
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes o No þ
Indicate by check mark whether the registrant (l) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and "emerging growth company" Rule 12b-2 of the Exchange Act. (Check one)
Large accelerated filer o
Non-accelerated filer o (Do not check if a smaller reporting company)
|Smaller reporting Company||þ|
|Emerging Growth Company||o|
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 o
Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. þ
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).
Yes o No þ
The aggregate market value of the registrant’s voting stock held by non-affiliates on June 30, 2020, based upon the closing price of the registrant's Common Stock on that date, was approximately $141,259,000.
As of January 31, 2021, 9,061,039 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
“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 the risk factors set forth in Item 1A of this Form 10-K.
The Company undertakes no obligation to update any such factors, assumptions and uncertainties 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. Any references to our website in this Annual Report on Form 10-K are not and should not be considered an incorporation of information including on our website into this Annual Report on Form 10-K.
ITEM 1. BUSINESS.
Lawson Products, Inc. (“Lawson”, the “Company”, “we”, “our”, or “us”) was incorporated in Illinois in 1952, and reincorporated in Delaware in 1982. Lawson serves the industrial, commercial, institutional and government Maintenance, Repair and Operations ("MRO") market.
Our vision is to be our customers' first choice for maintenance, repair and operational solutions that improve their operating performance. We plan to achieve our vision by working closely with our customers to maintain and enhance their operations by providing them with quality products, superior service and innovative solutions.
Industry and Competition
The MRO market is comprised of companies that buy and stock products in bulk and supply these products to customers on an as needed basis. The customer benefits from our knowledge and the convenience of ordering smaller quantities maintained by us. We estimate that total current annual revenue generated by the North American MRO marketplace exceeds $150 billion.
There is a significant amount of competitive fragmentation by geography and product within the industry. We encounter competition from several national distributors and manufacturers and a large number of regional and local distributors. Some competitors have greater financial and personnel resources, handle more extensive lines of merchandise, operate larger facilities and price some merchandise more competitively than we do.
We operate in two reportable segments, the Lawson operating segment and the Bolt operating segment.
Through the Lawson operating segment, we deliver quality products to our customers and offer them extensive product knowledge, product application expertise and Vendor Managed Inventory ("VMI") services. Our broad geographic sales coverage allows us to serve large multi-location customers throughout the U.S. and Canada. We compete for business primarily by offering a value-added service approach in which our highly trained sales representatives manage the product inventory for our customers. The VMI model makes it less likely that our customers will unintentionally run out of a product while optimizing their inventory levels.
Sales orders are primarily generated from our sales representatives on behalf of customers; however, customers can also order directly from our website or through our customer service team via fax or phone. We ship products to customers in all 50 states, Puerto Rico, Canada, Mexico and the Caribbean. We normally ship to our customers within one day of order placement.
Our MRO distribution process normally entails the purchase of product from suppliers in bulk for delivery to our packaging and distribution facility in McCook, Illinois (“McCook Facility”) for possible repackaging, labeling or cross-docking. Product is then either stocked at the McCook Facility or delivered to one of our strategically located distribution centers. As orders are received, product is picked, packed and shipped to our customers. Many factors affect the efficiency of this process including the physical design of the distribution centers, the extent of automation, routing logistics, the number of times the product needs to be handled, transportation costs and the flexibility to meet the specific requirements of our customers.
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 and approximately 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 Bolt operating segment primarily delivers products to its customers through 14 branches located in Alberta, Saskatchewan, Manitoba, and British Columbia, Canada. Bolt generates sales from walk up business at its branch locations and through its sales team, phone, fax or the Internet. Bolt inventory is delivered to the packaging and distribution facility in Calgary, Alberta, and then distributed to each branch location. Sales generated via its sales team or through phone, fax or Internet orders are primarily shipped from one of the branch locations to the customer. The majority of Bolt's customers are located in the geographic vicinity of the branches. Bolt generally does not offer VMI services to its customers. Bolt generated 11.0% of the Company's annual 2020 sales. Bolt product offerings are listed on the Bolt website and are available in each of the branch locations.
During 2020, the Lawson segment sold products to over 84,000 identified customers and the Bolt segment sold products to approximately 12,000 identified customers in addition to the walk up customers at its 14 branch locations. Our largest customer accounted for approximately three percent of net sales. In 2020, approximately 81% of our net sales were generated in the United States and approximately 19% in Canada. The percentage of sales in Canada slightly decreased in 2020 compared to 2019 primarily due to the inclusion of Partsmaster sales, the majority of which occurred in the US. Our customers operate in a variety of industries including automotive repair, commercial vehicle maintenance, government, manufacturing, food processing, distribution, construction, oil and gas, mining, wholesale, service and others. Although seasonality is not significant in our business, due to fewer selling days and less activity during the holiday season, net sales in the fourth quarter are historically lower than the first three quarters of the year.
Our customers include a wide range of purchasers of industrial supply products from small repair shops to large national and governmental accounts. Historically, we have been very effective selling to and servicing small and medium sized customer locations that value our service approach.
Our product offerings are listed on our websites and in catalogs distributed to our customers. Sales percentages by broad product categories of our product mix in 2020 were as follows:
|Cutting tools and abrasives||14%|
|Aftermarket automotive supplies||7%|
|Welding and metal repair||2%|
The Lawson segment offers over 357,000 different products for sale of which over 89,000 products are maintained in our distribution centers. The Partsmaster acquisition contributed approximately 201,000 different products for sale including items not stored in their distribution center. We strive to carry sufficient inventory to ensure product availability and rapid processing of customer orders. Accurate forecasting of customer demand is essential to establish the proper level of inventory for each product. Inventory levels need to be sufficient to meet customer demand while avoiding the costs of stocking excess items.
During 2020, our Lawson segment purchased products from approximately 3,100 suppliers and no single supplier accounted for more than four percent of our purchases. The loss of one of our core suppliers could affect our operations by hindering our ability to provide full service to our customers.
Our quality control department tests our product offerings to ensure they meet our customers' specifications. We recommend solutions to help customers maximize product performance and avoid costly product failures. Our engineering
department provides technical support for our products and offers on-site problem solutions. It also develops and presents product safety and technical training seminars tailored to meet our customers' needs. Safety Data Sheets are maintained electronically and are available to our customers on our website.
Bolt offers approximately 40,000 different core products for sale of which approximately 19,000 products are maintained in the Calgary distribution center. The majority of inventory is kept in the Calgary distribution center, with each branch maintaining appropriate inventory levels for their business needs.
Human Capital Resources
General Employee Information
Our organization supports a culture of continuous improvement and emphasizes the importance of addressing the needs of our customers. We require our employees to act with integrity in every aspect of our business while encouraging them to be results driven, team oriented and progressive.
On December 31, 2020, our combined workforce included approximately 1,910 individuals, comprised of approximately 1,300 in sales and marketing, approximately 470 in operation and distribution and approximately 140 in management and administration. Approximately 1,750 of the 1,910 individuals are within the Lawson segment and the remaining are within Bolt. Approximately 8% of the workforce is covered by three collective bargaining agreements. We believe that our relations with our employees and their collective bargaining organizations are good.
On December 31, 2020, the Lawson sales and marketing team consisted of approximately 1,300 individuals focused on servicing existing customers, identifying new customers, providing customer service support and providing on-site customer service. Of the total sales team, 1,090 are sales representatives who are primarily organized into geographical regions. The performance of each region is the responsibility of a Regional Sales Director. Each region is further divided into geographically defined districts. The performance of each district is the responsibility of a District Sales Manager who reports to the Regional Sales Director. Our District Sales Managers work with the sales representatives to generate sales from new and existing customers. Lawson also has a team dedicated to the acquisition of larger national and mid-market accounts and a team dedicated to serving governmental accounts. The national accounts are comprised of multi-location customers with a national scope.
Sales force growth is a driver of our business. Increased sales coverage throughout the United States and Canada directly impacts our success as an organization. The Company is focused on identifying and recruiting individuals who are a good fit for our sales organization and providing them the tools needed to succeed. When these employees are hired, they participate in a training program to learn the products and processes of Lawson and also the history, values and culture of the Company. This sales training program allows the new sales representatives to assimilate into the Company and learn the most successful ways to call on potential customers, maintain relationships with existing customers, and provide the proper products and VMI services to ensure that the customers needs are met.
The Lawson sales team receives education in the best uses of products, enabling them to provide customized solutions to address customers' needs including technical expertise and on-site problem resolution. The VMI services Lawson offers primarily consist of ordering the right products in the optimal quantity for the customer and stocking the product for customers when the product is delivered. The sales team also periodically provides product presentations to customers that are designed to demonstrate how the products can improve their productivity. Additionally, Lawson sales representatives offer customized storage systems for improved organization and a more efficient work-flow.
While recruitment of new sales representatives is important, the goal of this process is to ensure the sales representatives who are brought on board will be members of the Lawson team for the long term. Our experience has proven that a sales representative becomes more successful and generates more sales for the Company the longer they are a part of Lawson. Longer tenured sales representatives form deeper relationships with customers, which results in customers relying on the Lawson sales representative for a larger share of their MRO needs. Reducing sales force churn and ensuring sales representatives can grow and reach their full potential over the long term is a focus of the Lawson leadership team. The sales leadership team is in regular contact with Regional Sales Directors, District Sales Managers and experienced sales representatives to discuss the challenges our sales representatives face in generating sales and how the Company can support them. The Company regularly reviews the performance of sales representatives and determines how to manage underperforming sales representatives and territories.
In August 2020, we acquired Partsmaster, a leading MRO distributor from NCH Corporation ("NCH"). At the time of acquisition Partsmaster had approximately 200 sales representatives throughout the United States and Canada. Partsmaster is an example of the acquisition strategy pursued by Lawson in recent years. Our acquisition strategy targets companies who are a good cultural fit and include organizations whose sales representatives will improve our sales coverage in underserved territories and allow us to generate additional sales by leveraging their existing customer relationships.
The majority of Bolt sales are made from its 14 branch locations. Bolt has approximately 23 sales territory managers who serve companies and professional tradespeople throughout Western Canada. In 2017, Bolt began requiring members of the sales teams to be certified as Certified Sales Professionals for the Canadian Professional Sales Association. All newly-hired sales team members are required to receive and maintain the same certification.
COVID-19 Impact on Human Capital
The Company’s response to the COVID-19 pandemic is evidence that the Company can take the necessary steps to ensure the safety of our employees and still fulfill the needs of its customers and other stakeholders. The unique circumstances of the COVID-19 pandemic negatively impacted the ability of Lawson MRO sales reps and the Bolt branch locations to fulfill their duties during 2020. The second quarter 2020 performance of the Company was negatively impacted as state and local governments throughout the United States and Canada imposed strict COVID-19 related restrictions, including shutdowns of nonessential businesses and stay-at-home orders. The Lawson MRO business model relies upon customer interaction as well as a consistent schedule of onsite visits by our sales representatives to customer locations. The Bolt business model relies on foot traffic in its branch locations. The onset of the COVID-19 pandemic, as well as social distancing guidelines and government mandated shelter in place orders, have negatively impacted the ability of our sales reps to visit our customers and for foot traffic to return to our Bolt branch locations, resulting in an overall negative impact on our business. A large portion of Lawson corporate employees began to work remotely at the onset of the pandemic in March 2020 to limit exposure to the virus. Many of these employees continue to work from home.
In response to the onset of the COVID-19 pandemic, sales representatives contacted customers via phone, e-mail and other electronic means, who were deemed essential businesses and therefore allowed to remain open during this time. As COVID-19 related restrictions were relaxed, Lawson MRO sales representatives began to safely visit customers and call on new customers, while following social distancing guidelines and limiting potential exposure to the virus. In addition, Bolt branch locations began to offer curbside pickup in the second quarter of 2020 and continue to do so. As COVID-19 restrictions were relaxed, the Company was able to operate in a more stable environment. Lawson MRO sales representatives have continued to safely visit customer locations, develop strong relationships and provide excellent service to existing customers, and generate new customer relationships while following COVID-19 related restrictions and social distancing guidelines. Bolt branch locations continue to safely operate while following social distancing guidelines and allowing customers into stores. The Company will continue to navigate through the COVID-19 pandemic with a focus on the safety of its team members.
In 2021, we intend to grow our sales organically, pursue acquisitions and further improve our operations to make Lawson our customers' first choice for products, services and solutions that improve their operating performance.
Our sales are impacted by the size of our sales team, their productivity and their territorial coverage. Our plan to expand the sales force is designed by identifying under-served territories that offer the greatest growth potential, locate and recruit talented sales representatives, provide them with the proper training, and successfully integrate them into our organization.
To acquire the best new sales talent and prepare them for success, we have developed an extensive talent acquisition strategy. We use both internal and external resources to identify and recruit the best available sales talent. As we increase our sales coverage, we anticipate a short-term decrease in average sales per day per sales representative, as new representatives build up customer relationships in their territories. However, we believe that these short-term investments will result in future opportunities as we leverage the positive impact of top-line growth against our operating costs which are fixed to a significant extent.
We are also focused on increasing the productivity of our sales representatives. We strive to empower our sales representatives with the training, technology and support they need to maximize their sales potential while providing our customers with superior service and making it easy for them to do business with us.
In addition to organic growth, we plan to continue to actively pursue acquisition opportunities that we believe will be financially accretive to our organization. Lawson plans to continue to explore growth opportunities in the MRO space that provide different channels to reach customers, increase sales and generate positive results.
In order to improve our operations, we utilize a Lean Six Sigma approach, which is a set of tools that allow a project team to analyze and improve selected business processes. The project teams work with the process owners to develop statistical measures to evaluate the effectiveness of the process, document the current components and process flow, examine the root cause of defects and effect of current operations, design and implement new ways to improve performance and then measure the results for effectiveness. The Lean Six Sigma process is ingrained in our culture as we have had over 100 employees complete Lean Six Sigma training over the past five years and plan to continue this training program in the years to come.
We believe our emphasis on continuous improvement will lead to further reductions in error rates, increased processing speed, reduction in cycle times, standardization of procedures and elimination of waste. This will enable us to become a more efficient and effective organization which provides our customers with the best purchasing experience possible.
The acquisition of Partsmaster represents an important step in our acquisition strategy. Partsmaster is a strong strategic fit with a successful VMI business model and product offerings complementary to the Company. The addition of the Partsmaster sales force has increased our coverage throughout the United States and Canada and will offer potential for combined company sales, and continue to leverage the existing customer relationships in order to grow our business.
We file or furnish annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and file or furnish amendments to those reports pursuant to Section 13(a) or 15(d) of the Exchange Act and Section 16 reports with the Securities and Exchange Commission (“SEC”). The public can obtain copies of these materials by accessing the SEC's website at http://www.sec.gov. In addition, as soon as reasonably practicable after such materials are filed with or furnished to the SEC, we make copies available to the public free of charge through our website at www.lawsonproducts.com or by calling (773) 304-5050. Information on our website is not incorporated by reference into this report. We also make available on our website our Code of Ethics, Corporate Governance Principles and the charters of the committees of our Board of Directors.
Executive Officers of the Registrant
The executive officers of Lawson as of February 1, 2021 were as follows:
|Name||Age||Year First Named to Present Office||Position|
|Michael G. DeCata||63||2012||President and Chief Executive Officer|
|Neil E. Jenkins||71||2004||Executive Vice President, Secretary and General Counsel|
|Ronald J. Knutson||57||2014||Executive Vice President, Chief Financial Officer, Treasurer and Controller|
|Matthew J. Brown||57||2017|
Senior Vice President, Sales
|Shane T. McCarthy||52||2019|
Senior Vice President, Supply Chain, Product Management and Marketing
Biographical information for the past five years relating to each of our executive officers is set forth below.
Mr. DeCata was elected President and Chief Executive Officer in September 2012. Mr. DeCata previously served in a consulting capacity for several private equity firms, including Hamilton Robinson Capital Partners from 2009 until 2012. Mr. DeCata previously served on the Board of Directors of Crescent Electric Supply Company from 2008 to 2013.
Mr. Jenkins was elected Executive Vice President, Secretary and General Counsel in 2004.
Mr. Knutson was elected Executive Vice President, Chief Financial Officer, Treasurer and Controller in April 2014 and has served as Executive Vice President, Chief Financial Officer since July 2012.
Mr. Brown was elected Senior Vice President, Sales in March 2017 and served as Vice President of Field Sales since January 2016. Mr. Brown held several levels of sales leadership roles for the Company over the last 19 years with the most recent title of Senior Director of Sales from 2014 to 2016.
Mr. McCarthy was named Senior Vice President, Supply Chain, Product Management and Marketing in September 2019. Mr. McCarthy previously served as Senior Vice President, Supply Chain and Business Development from December 2015 through September 2019 and served as Senior Vice President, Supply Chain since June 2014. Mr. McCarthy served as Senior Vice President, Operations from July 2012 to June 2014.
ITEM 1A. RISK FACTORS.
In addition to the other information in this Annual Report on Form 10-K for the fiscal year ended December 31, 2020, the following factors should be considered in evaluating Lawson's business. Our operating results depend upon many factors and are subject to various risks and uncertainties. The material risks and uncertainties known to us and described below may negatively affect our business operations or affect our financial results. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations or affect our financial results.
Risks Related to COVID-19 and Other Infectious Diseases
In 2020, a new strain of coronavirus ("COVID-19") created a worldwide pandemic which has continued to affect our business and could have further undetermined material adverse effects on our revenues, operating results and financial condition.
The COVID-19 pandemic has resulted in lost revenue to our Company, limitations on our ability to source high demand product, limitations on our sales force to perform certain functions due to state or federal stay-at-home orders, a slow-down of customer demand for our products and limitations of some customers to pay us on a timely basis. The impact of the COVID-19 pandemic on our operational and financial performance includes affecting our ability to execute our business strategies and initiatives in the expected time frame. The extent of the effect will depend on future developments, including the duration and spread of the pandemic and related restrictions on travel, transports and person to person contact, all of which are uncertain and cannot be predicted at the present time. On a broader scale, the COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains and created significant volatility and disruption of financial markets. An extended period of global supply chain and economic disruption could materially affect our sales, workforce, supply chains, results of operations, and our ability to access our Credit Agreement (as defined below) to fund operations.
In the first quarter of 2020, our business was defined by the state of Illinois as an essential business, allowing us to operate during the pandemic. A change in this status could result in the temporary closure of our business. Additionally, the COVID-19 pandemic could result in a temporary closure of any or all of our distribution facilities or the Bolt branch locations, which would negatively impact our operations. Other disruptions to our supply chain such as reduced capacity or temporary shutdowns of freight carriers could also negatively impact Company performance.
Our sales results have been and may be negatively impacted in the future by any social distancing guidelines and government mandated shelter in place orders that would prevent our sales representatives in our MRO business segment from visiting customers in person. Shelter in place orders also reduce customer visits to our Bolt branch locations. The reduction of operations and temporary shut down by many of our customers in response to COVID-19 has also negatively impacted sales and our ability to collect on existing credit balances, and we expect to be impacted by those reductions and shut downs in the until the pandemic ends. Further, vendors who are negatively impacted by COVID-19 may temporarily shut down operations or have difficulty obtaining inventory, which could negatively impact our ability to fulfill customer orders.
The Company expects to continue to be negatively impacted by the COVID-19 pandemic and the various federal, state and local restrictions enacted to combat the pandemic. In the fourth quarter of 2020, the U.S. Food and Drug Administration approved certain vaccines that have demonstrated effectiveness in preventing the spread of the COVID-19 virus. However, it is projected that the production, distribution and administration of the vaccine to a sufficient percentage of the population to significantly minimize the future effect of the pandemic will not be reached until mid-2021.
Certain items on our balance sheet require judgments on their valuation, including intangible assets and goodwill. These valuations are based on assumptions that take future financial performance into account. COVID-19 may have a negative impact to our future financial performance that would require us to revise assumptions about future financial performance and impair the value of these assets. Although the Company believes that its 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. In the fourth quarter of 2020 the Company reviewed the 2020 results of the Screw Products reporting unit and completed its 2021 budgeting process. Based on the results of its analysis and the time passed since acquisition, the Company determined it would be appropriate to perform a quantitative impairment test on the goodwill of the Screw Products reporting unit. The Company performed a quantitative goodwill impairment analysis on December 1, 2020 and determined that the carrying value of the net assets exceeded the fair value of the Screw Products reporting unit, and accordingly recognized an impairment charge of $1.9 million.
All Lawson employees have been encouraged to follow the recommended social distancing guidelines and work remotely whenever possible to reduce the spread of COVID-19 during the pandemic. The increased number of employees working remotely can exacerbate the risks mentioned in regards to internal controls and cybersecurity.
A significant portion of our inventory may become obsolete.
Our business strategy requires us to carry a significant amount of inventory in order to meet rapid processing of customer orders. If our inventory forecasting and production planning processes result in inventory levels exceeding the levels demanded by customers or should our customers decrease their orders with us, our operating results could be adversely affected due to costs of carrying the inventory and additional inventory write-downs for excess and obsolete inventory.
Work stoppages and other disruptions at transportation centers or shipping ports may adversely affect our ability to obtain inventory and make deliveries to our customers.
Our ability to rapidly process customer orders is an integral component of our overall business strategy. Interruptions at our company operated facilities or disruptions at a major transportation center or shipping port, due to events such as severe weather, labor interruptions, natural disasters, acts of terrorism or other events, could affect our ability to maintain core products in inventory, deliver products to our customers on a timely basis or adversely affect demand for our products, which may in turn adversely affect our results of operations.
Changes in our customers, product mix and pricing strategy could cause our gross margin percentage to decline in the future.
From time to time, we have experienced overall changes in the product mix demand of our customers. When customers or product mix changes, there can be no assurance that we will be able to maintain our historical gross profit margins. Changes in our customers, product mix, volume of orders, prices charged, additional freight costs or lower productivity levels, could cause our gross profit margin percentage to decline. Our gross margin percentage may also come under pressure in the future if we increase the percentage of national accounts in our customer base, as sales to these customers are generally at lower margins.
Disruptions of our information and communication systems could adversely affect the Company.
We depend on our information and communication systems to process orders, purchase and manage inventory, maintain cost-effective operations, sell and ship products, manage accounts receivable collections and serve our customers. Disruptions in the operation of information and communication systems can occur due to a variety of factors including power outages, hardware failure, programming faults and human error. Disruptions in the operation of our information and communication systems, whether over a short or an extended period of time or affecting one or multiple distribution centers, could have a material adverse effect on our business, financial condition and results of operations.
Cyber attacks or other information security breaches could have a material adverse effect on our operating results and financial condition, subject us to additional legal costs and damage our reputation in the marketplace.
We are increasingly dependent on digital technology to process and record financial and operating data and communicate with our employees and business partners. During the normal course of business we receive, retain and transmit certain confidential information that our customers provide to us to purchase products or services or otherwise communicate with us.
Our technologies, systems, networks, and those of our business partners may become the target of cyber attacks or information security breaches that could result in the unauthorized release, misuse, loss or destruction of proprietary and other information, or other disruption of our business operations, subject us to additional legal costs and damage our reputation in the marketplace. As cyber threats continue to evolve, we may be required to expend additional resources to continue to modify or enhance our protective measures or to investigate and fix any information security vulnerabilities.
The inability to successfully recruit, integrate and retain productive sales representatives could adversely affect our operating results.
We have committed to a plan to increase the size of our sales force which we believe will lead to increased sales and improve our long-term financial results. A successful expansion in our sales force requires us to identify under-served territories that offer the greatest potential growth opportunity, locate and recruit talented sales representatives, provide them with the proper training, and successfully integrate them into our organization. This expansion plan requires significant investment in capital and resources. The failure to identify the optimal sales territories, recruit and retain quality sales representatives and provide them with sufficient support could adversely affect our operating results. Additionally, we anticipate a short-term decrease in average sales per day per sales representative as new representatives build up customer relationships in their territories.
It is also critical to retain the experienced and productive sales representatives that have historically contributed to our success. Failure to retain a sufficient number of talented, experienced and productive sales representatives could adversely affect our financial and operating results.
Failure to retain talented employees, managers and executives could negatively impact our operating results.
Our success depends on our ability to attract, develop and retain talented employees, including executives and other key managers. The loss of certain key executives and managers or the failure to attract and develop talented employees could have a material adverse effect on our business.
The inability of management to successfully implement changes in operating processes, could lead to disruptions in our operations.
We are continually striving to improve operational efficiencies throughout our organization and to identify and initiate changes intended to improve our internal operations. The implementation of changes to our current operations involve a risk that the changes may not work as intended, may disrupt related processes, may not be properly applied or may not result in accomplishing the intended efficiencies. Failure to successfully manage the implementation of these changes could lead to disruptions in our operations.
The inability to successfully integrate acquisitions into our organization could adversely affect our operations and operating results.
One of our growth strategies is to actively pursue acquisition opportunities which complement our service oriented business model. Failure to successfully identify the right opportunities and to successfully integrate their sales teams and operations into our organization could adversely affect our operations and our operating results.
The Company operates in highly competitive markets.
The MRO marketplace is highly competitive. Our competitors include large and small companies with similar or greater market presence, name recognition, and financial, marketing, and other resources. We believe the competition will continue to challenge our business with their product selection, financial resources and services.
Changes that affect governmental and other tax-supported entities could negatively impact our sales and earnings.
A portion of our sales are derived from the United States military and other governmental and tax-supported entities. These entities are largely dependent upon government budgets and require adherence to certain laws and regulations. A decrease in the levels of defense and other governmental spending or the introduction of more stringent governmental regulations and oversight, could lead to reduced sales or an increase in compliance costs which would adversely affect our financial position and results of operations.
Failure to adequately fund our operating and working capital needs through cash generated from operations and cash available through our Credit Agreement could negatively impact our ability to invest in the business and maintain our capital structure.
Our business requires investment in working capital and fixed assets. We fund these investments from cash generated from operations and funds available from our Credit Agreement. Failure to generate sufficient cash flow from operations or from our Credit Agreement could cause us to have insufficient funds to operate our business. Adequate funds may not be available when needed or may not be available on favorable terms.
Failure to meet the covenant requirements of our Credit Agreement could lead to higher financing costs, increased restrictions and reduce or eliminate our ability to borrow funds.
Our Credit Agreement contain financial and other restrictive covenants. These covenants could adversely affect us by limiting our financial and operating flexibility as well as our ability to plan for and react to market conditions and to meet our capital needs. Failure to meet these covenant requirements could lead to higher financing costs, increased restrictions, reduce or eliminate our ability to borrow funds, or accelerate the payment of our existing indebtedness. If we require more liquidity than is currently available to us under our Credit Agreement, we may need to raise additional funds through debt or equity offerings which may not be available when needed or may not be available on terms favorable to us. Should funding be insufficient at any time in the future, we may be unable to develop or enhance our products or services, take advantage of business opportunities or respond to competitive pressures, any of which could have a material adverse effect on our business, financial condition and results of operations.
Risks Related to Common Stock
The market price of our common stock may decline.
Our stock price could decrease if our financial performance is inadequate or does not meet investors' expectations, if there is deterioration in the overall market for equities, if large amounts of shares are sold in the market, if there is index trading, or if investors have concerns that our business, financial condition, results of operations and capital requirements are negatively impacted by an economic downturn.
Luther King Capital has significant influence over the Company, and this influence could delay or deter a change in control or other business combination or otherwise cause us to take actions with which you may disagree.
On December 31, 2020, Luther King Capital beneficially owned 48.0% of the outstanding common stock of the Company. J. Bryan King, a director of the Company, is the Principal of Luther King Capital. As a result, Luther King Capital has significant influence over the outcome of matters requiring a stockholder vote, including the election of directors, and the approval of significant matters and its interests may not align with the interests of other stockholders. This concentration of ownership could also have the effect of delaying, determining or preventing a change of control or other business combination that might be beneficial to our stockholders.
Legal and Regulatory Risks
A violation of federal, state or local environmental protection regulations could lead to significant penalties and fines or other remediation costs.
Our product offering includes a wide variety of industrial chemicals and other products which are subject to a multitude of federal, state and local regulations. These environmental protection laws change frequently and affect the composition, handling, transportation, storage and disposal of these products. Failure to comply with these regulations could lead to severe penalties and fines for each violation.
Additionally, a facility we own in Decatur, Alabama, was found to contain hazardous substances in the soil and groundwater as a result of historical operations prior to our ownership. We retained an environmental consulting firm to further investigate the contamination, including measurement and monitoring of the site. The Company concluded that further remediation was required, and accordingly, has made an accrual for the estimated cost of this environmental matter. A remediation plan was approved by the Alabama Department of Environmental Management and the remediation of the affected area is ongoing. Additional procedures may be required that could negatively impact our operating results.
Our results of operations could be affected by changes in taxation.
Our results of operations could be affected by changes in tax rates, audits by taxing authorities or changes in laws, regulations and their interpretation. Changes in applicable tax laws and regulations could continue to affect our ability to realize the deferred tax assets on our balance sheet, which could affect our results of operations.
Our results of operations may be adversely impacted by a downturn in the economy or in certain sectors of the economy.
Any decline or uncertainty in the strength of the economy may lead to a decrease in customer spending and may cause certain customers to cancel or delay placing orders. In the first quarter of 2020, the economy experienced a significant decline due to the response of businesses and state governments to the onset of the COVID-19 pandemic. Subsequently, the economy partially recovered from the initial downturn. Some of our customers may file for bankruptcy protection, preventing us from collecting on accounts receivable and may result in our stocking excess inventory. Contractions in the credit markets may also cause some of our customers to experience difficulties in obtaining financing, leading to lower sales, delays in the collection of receivables and result in an increase in bad debt expense.
Adverse economic conditions could also affect our key suppliers and contractors. This could lead to us incurring additional expenses or result in delays in shipping products to our customers. Economic uncertainty can make it difficult for us to accurately predict future order activity and affect our ability to effectively manage inventory levels. There are no assurances that we would be able to establish alternative financing or obtain financing with terms similar to our present Credit Agreement.
Changes in energy costs, tariffs and the cost of raw materials used in our products could impact our cost of goods and distribution and occupancy expenses, which may result in lower operating margins.
Increases in the cost of raw materials used in our products (e.g., steel, brass), tariffs and increases in energy costs raise the production costs of our vendors. Those vendors typically look to pass the higher costs along to us through price increases. If we are unable to fully pass these increased prices and costs through to our customers or to modify our activities, the impact would have an adverse effect on our operating profit margins. Low oil prices may result in weaker demand from oil and gas customers in the future, resulting in lower net sales. Changes in trade policies could affect our sourcing of product, our ability to secure sufficient product and/or impact the cost or price of our products, with potentially negative impacts on our reported gross profits and results of operations.
The Company is exposed to the risk of foreign currency changes.
Two of our subsidiaries are located and operate in Canada using the Canadian dollar as its functional currency. Operating results are translated into U.S. dollars when consolidated into our financial statements. Therefore, we are exposed to market risk relating to the change in the value of the Canadian dollar relative to the U.S. dollar that could adversely affect our financial position and operating results.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
ITEM 2. PROPERTIES
At December 31, 2020, we owned or leased the following facilities:
Approximate Square Footage
|Chicago, Illinois||Lawson||Headquarters||86,300 ||Lease||March 2023|
|McCook, Illinois||Lawson||Packaging/Distribution||306,800 ||Lease||June 2025|
|Reno, Nevada||Lawson||Distribution||105,200 ||Lease||June 2024|
|Suwanee, Georgia||Lawson||Distribution||91,200 ||Own|
Decatur, Alabama (1)
|Dayton, OH||Lawson||Distribution||4,500 ||Lease||Monthly|
|Greenville, TX||Lawson||Distribution||123,200 ||Lease||February 2022|
|Dallas, TX||Lawson||Lease||3,800 ||Lease||January 2022|
|Mississauga, Ontario||Lawson||Distribution||78,000 ||Own|
Calgary, Alberta (2)
|Lawson/Bolt||Distribution||43,700 ||Lease||December 2021|
|Calgary, Alberta (Foothills)||Bolt||Branch||11,200 ||Lease||April 2024|
|Calgary, Alberta (South)||Bolt||Branch||10,300 ||Lease||November 2023|
|Calgary, Alberta (North)||Bolt||Branch||6,900 ||Lease||January 2024|
|Edmonton, Alberta (North)||Bolt||Branch||6,000 ||Lease||February 2022|
|Edmonton, Alberta (South)||Bolt||Branch||5,600 ||Lease||September 2023|
|Fort McMurray, Alberta||Bolt||Branch||7,500 ||Lease||February 2024|
|Lethbridge, Alberta||Bolt||Branch||3,400 ||Own|
|Medicine Hat, Alberta||Bolt||Branch||4,900 ||Own|
|Port Kells, British Columbia||Bolt||Branch||12,000 ||Lease||August 2023|
|Prince Albert, Saskatchewan||Bolt||Branch||4,300 ||Lease||October 2025|
|Red Deer, Alberta||Bolt||Branch||4,100 ||Lease||January 2022|
|Regina, Saskatchewan||Bolt||Branch||4,800 ||Lease||December 2029|
|Saskatoon, Saskatchewan||Bolt||Branch||10,800 ||Lease||May 2021|
|Winnipeg, Manitoba||Bolt||Branch||7,500 ||Lease||September 2025|
(1) In connection with the sale of a discontinued business, we have agreed to lease the Decatur facility prior to the sale of the property.
(2) Lawson and Bolt manage separate distribution operations out of the same physical location.
While we believe that our facilities are adequate to meet our current needs, we will continue to assess the location and operation of our facilities to determine whether they meet the strategic needs of our business.
ITEM 3. LEGAL PROCEEDINGS.
The Company is involved in legal actions that arise in the ordinary course of business. It is the opinion of management that the resolution of any currently pending litigation will not have a material adverse effect on the Company’s financial position, results of operations or cash flows.
ITEM 4. MINE SAFETY DISCLOSURES.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Stock Price Data
The Company’s Common Stock is traded on the NASDAQ Global Select Market under the symbol of “LAWS”. On January 31, 2021, the closing sales price of our common stock was $49.59 and the number of stockholders of record was 290. We did not issue dividends in either 2020 or 2019 and the Company currently has no plans to issue dividends in the foreseeable future and dividends are subject to certain restriction based on terms detailed in our Credit Agreement. Information about our equity compensation plans may be found in Item 12 of this report which is hereby incorporated by reference.
Repurchased Shares of Stock
The following table summarizes the repurchases of the Company's Common Stock for the three months ended December 31, 2020. These shares were purchased for the sole purpose of satisfying tax withholding obligations of certain employees upon the vesting of market stock units granted to them by the Company. No shares were repurchased in the open market during the fourth quarter under the Company's $7.5 million repurchase program that was authorized in 2019.
Total number of shares (or units) purchased
Average price paid per share (or unit)
Total number of shares (or units) purchased as part of publicly announced plans or programs
Maximum number (or approximate dollar value) of shares that may yet be purchased under the plans or programs
|October 1 to October 31, 2020||291 ||$||45.51 ||— ||$||4,512,000 |
|November 1 to November 30, 2020||— ||— ||— ||4,512,000 |
|December 1 to December 31, 2020||20,314 ||50.91 ||— ||4,512,000 |
|Three months ended December 31, 2020||20,605 ||— |
ITEM 6. SELECTED FINANCIAL DATA.
The following selected financial data should be read in conjunction with the Consolidated Financial Statements of the Company and Notes thereto included in Item 8 in this Annual Report. The income statement data and balance sheet data are for, and as of the end of each of the years in the five-year period ended December 31, 2020 and are derived from the audited Consolidated Financial Statements of the Company.
|(Dollars in thousands, except per share data)|
|Revenue||$||351,591 ||$||370,785 ||$||349,637 ||$||305,907 ||$||276,573 |
Net income (loss)
|$||15,113 ||$||7,221 ||$||6,214 ||$||29,688 ||$||(1,629)|
Diluted income (loss) per share of common stock:
|$||1.62 ||$||0.77 ||$||0.67 ||$||3.25 ||$||(0.19)|
|$||256,304 ||$||204,429 ||$||197,142 ||$||191,111 ||$||135,307 |
|$||35,887 ||$||39,498 ||$||31,760 ||$||37,644 ||$||34,737 |
|$||122,422 ||$||108,001 ||$||99,173 ||$||93,490 ||$||61,133 |
(1)The 2020 financial data reflects the inclusion of Partsmaster acquisition that was completed in August.
(2)The 2019 financial data reflects the inclusion of Screw Products, Inc. ("Screw Products") for the full year.
(3)The 2018 financial data reflects the inclusion of Bolt for the full year, as well as a $0.5 million increase in the estimated future remediation cost of an environmental matter involving land owned in Decatur, Alabama, that was part of a division that was previously sold.
(4)The 2017 financial data includes an income tax benefit of $19.6 million primarily as a result of releasing Deferred Tax Asset ("DTA") valuation reserves of $21.2 million at December 31, 2017. 2017 also includes a $5.4 million gain on the sale of the Fairfield, New Jersey distribution center.
(5)Company adopted ASC 606 in 2018 and ASC 842 in 2019 on a modified retrospective basis.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
We are a distributor of products and services to the industrial, commercial, institutional, and governmental maintenance, repair and operations ("MRO") marketplace. We operate in two reportable segments: Lawson and Bolt. The Lawson operating segment primarily distributes MRO products to its customers through a network of sales representatives throughout the U.S. and Canada. The Bolt operating segment primarily distributes its MRO products through a network of 14 branches located in Alberta, Saskatchewan, Manitoba and British Columbia, Canada.
In March 2020, the World Health Organization declared a new strain of coronavirus (“COVID-19”) a pandemic. The COVID-19 pandemic continues to negatively impact the global economy by disrupting global supply chains and financial markets and has negatively impacted our operational and financial performance. The continued impact of the COVID-19 pandemic on our operational and financial performance, including our ability to execute our business strategies and initiatives in the expected time frame, will depend on future developments, including the duration and spread of the pandemic and related restrictions on travel and transports, all of which remain uncertain. An extended period of global supply chain and economic disruption could materially affect our business, sales, results of operations and financial condition.
Lawson continues to be defined as an essential business by the state of Illinois. A change in this status could result in the temporary closure of our business. Additionally the COVID-19 pandemic could result in a temporary closure of some or all of our distribution facilities or the Bolt branch locations, which would negatively impact our operations. Other disruptions to our supply chain such as reduced capacity or temporary shutdowns of freight carriers could also negatively impact our performance. The pandemic has negatively impacted our current operations and may negatively impact our future financial results, liquidity and overall performance. Additionally, it is possible that estimates made in support of our financial statements may be materially and adversely impacted in the near term as a result of these conditions, including delay in payment of receivables, impairment losses related to goodwill and other long-lived assets, and inability to utilize deferred tax assets.
The Company experienced the most severe impacts of the COVID-19 pandemic in the second quarter 2020. The onset of the pandemic and government regulations, including social distancing guidelines and shutdowns of nonessential businesses, led to closure of customer businesses throughout the United States and Canada, as well as substantial restrictions on the ability of Lawson MRO sales representatives to visit customer locations and perform VMI services. Additionally government regulations also severely restricted the ability of customers to visit Bolt branch locations. The economic climate in the third and fourth quarters improved as many nonessential businesses have reopened in both limited capacity and full capacity. The relaxed restrictions have resulted in consistent customer visits and increased customer contact.
While business conditions improved in the third and fourth quarters, the Company expects to continue to be adversely impacted by the COVID-19 pandemic and the various federal, state and local restrictions enacted to combat the pandemic. In the fourth quarter of 2020, U.S. Food and Drug Administration approved certain vaccines that have demonstrated effectiveness in preventing the spread of the COVID-19 virus. However, it is projected that the production, distribution and administration of the vaccine to a sufficient percentage of the population to significantly minimize the future effect of the pandemic will not be reached until mid-2021 or later.
We continue to take action to mitigate the potential negative impacts of COVID-19. The actions taken included, but are not limited to, furloughing employees, reducing base salaries and incentive awards for a period of time, canceling travel and award trips, temporarily consolidating our Suwanee distribution center operations into the McCook facility, eliminating non-critical capital expenditures and eliminating various positions throughout the Company.
We continue to monitor our balance sheet and liquidity position and take actions to protect our cash flows from operations while at the same time managing our operating expenses in relation to current sales trends. At December 31, 2020, we had $28.4 million of unrestricted cash and cash equivalents and an additional $66.0 million of borrowing capacity, net of outstanding letters of credit. Our outstanding letters of credit include a letter of credit for $33.0 million to secure the remaining payment of the Partsmaster acquisition.
We will continue to closely monitor the overall economic and operating environment and we will take appropriate actions to protect the safety of our employees, customers and suppliers while continuing to meet our working capital needs and remain in compliance with our debt covenants. While COVID-19 has negatively impacted our sales, cost control measures and ability to effectively service our customers, we have continued to generate positive cash flow that has enabled us to maintain a strong financial position. We plan to continue to respond to pandemic developments in a prompt and disciplined manner with an emphasis on protecting our employees and maintaining our strong financial position.
The North American MRO market is highly fragmented. We compete for business with several national distributors as well as a large number of regional and local distributors. The MRO business is influenced by the overall strength of the manufacturing sector of the U.S. economy which has been significantly affected by the COVID-19 pandemic. One measure used to evaluate the strength of the industrial products market is the PMI index published by the Institute for Supply Management. The PMI index is a composite index of economic activity in the United States manufacturing sector and is available at https://www.instituteforsupplymanagement.org. A measure of that index above 50 generally indicates expansion of the manufacturing sector while a measure below 50 generally represents contraction. The average monthly PMI (Purchasing Managers Index) was 52.5 for the year ended December 31, 2020 compared to 51.3 for the year ended December 31, 2019. The average monthly PMI for the fourth quarter of 2020 was 59.2, which indicates expansion of the manufacturing sector compared to the previous periods. This is compared to the fourth quarter of 2019 which was 48.1, which indicates contraction of the manufacturing sector compared to the previous periods.
One metric we use to measure our success is Average Daily Sales ("ADS") in which we calculate our total sales divided by the number of selling days, which exclude weekends and holidays. Our sales are affected by the number and effectiveness of sales representatives and the amount of sales each representative can generate from providing products and services to our customers, which we measure as average sales per day per sales representative. We had an average of 1,012 sales representatives working for us in 2020, a 2.1% increase over 2019. Excluding the Partsmaster acquisition, we had an average of 944 sales representatives working for us in 2020.
In August 2020, we acquired Partsmaster, a leading Maintenance, Repair and Operations ("MRO") distributor from NCH Corporation ("NCH"). Partsmaster has approximately 200 sales representatives and serves approximately 16,000 customers throughout the United States and Canada. We also subleased the Partsmaster distribution center located in Greenville, Texas from NCH, and we will continue to fulfill orders from this facility as we integrate Partsmaster into our MRO segment operations.
The purchase price of the acquisition was $35.3 million in cash and the assumption of certain liabilities. We paid $2.3 million at the time of the acquisition and we will pay the remaining $33.0 million in May 2021. We plan to pay the remaining portion of the purchase price with cash on hand with any remaining portion using our existing credit facility.
Assets acquired and liabilities assumed as a result of the acquisition were accounted for at their fair value on the acquisition date. The identified assets include $5.0 million of intangible assets for customer relationships and $2.8 million for trade names with estimated useful lives of 10 years and 5 years, respectively. Goodwill of $15.8 million related to this acquisition reflects the purchase price less the fair market value of the identifiable assets. The liabilities assumed include approximately $2.9 million relating to deferred employee compensation and $4.1 million of accounts payable and other accrued liabilities. The appropriate fair values of the assets acquired and liabilities assumed are based on preliminary estimates and assumptions. These preliminary estimates and assumptions could change during the purchase price measurement period as we finalize the valuations of the assets acquired and liabilities assumed.
Additional information related to the Partsmaster acquisition is provided in Note 3 - Acquisition in the notes to the consolidated financial statements. The Partsmaster acquisition is reported in the Lawson MRO segment.
RESULTS OF OPERATIONS FOR 2020 AS COMPARED TO 2019
|Year Ended December 31,||Year-to-Year|
|(Dollars in thousands)||Amount||% of Net Sales||Amount||% of Net Sales||Amount||%|
|Revenue||$||351,591 ||100.0 ||%||$||370,785 ||100.0 ||%||$||(19,194)||(5.2)||%|
Cost of goods sold
|165,053 ||46.9 ||173,431 ||46.8 ||(8,378)||(4.8)|
|186,538 ||53.1 ||197,354 ||53.2 ||(10,816)||(5.5)|
|76,775 ||21.8 ||85,342 ||23.0 ||(8,567)||(10.0)|
General and administrative expenses
|89,213 ||25.5 ||102,946 ||27.8 ||(13,733)||(13.3)|
Total operating expenses
|165,988 ||47.3 ||188,288 ||50.8 ||(22,300)||(11.8)|
|Operating income||20,550 ||5.8 ||9,066 ||2.4 ||11,484 |
|Other income, net||889 ||0.3 ||1,211 ||0.3 ||(322)|
Income before income taxes
|20,785 ||5.9 ||9,674 ||2.6 ||11,111 |
Income tax expense
|5,672 ||1.6 ||2,453 ||0.7 ||3,219 |
|$||15,113 ||4.3 ||%||$||7,221 ||1.9 ||%||$||7,892 |
Non-GAAP Financial Measure - Adjusted Operating Income
The Company's management believes that certain non-GAAP financial measures may provide users of this financial information with additional meaningful comparisons between current results and results in prior operating periods. Management believes that these non-GAAP financial measures can provide additional meaningful reflection of underlying trends of the business because they provide a comparison of historical information that excludes certain infrequently occurring, seasonal or non-operational items that impact the overall comparability. These non-GAAP financial measures should be viewed in addition to, and not as an alternative for, the Company's reported results prepared in accordance with GAAP.
Adjusted operating income is defined by us as GAAP operating income excluding stock-based compensation, severance expense, and other non-recurring items in the period in which these items are incurred.
Operating income was $20.6 million for 2020 inclusive of $2.0 million of stock-based compensation compared to $9.1 million in 2019 which included $17.8 million of stock-based compensation. Excluding stock-based compensation, severance and other non-recurring items, adjusted operating income decreased to $27.4 million from $28.6 million on lower sales, offset by cost control measures enacted in response to the COVID-19 pandemic and the contribution of Partsmaster to the adjusted non-GAAP operating income of $1.7 million.
|Reconciliation of GAAP Operating Income to Adjusted Non-GAAP Operating Income (Unaudited)|
|Twelve Months Ended|
|(Dollars in Thousands)||2020||2019|
|Operating income as reported per GAAP||$||20,550 ||$||9,066 |
Stock-based compensation (1)
|2,009 ||17,788 |
Severance expense (2)
|2,077 ||1,756 |
Goodwill impairment (3)
|1,918 ||— |
Acquisition related costs (4)
|880 ||— |
|Adjusted non-GAAP operating Income||$||27,434 ||$||28,610 |
(1) Expense for stock-based compensation, of which a portion varies with the Company's stock price
(2) Includes severance expense from actions taken in 2020 and 2019 along with 2020 severance and retention costs related to the Partsmaster acquisition.
(3) Represents the goodwill impairment related to the 2018 acquisition of Screw Products, Inc as the carrying value of the reporting unit exceeded its estimated fair value.
(4) Primarily legal and accounting costs pertaining to the Partsmaster acquisition.
Sales and Gross Profits
Sales and gross profit results by operating segment for the years ended December 31, 2020 and 2019 were as follows:
|Year Ended December 31,||Increase (Decrease)|
|(Dollars in thousands)||2020||2019||Amount||%|
|$||312,803 ||$||329,367 ||$||(16,564)||(5.0)||%|
|38,788 ||41,418 ||(2,630)||(6.3)||%|
|$||351,591 ||$||370,785 ||$||(19,194)||(5.2)||%|
|$||171,258 ||$||181,567 ||$||(10,309)||(5.7)||%|
|15,280 ||15,787 ||(507)||(3.2)||%|
|$||186,538 ||$||197,354 ||$||(10,816)||(5.5)||%|
|Gross profit margin|
|54.7 ||%||55.1 ||%|
|39.4 ||%||38.1 ||%|
|53.1 ||%||53.2 ||%|
Consolidated revenue in 2020 decreased 5.2% to $351.6 million from $370.8 million in 2019. Sales were negatively impacted by the COVID-19 pandemic and lower sales to oil and gas customers. All customer categories have been negatively impacted by the effect of the COVID-19 pandemic. The most acute negative impacts of the COVID-19 pandemic were experienced in the second quarter at the onset of the pandemic. Restrictions related to the pandemic began to be relaxed in the third quarter and continued to be relaxed in the fourth quarter, which led to improved customer activity, as well as increased customer contact for Lawson MRO sales representatives and greater foot traffic for the Bolt branches compared to the second quarter. Excluding Partsmaster, sales decreased 11.3% primarily as a result of the pandemic. The decrease in sales was offset by the inclusion of $22.6 million of sales contributed by the Partsmaster acquisition since August 31, 2020. Average daily sales decreased to $1.390 million in 2020 compared to $1.471 million in 2019 with one more selling day in 2020. Excluding a foreign currency effect of $0.7 million, consolidated revenue decreased by 5.0% for the year.
Gross profit decreased to $186.5 million in 2020 from $197.4 million in 2019 driven primarily by the decrease in sales due to the COVID-19 pandemic, partially offset by the inclusion of $13.2 million of gross profit from Partsmaster. Gross profit as a percent of sales decreased to 53.1% from 53.2% a year ago. Gross profit as a percentage of sales generated by sales representatives acquired from the Partsmaster acquisition was 58.4% post-acquisition. The organic Lawson MRO (excluding Bolt, Screw Products, and Partsmaster) gross margin as a percent of sales declined to 59.8% compared to the prior year organic gross margin percent of 60.7% primarily as a result of lower margin products comprising a larger portion of our sales compared to the prior year and fixed distribution costs allocated over a lower sales base.
Selling, General and Administrative Expenses
|Year Ended December 31,||Increase (Decrease)|
|(Dollars in thousands)||2020||2019||Amount||%|
|$||73,706 ||$||81,999 ||$||(8,293)||(10.1)||%|
|3,069 ||3,343 ||(274)||(8.2)||%|
|$||76,775 ||$||85,342 ||$||(8,567)||(10.0)||%|
|General and administrative expenses|
|$||79,837 ||$||93,085 ||$||(13,248)||(14.2)||%|
|9,376 ||9,861 ||(485)||(4.9)||%|
|$||89,213 ||$||102,946 ||$||(13,733)||(13.3)||%|
Selling expenses decreased to $76.8 million in 2020 from $85.3 million in 2019 and, as a percent of sales decreased to 21.8% in 2020 from 23.0% in 2019. The decrease in selling expense as a percent of sales was primarily driven by reduced sales compensation driven by lower sales and a reduction of travel related expenses after the onset of the COVID-19 pandemic. These declines were partially offset by an inclusion of $6.5 million of selling expenses from the Partsmaster acquisition.
General and administrative expenses decreased to $89.2 million in 2020 from $102.9 million in 2019 primarily due to a decrease in stock-based compensation expense of $15.8 million, a portion of which varies with the Company stock price, and lower employee compensation, lower travel expense and other cost control measures in order to mitigate the negative impacts of COVID-19. The decline was offset by the inclusion of $7.4 million of General and administrative expense from the Partsmaster acquisition and the goodwill impairment of $1.9 million related to the 2018 acquisition of Screw Products as the carrying value of the reporting unit exceeded its fair value. Additionally the Company recorded $1.4 million under the Canada Emergency Wage Subsidy ("CEWS") as a reduction of general and administrative expenses.
The Company performed a quantitative goodwill impairment analysis as of December 1, 2020 for the Screw Products reporting unit. The Company engaged a third-party valuation firm to determine the value of the Screw Products reporting unit and determined that the carrying value of the net assets exceeded the fair value of the reporting unit and accordingly recognized an impairment charge of $1.9 million.. The impairment charge is included in general and administrative expense.
Interest expenses increased $0.1 million in 2020 over the prior year, due primarily to the inclusion of imputed interest expense from our accrued acquisition liability offset by lower average outstanding balances under our credit agreement.
Other Income, Net
Other income, net was $0.9 million in 2020 compared to other income, net of $1.2 million in 2019. Other income, net in both years was driven by fluctuations in the Canadian currency exchange rate.
Income Tax Expense
Income tax expenses were $5.7 million resulting in a 27.3% effective tax rate for 2020 compared to income tax expense of $2.5 million and a 25.4% effective tax rate for 2019. The higher effective tax rate in 2020 is due primarily to increases in uncertain tax positions and lower stock compensation deductions.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities was $32.5 million and $9.2 million in 2020 and 2019, respectively, reflecting stronger operating results along with tightly managing its working capital.
Capital expenditures of $1.7 million and $2.0 million in 2020 and 2019 respectively, were primarily for improvements to our distribution centers and information technology. In the third quarter of 2020, the Company paid $2.3 million in cash related to the Partsmaster acquisition.
In 2019, our Board of Directors authorized a program in which we may repurchase up to $7.5 million of our common stock from time to time in open market transactions, privately negotiated transactions or by other methods. In the first quarter of 2020 we purchased 47,504 shares of our common stock at an average purchase price of $36.93 under the repurchase program. During 2019, the Company purchased 32,362 shares of common stock at an average purchase price of $38.13 under the repurchase program. On December 31, 2020, the Company had $4.5 million available under its repurchasing program.
At December 31, 2020, we had no borrowings under the Credit Agreement and had borrowing availability of $66.0 million. See Note 13 - Credit Agreement for further information on the Company Credit Agreement.
In addition to other customary representations, warranties and covenants, the Credit Agreement contains certain financial covenants. The following chart reflects the EBITDA to fixed charges ratio and total net leverage ratio covenant:
|Quarterly Financial Covenants||Requirement||Actual|
|EBITDA to fixed charges ratio||1.15 : 1.00||4.77 : 1.00|
|Total net leverage ratio||3.25 : 1.00||0.60 : 1.00|
The Company was in compliance with all financial covenants as of December 31, 2020.
No cash dividends have been paid in the two years ended December, 31 2020. Dividends are subject to certain restrictions under our Credit Agreement.
Partsmaster Acquisition Liability
As a part of the Partsmaster acquisition, payment of $33.0 million is due to the sellers in May 2021. The payment has been guaranteed under the Purchase Agreement, which includes the issuance of a $33.0 million irrevocable standby letter of credit. Payment will be made with cash on hand and with any remaining portion using our existing credit facility. The $33.0 million obligation has been discounted to its present value and is recognized as a current liability of $32.7 million in our condensed consolidated balance sheet as of December 31, 2020.
OFF-BALANCE SHEET ARRANGEMENTS
The majority of our operating leases were recognized as right of use assets and lease liabilities on the balance sheet upon the adoption of ASU 2016-02, Leases ("ASU 2016-02") in the first quarter of 2019. See Note 12 - Leases for the transition to ASU 2016-02.
Also, as of December 31, 2020, we had contractual commitments to purchase approximately $24.4 million of product from our suppliers and contractors.
CRITICAL ACCOUNTING POLICIES
We have disclosed our significant accounting policies in Note 2 to the consolidated financial statements. The following provides information on the accounts requiring more significant estimates.
Allowance for Doubtful Accounts — We evaluate the collectability of accounts receivable based on a combination of factors. In circumstances where we are 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 we believe will be collected. For all other customers, we recognize reserves for bad debts based on our historical experience of bad debt write-offs as a percent of accounts receivable outstanding. If circumstances change (e.g., 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 to us could be revised. At December 31, 2020, our reserve was 1.4% of our gross accounts receivable outstanding. A hypothetical change of one percent to our reserve as a percent of our gross accounts receivable would have affected our annual doubtful accounts expense by approximately $0.4 million.
Inventory Reserves — Inventories consist principally of finished goods and are stated at the lower of cost (determined using the first-in-first-out method for the Lawson segment and weighted average for the Bolt segment) or net realizable value. Most of our products are not exposed to the risk of obsolescence due to technology changes. However, some of our products do have a limited shelf life, and from time to time we add and remove items from our catalogs, brochures or website for marketing and other purposes.
To reduce our inventory to a lower of cost or market value, we record a reserve for slow-moving and obsolete inventory based on historical experience and monitoring of our current inventory activity. We use estimates to determine the necessity of recording these reserves based on periodic detailed analysis, using both qualitative and quantitative factors. As part of this analysis, we consider several factors including the inventories’ length of time on hand, historical sales, product shelf life, product life cycle, product category and product obsolescence. In general, depending on the product category, we reserve inventory with low turnover at higher rates than inventory with higher turnover.
At December 31, 2020, our inventory reserve was $5.3 million, equal to approximately 7.8% of our gross inventory. A hypothetical change of one percent to our reserve as a percent of total inventory would have affected our cost of goods sold by $0.6 million.
Income Taxes — Deferred tax assets or liabilities reflect temporary differences between amounts of assets and liabilities for financial and tax reporting. Such amounts are adjusted, as appropriate, to reflect changes in enacted tax rates expected to be in effect when the temporary differences reverse. Significant judgment is required in determining income tax provisions as well as deferred tax asset and liability balances, including the estimation of valuation allowances and the evaluation of uncertain tax positions.
Goodwill Impairment – Goodwill represents the cost of business acquisitions in excess of the fair value of identifiable net tangible and intangible assets acquired. Goodwill is allocated to the appropriate reporting unit as reviewed by the Company's segment managers. The Company reviews goodwill for potential impairment annually on December 1st, or when an event or other circumstances change that would more likely than not reduce the fair value of the asset below its carrying value. The first step in the multi-step process to determine if goodwill has been impaired and to what degree is to review the relevant qualitative factors that could cause the fair value of the reporting unit to decrease below the carrying value of the reporting unit. The Company considers factors such as macroeconomic, industry and market conditions, cost factors, overall financial performance and other relevant factors that would affect the individual reporting units. If we determine that it is more likely than not that the fair value of the reporting unit is greater than the carrying value of the reporting unit, then no further impairment testing is needed. If we determine that it is more likely than not that the carrying value of the reporting unit is greater than the fair value of the reporting unit, the Company will move to the next step in the process. The Company will estimate the fair value of the reporting unit and compare it to the reporting unit's carrying value. If the carrying value of the reporting unit exceeds its fair value, the Company will record an impairment of goodwill equal to the amount the carrying value of the reporting unit exceeds its fair value, up to the total amount of goodwill previously recognized.
Revenue Recognition - For reporting purposes, the Company has two separate performance obligations including products and vendor managed inventory services. The allocation of product and service revenue as well as the estimation of service costs requires judgments and assumptions including the standalone selling prices, the period of time that it takes for the service obligation to be fulfilled and the amount of time spent on vendor managed inventory services during the sales process. Changes in various assumptions could increase or decrease the allocation of service revenue and related costs; however, would not materially impact total reported revenues or reported operating income.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The following information is presented in this item:
Report of Independent Registered Public Accounting Firm
Shareholders and Board of Directors
Lawson Products, Inc.
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Lawson Products, Inc. (the “Company”) as of December 31, 2020 and 2019, the related consolidated statements of income and comprehensive income, changes in stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2020, and the related notes and financial statement schedule listed in the accompanying index (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company's internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and our report dated February 26, 2021 expressed an unqualified opinion thereon.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing a separate opinion on the critical audit matters or on the accounts or disclosures to which they relate.
Goodwill Impairment Assessment - Bolt Reporting Unit
As described in Note 8 to the consolidated financial statements, the Company’s consolidated goodwill balance as of December 31, 2020 was $35.2 million. At December 31, 2020, the Bolt reporting unit’s (“Bolt”) goodwill balance was $13.8 million. The Company tests for impairment annually on a reporting unit basis or more often when impairment indicators exist. As a result of the COVID-19 pandemic and its impact on Bolt’s revenue and earnings during the first quarter of 2020, the Company performed interim goodwill impairment tests of Bolt. The Company prepared a valuation of Bolt using both a market approach and an income approach. The determination of the fair value of the reporting unit requires management to make significant estimates and assumptions related to forecasts of future revenue and earnings.
We identified the valuation of Bolt during the interim impairment assessment of goodwill as a critical audit matter. The principal considerations for our determination are: (i) Bolt’s excess fair value over book value was less than 10% in the first quarter of 2020, as such, management’s estimates were more sensitive to the assumptions and judgments used, (ii) inherent uncertainties exist related to the Company’s forecasts and how various economic and other factors including the projected impact from the COVID-19 pandemic, could affect the Company’s forecasted assumptions of revenue and earnings included in the income approach, and (iii) the appropriateness and relative weighting of valuation methods, and the appropriateness of the selected comparable companies and market multiples used in the market approach. Auditing these elements involved especially challenging auditor judgment due to the nature and extent of audit effort required to address these matters, including the extent of specialized skill or knowledge needed.
The primary procedures we performed to address this critical audit matter included:
•Evaluating the reasonableness of assumptions used in management’s income approach analysis by independently comparing the forecasts to: (i) historical results, and (ii) market trends by obtaining multiple independent publicly available market reports and assessing the projected impact of the COVID-19 pandemic and the forecasted recovery period for the industry.
•Assessing the appropriateness of the market approach and evaluating the reasonableness of the comparable companies and market multiples selected.
•Utilizing personnel with specialized knowledge and skill in valuation to assist in: (i) testing the underlying source information utilized in the market approach, (ii) assessing the appropriateness and relative weighting of valuation methods, (iii) evaluating the reasonableness of selected comparable companies and market multiples used in the market approach, and (iv) testing the mathematical accuracy of the Company’s calculations.
Business Combination- Partsmaster Intangible Assets Valuation
As described in Note 3 to the consolidated financial statements, the Company completed the acquisition of Partsmaster on August 31, 2020 for $35.3 million in cash plus assumed liabilities, which resulted in $7.7 million of intangible assets. The Company applied significant judgment in estimating the fair value of the intangible assets acquired which involved the use of significant estimates and assumptions with respect to expected future cash flows and discount rates.
We identified the valuation of the intangible assets acquired in the Partsmaster business combination as a critical audit matter. Management was required to make significant judgments and assumptions, including forecasted cash flows and discount rates, in determining the fair values of the intangible assets acquired which were identified as customer relationships and trade names. Auditing these elements involved especially challenging auditor judgment due to the nature and extent of audit effort required to address these matters, including the extent of specialized skill or knowledge needed.
The primary procedures we performed to address this critical audit matter included:
•Evaluating the reasonableness of the forecasted cash flows through: (i) evaluating historical results of Partsmaster (ii) assessing forecasted performance against market trends and guideline companies, and (iii) testing the mathematical accuracy of the Company’s calculations.
•Utilizing personnel with specialized knowledge and skill in valuation to assist in: (i) evaluating the appropriateness of the selected comparable companies, (ii) evaluating the reasonableness of the discount rate used, and (iii) testing the mathematical accuracy of the Company’s calculations.
/s/BDO USA, LLP
We have served as the Company's auditors since 2013.
February 26, 2021
Lawson Products, Inc.
Consolidated Balance Sheets
(Dollars in thousands, except share data)
Cash and cash equivalents
|$||28,393 ||$||5,495 |
|998 ||802 |
Accounts receivable, less allowance for doubtful accounts of $654 and $593, respectively
|44,515 ||38,843 |
|61,867 ||55,905 |
Miscellaneous receivables and prepaid expenses
|7,289 ||5,377 |
Total current assets
|143,062 ||106,422 |
|Property, plant and equipment, less accumulated depreciation and amortization||15,800 ||16,546 |
|Deferred income taxes||18,482 ||21,711 |
|Goodwill||35,176 ||20,923 |
|Cash value of life insurance||16,185 ||14,969 |
|Intangible assets, net||18,503 ||12,335 |
|Right of use assets||8,764 ||11,246 |
|Other assets||332 ||277 |
|$||256,304 ||$||204,429 |
LIABILITIES AND STOCKHOLDERS’ EQUITY
|Accrued acquisition liability||$||32,673 ||$||— |
|22,262 ||13,789 |
|4,568 ||3,830 |
Accrued expenses and other liabilities
|38,492 ||39,311 |
Total current liabilities
|97,995 ||56,930 |
Revolving line of credit
|— ||2,271 |
Security bonus plan
|11,262 ||11,840 |
|5,738 ||9,504 |
|10,461 ||6,370 |
Deferred tax liability
|2,841 ||6,188 |
|5,585 ||3,325 |
|133,882 ||96,428 |
|Commitments and contingencies – Note 16|
Preferred stock, $1 par value:
Authorized - 500,000 shares, issued and outstanding - None
|— ||— |
Common stock, $1 par value:
Authorized - 35,000,000 shares
Issued – 9,287,625 and 9,190,171 shares, respectively
Outstanding – 9,061,039 and 9,043,771 shares, respectively
|9,288 ||9,190 |
Capital in excess of par value
|19,841 ||18,077 |
|101,609 ||86,496 |
Treasury stock – 226,586 and 146,400 shares held, respectively
|Accumulated other comprehensive income (loss)||699 ||(1)|
Total stockholders’ equity
|122,422 ||108,001 |
Total liabilities and stockholders’ equity
|$||256,304 ||$||204,429 |
See notes to Consolidated Financial Statements
Lawson Products, Inc.
Consolidated Statements of Income and Comprehensive Income
(Dollars in thousands, except per share data)
|Year Ended December 31,|
|Revenue||351,591 ||370,785 |
|Cost of goods sold||165,053 ||173,431 |
|Gross profit||186,538 ||197,354 |
|76,775 ||85,342 |
General and administrative expenses
|89,213 ||102,946 |
|165,988 ||188,288 |
|20,550 ||9,066 |
|Other income, net||889 ||1,211 |
Income before income taxes
|20,785 ||9,674 |
Income tax expense
|5,672 ||2,453 |
|$||15,113 ||$||7,221 |
Basic income per share of common stock
|$||1.68 ||$||0.81 |
Diluted income per share of common stock
|$||1.62 ||$||0.77 |
Weighted average shares outstanding:
Basic weighted average shares outstanding
|9,020 ||8,968 |
Effect of dilutive securities outstanding
|311 ||408 |
Diluted weighted average shares outstanding
|9,331 ||9,376 |
|$||15,113 ||$||7,221 |
|Other comprehensive income, net of tax:|
Adjustment for foreign currency translation
|700 ||1,559 |
|$||15,813 ||$||8,780 |
See notes to Consolidated Financial Statements
Lawson Products, Inc.
Consolidated Statements of Changes in Stockholders’ Equity
(Dollars in thousands)
$1 Par Value
|Capital in Excess of Par Value||Retained Earnings||Treasury Stock||Accumulated Other Comprehensive Income (Loss)||Total Stockholders' Equity|
|Balance at January 1, 2019||8,955,930 ||$||9,006 ||$||15,623 ||$||77,338 ||$||(1,234)||$||(1,560)||$||99,173 |
Change in accounting principle (1)
|— ||— ||— ||1,937 ||— ||— ||1,937 |
|— ||— ||— ||7,221 ||— ||— ||7,221 |
Adjustment for foreign currency translation
|— ||— ||— ||— ||— ||1,559 ||1,559 |
|— ||— ||2,638 ||— ||— ||— ||2,638 |
|184,455 ||184 ||(184)||— ||— ||— ||— |
Shares repurchased held in treasury
|(96,614)||— ||— ||— ||(4,527)||— ||(4,527)|
|Balance at December 31, 2019||9,043,771 ||9,190 ||18,077 ||86,496 ||(5,761)||(1)||108,001 |
|— ||— ||— ||15,113 ||— ||— ||15,113 |
Adjustment for foreign currency translation
|— ||— ||— ||— ||— ||700 ||700 |
|— ||— ||1,847 ||— ||— ||— ||1,847 |
|97,454 ||98 ||(83)||— ||— ||— ||15 |
Shares repurchased held in treasury
|(80,186)||— ||— ||— ||(3,254)||— ||(3,254)|
|Balance at December 31, 2020||9,061,039 ||$||9,288 ||$||19,841 ||$||101,609 ||$||(9,015)||$||699 ||$||122,422 |
(1) The Company adopted the on January 1, 2019 using the modified retrospective approach. See Note 12 - Leases for further details.
See notes to Consolidated Financial Statements
Lawson Products, Inc.
Consolidated Statements of Cash Flows
(Dollars in thousands)
|Year Ended December 31,|
|$||15,113 ||$||7,221 |
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
|6,701 ||5,893 |
|1,479 ||4,054 |
Deferred income taxes
|Goodwill impairment||1,918 ||— |
Changes in operating assets and liabilities, net of effect of acquired businesses:
Miscellaneous receivables, prepaid expenses and other assets
Accounts payable and other liabilities
|733 ||667 |
Net cash provided by operating activities
|32,528 ||9,196 |
Purchases of property, plant and equipment
Business acquisition, net of acquired cash
Net cash used in investing activities
Net payments on revolving lines of credit
Shares repurchased held in treasury
Payment of financing fees
Payment of financing lease principal
Proceeds from stock option exercises
|15 ||33 |
Net cash used in financing activities
Effect of exchange rate changes on cash and cash equivalents
|320 ||336 |
Increase (decrease) in cash and cash equivalents and restricted cash
Cash, cash equivalents and restricted cash at beginning of year
|6,297 ||12,683 |
Cash, cash equivalents and restricted cash at end of year
|$||29,391 ||$||6,297 |
|Cash and cash equivalents||$||28,393 ||$||5,495 |
|Restricted cash||998 ||802 |
Total cash, cash equivalents and restricted cash
|$||29,391 ||$||6,297 |
|Supplemental disclosure of cash flow information|
|Net noncash financing liability related to acquisition||(32,673)||— |
Net cash paid for income taxes
|5,377 ||947 |
Net cash paid for interest
|398 ||590 |
See notes to Consolidated Financial Statements
Lawson Products, Inc.
Notes to Consolidated Financial Statements
Note 1 - Description of Business
Lawson Products, Inc. (“Lawson” or the “Company”) is a North American distributor of products and services to the industrial, commercial, institutional and government maintenance, repair and operations (“MRO”) marketplace. The Company has two reportable segments. The Lawson reportable segment distributes 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 Bolt reportable segment distributes MRO products primarily through its 14 branches located in Western Canada. On August 31, 2020, the Company acquired Partsmaster, a distributor of MRO products. Partsmaster is included in the Lawson reportable segment.
Note 2 - Summary of Significant Accounting Policies
Principles of Consolidation — The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States and include the accounts and transactions of the Company and its wholly-owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. Certain reclassifications have been made to prior period amounts to conform to the current period presentation. Such reclassifications have no effect on net income as previously reported.
Revenue Recognition — The Company recognizes two revenue streams: revenues from the sale of product and revenues from the performance of VMI services. The Company offers VMI services only in conjunction with product sales. The Company does not bill product sales and services separately. A portion of selling expenses is allocated to cost of sales for reporting purposes based upon the estimated time spent on such services. Product revenue includes product sales and billings for freight and handling charges. Sales and associated cost of goods sold are generally recognized when products are shipped and title passes to customers. We accrue for returns based on historical evidence of return rates. Service revenue and associated cost of sales are recognized when services are performed. A portion of service revenue and cost of service is deferred, as not all services are performed in the same period as billed. The Company also operates as a lessor and recognizes lease revenue on a straight-line basis over the life of each lease. The Company has adopted the practical expedient not to separate the non-lease components that would be within the scope of ASC 606 from the associated lease component as the relevant criteria under ASC 842 are met.
Cash Equivalents — The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. The carrying amount of the Company’s cash equivalents at December 31, 2020 approximates fair value.
Allowance for Doubtful Accounts — The Company evaluates the collectability 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 (e.g., 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.
Inventories — Inventories principally consist of finished goods stated at the lower of cost or net realizable value using the first-in-first-out method for the Lawson segment and weighted average for the Bolt segment as well as Partsmaster. To reduce the cost basis of inventory to a lower of cost or net realizable value, a reserve is recorded for slow-moving and obsolete inventory based on historical experience and monitoring of current inventory activity. Estimates are used to determine the necessity of recording these reserves based on periodic detailed analysis using both qualitative and quantitative factors. As part of this analysis, the Company considers several factors including the inventories length of time on hand, historical sales, product shelf life, product life cycle, product category and product obsolescence.
Property, Plant and Equipment — Property, plant and equipment are stated at cost less accumulated depreciation and amortization. Depreciation expense is computed primarily by the straight-line method for buildings, machinery and equipment, furniture and fixtures and vehicles. The Company estimates useful lives of 20 to 40 years for buildings and improvements and 3 to 10 years for machinery and equipment, furniture and fixtures and vehicles. Amortization of financing and capital leases is included in depreciation expense.
Depreciation expense was $4.4 million and $3.9 million for 2020 and 2019 respectively. Capitalized software is amortized over estimated useful lives of 3 to 5 years using the straight-line method. Amortization expense of capitalized software was $0.6 million for 2020 and 2019 respectively.
Cash Value of Life Insurance — The Company has invested funds in life insurance policies on certain current and former employees. The cash surrender value of the policies is invested in various investment instruments and is recorded as an asset on our consolidated balance sheet. The Company records these funds at contractual value. The change in the cash surrender value of the life insurance policies, which is recorded as a component of General and administrative expenses, is the change in the policies' contractual values.
Deferred Compensation — The Company’s Executive Deferral Plan (“Deferral Plan”) allows certain executives to defer payment of a portion of their earned compensation. The deferred compensation is recorded in an Account Balance, which is a bookkeeping entry made by the Company to measure the amount due to the participant. The Account Balance is equal to the participant’s deferred compensation, adjusted for increases and/or decreases in the amount that the participant has designated to one or more bookkeeping portfolios that track the performance of certain mutual funds. Lawson adjusts the deferred compensation liability to equal the contractual value of the participants’ Account Balances. These adjustments are the changes in contractual value of the individual plans and are recorded as a component of General and administrative expenses.
On August 31, 2020, the Company acquired Partsmaster from NCH Corporation, and assumed certain liabilities, including non-qualified deferred compensation plans related to Partsmaster employees. Effective December 31, 2020, Lawson accepted sponsorship of the portions of the non-qualified plans related to Partsmaster employees. The plans were frozen effective January 1, 2021.
Stock-Based Compensation — Compensation based on the share value of the Company’s common stock is valued at its fair value at the grant date and the expense is recognized over the vesting period. Fair value is re-measured each reporting period for liability-classified awards that may be redeemable in cash. We account for forfeitures of stock-based compensation in the period in which they occur.
Goodwill — The Company had $35.2 million and $20.9 million of goodwill in 2020 and 2019, respectively. Goodwill represents the cost of business acquisitions in excess of the fair value of identifiable net tangible and intangible assets acquired. Goodwill is allocated to the appropriate reporting unit as reviewed by the Company’s segment managers. The Company has four reporting units; Lawson MRO, Bolt, Screw Products, and Partsmaster. The Company reviews goodwill for potential impairment annually on December 1st, or when an event or other circumstances change that would more likely than not reduce the fair value of the asset below its carrying value.
The first step in the multi-step process to determine if goodwill has been impaired and to what degree is to review the relevant qualitative factors that could cause the fair value of the reporting unit to decrease below the carrying value of the reporting unit. During the first and second quarter of fiscal 2020, the Company identified a triggering event due to adverse changes in the business climate related to COVID-19. As a result, the Company performed interim quantitative impairment tests as of March 31, 2020 and June 30, 2020 on the goodwill in its Bolt reporting unit, which is also the Bolt reportable segment. The Company compared the estimated fair value using the income approach and the market approach of the reporting unit with its estimated book value. Based on the evaluation performed, the Company determined that goodwill was not impaired as the fair value of the reporting unit exceeded its respective carrying amounts. The income approach calculations are dependent on several subjective factors including forecasts of future revenue and earnings and the discount rate. The market approach is based on financial multiples of comparable companies.
After reviewing the financial performance of the reporting units compared to our projected results, as well as macroeconomic conditions as a whole including the effect of the COVD-19 pandemic, we determined that it is more likely than not that the fair value of the goodwill generated by the acquisition of Screw Products, which reporting unit is a part of the Lawson reportable segment, had been impaired. As a result, we performed a quantitative impairment test as of December 1, 2020. The Company bases its measurement of the fair value of the reporting unit using the income approach. The income approach calculations are dependent on several subjective factors, including forecasts of future revenue and earnings and the discount rate.
Related to the Lawson MRO, Bolt, and Partsmaster reporting units, the Company performed a qualitative assessment as of December 1, 2020 and determined that it was more likely than not the fair value of the reporting units exceeded the carrying value of the reporting units.
Intangible Assets — The Company's intangible assets consist of trade names, and customer relationships. Intangible assets are amortized over a weighted average of 12 and 11 year estimated useful lives for trade names and customer relationships, respectively. The Company amortizes trade name intangible assets on a straight-line basis and customer relationship intangible assets on a basis consistent with their estimated economic benefit.
Impairment of Long-Lived Assets — The Company reviews its long-lived assets, including property, plant and equipment and definite life intangibles, for impairment whenever events or changes in circumstances indicate that the carrying amounts of these assets may not be recoverable. Recoverability is measured by a comparison of the assets' carrying amount to their expected future undiscounted net cash flows. If such assets are considered to be impaired, the impairment to be recognized is measured based on the amount by which the carrying amount of the asset exceeds its fair value. No impairments occurred in 2019 or 2020.
Income Taxes — Deferred tax assets or liabilities reflect temporary differences between amounts of assets and liabilities for financial and tax reporting. Such amounts are adjusted, as appropriate, to reflect changes in enacted tax rates expected to be in effect when the temporary differences reverse. A valuation allowance is established to offset any deferred tax assets if, based upon the available evidence, it is more likely than not (i.e. greater than 50% likely) that some or all of the deferred tax assets will not be realized. The determination of the amount of a valuation allowance to be provided on recorded deferred tax assets involves estimates regarding (1) the timing and amount of the reversal of taxable temporary differences, (2) expected future taxable income, (3) the impact of tax planning strategies and (4) the ability to carry back deferred tax assets to offset prior taxable income. In assessing the need for a valuation allowance, we consider all available positive and negative evidence, including past operating results, projections of future taxable income and the feasibility of ongoing tax planning strategies. The projections of future taxable income include a number of estimates and assumptions regarding our volume, pricing and costs. Additionally, valuation allowances related to deferred tax assets can be impacted by changes to tax laws. Significant judgment is required in determining income tax provisions as well as deferred tax asset and liability balances, including the estimation of valuation allowances and the evaluation of tax positions.
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 would subject the Company to foreign withholding taxes and may subject the Company to U.S. federal and state taxes.
The Company recognizes the benefit of tax positions when a benefit is more likely than not (i.e., greater than 50% likely) to be sustained on its technical merits. Recognized tax benefits are measured at the largest amount that is more likely than not to be sustained, based on cumulative probability, in final settlement of the position. The Company recognizes interest and penalties related to unrecognized tax benefits as a component of income tax expense.
Leases — Leases are categorized as either operating or financing leases at commencement. For both classes of leases, a Right Of Use ("ROU") asset and corresponding lease liability are recognized at commencement. Operating leases consist of the company headquarters, distribution centers, and Bolt branches. Financing leases consist of equipment such as forklifts and copiers. The value of the lease assets and liabilities are the present value of the total cash payments for each lease. The Company uses its incremental borrowing rate to discount the total cash payments to present value for each lease. The Company will review each lease to determine if there is a more appropriate discount rate to apply. Upon commencement, rent expense is recognized on a straight line basis for each operating lease. Each financing lease ROU asset is amortized on a straight line basis over the lease period. Prior to acquisition, Partsmaster participated in a leasing program where they actively leased parts washer machines to customers. The Company will continue the leasing program for the foreseeable future. These leases are classified as operating leases. The leased machines are recognized as fixed assets on the Company's consolidated balance sheet and the leasing revenue is recognized on a straight line basis.
Earnings per Share — Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share reflect the potential dilution from the exercise or conversion of outstanding stock options, market stock units and restricted stock awards into common stock. For the years ended December 31, 2020 and December 31, 2019 no options to purchase shares of common stock were excluded from the computation of diluted earnings per share because all of the options were in the money.
Foreign Currency — The accounts of foreign subsidiaries are measured using the local currency as the functional currency. All balance sheet amounts are translated into U.S. dollars using the exchange rates in effect at the applicable period end. Components of income or loss are translated using the average exchange rate for each reporting period.
Gains and losses resulting from changes in the exchange rates from translation of the subsidiary accounts in local currency to U.S. dollars are reported as a component of Accumulated other comprehensive income or loss in the consolidated balance sheets. Gains and losses resulting from the effect of exchange rate changes on transactions denominated in currencies other than the functional currency are included as a component of net income or loss upon settlement of the transaction.
Gains and losses resulting from foreign intercompany transactions are included as a component of net income or loss each reporting period unless the transactions are of a long-term-investment nature and settlement is not planned or anticipated in the foreseeable future, in which case the gains and losses are recorded as a component of accumulated other comprehensive income or loss in the consolidated balance sheets.
Treasury Stock — The Company repurchased 47,504 and 32,362 of its common stock in 2020 and 2019, respectively, through its previously announced stock repurchase plan. The Company repurchased 32,682 and 64,252 shares of its common stock in 2020 and 2019, respectively from employees upon the vesting of restricted stock to offset the income taxes owed by
those employees. The Company accounts for treasury stock using the cost method and includes treasury stock as a component of stockholders’ equity. The cost of the common stock repurchased and held in treasury was $3.3 million and $4.5 million in 2020 and 2019, respectively.
Acquisitions — The Company recognizes identifiable assets acquired and liabilities assumed at their acquisition date fair values. Goodwill as of the acquisition date is measured as the excess of consideration transferred over the net of the acquisition date fair values of the assets acquired and the liabilities assumed. While the Company uses its best estimates and assumptions for the purchase price allocation process to value assets acquired and liabilities assumed at the acquisition date, the estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, the Company may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill.
Use of Estimates — Preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported for service revenue, service cost, allowance for doubtful accounts, inventory reserves, goodwill and intangible assets valuation, and income taxes in the consolidated financial statements and accompanying notes. Actual results could differ from these estimates.
Recent Accounting Pronouncements
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses, which revises the requirements for how an entity should measure credit losses on financial instruments. The pronouncement is effective for smaller reporting companies in fiscal years beginning after December 15, 2023, including interim periods within those fiscal years, and the new guidance will be applied on a prospective basis. The Company is still evaluating the effect the adoption of the new standard will have on its financial statements.
Note 3 - 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 approximately 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 plus 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 its present value and was recognized as an accrued acquisition liability of $32.4 million at the time of acquisition. As of December 31, 2020, the discounted present value of the $33.0 million due in May 2021 is $32.7 million and is recorded in the Company's consolidated balance sheet as an accrued acquisition liability. 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 with any remaining portion using its existing credit facility.
The purchase price of the acquisition was allocated to the fair value of Partsmasters' assets and liabilities on the acquisition date. The fair market value appraisals of the majority of the assets and liabilities was 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 $15.8 million allocated to goodwill reflects the purchase price less the fair market value of the identifiable net assets. The goodwill is attributable to the workforce of the acquired business and the significant synergies expected to arise after Lawson's acquisition of Partsmaster. The entire amount of goodwill is expected to be deductible for tax purposes.
The appropriate fair values of the assets acquired and liabilities assumed are based on estimates and assumptions. The Company continues to review preliminary estimates of various assets and liabilities including, but not limited to, pre-acquisition employee compensation liabilities and potential adjustments of certain accounts receivable balances as defined under the purchase agreement. These preliminary estimates and assumptions could change during the purchase price measurement period as the Company finalizes the valuations of the assets acquired and liabilities assumed. The Company recorded the fair value of accounts receivable after consideration of an estimate of cash flows not expected to be collected which was $0.4 million.
Partsmaster contributed $22.6 million of revenue and $0.8 million of operating income in the four months of 2020 post-acquisition.
A summary of the initial purchase price allocation of the acquisition is as follows (Dollars in thousands):
|Cash paid and payable and liabilities assumed|
|Cash paid and payable||$||34,523 |
|Accounts payable and accrued expenses||4,086 |
|Lease obligation||620 |
|Deferred compensation||2,938 |
|Fair value of assets acquired|
|Accounts receivable||7,706 |
|Customer relationships||4,961 |
|Trade names||2,775 |
|Property, plant and equipment||2,121 |
|Right of use asset||620 |
|Other assets||371 |
The following table contains unaudited pro forma revenue and net income for Lawson Products assuming the Partsmaster acquisition closed on January 1, 2019.
|Pro Forma Year Ended December 31,|
|Revenue||396,679 ||435,486 |
| Net Income||16,535 ||7,277 |
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 4 - 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.
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.
Lawson generates revenue primarily from the sale of MRO products to its customers. Revenue related to product sales is recognized at the time that control of the product has been transferred to the customer; either at the time the product is shipped or the time the product has been received by the customer. The Company does not commit to long-term contracts to sell customers a certain minimum quantity of products.
The Lawson segment, including the Partsmaster acquisition, offers a 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. Revenue is recognized at the time that control of the product has been transferred to the customer which is either upon delivery or shipment depending on the terms of the contract.
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 consolidated statements of income and comprehensive income and in the related notes to the consolidated financial statements. For the twelve months ended December 31, 2019, service revenue of $40.1 million was reported as service revenue which have now been combined as reported within total revenue.
Disaggregated revenue by product type follows:
|Year Ended December 31,|
|Cutting tools and abrasives||14%||13%|
|Aftermarket automotive supplies||7%||8%|
|Welding and metal repair||2%||2%|
Lawson as Lessor
Prior to acquisition, Partsmaster leased parts washer machines to customers through its Torrents leasing program. The Torrents leasing program comprised a minor portion of the Partsmaster business. The Company will continue the leasing program for the foreseeable future. These leases are classified as operating leases. The leased machines are recognized as fixed assets on the Company's consolidated balance sheet and the leasing revenue is recognized on a straight line basis. The Torrents machine leasing program generated $0.9 million of revenue in 2020 post-acquisition. The Company has adopted the practical expedient not to separate the non-lease components that would be within the scope of ASC 606 from the associated lease component as the relevant criteria under ASC 842 are met.
Note 5 — 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 has also agreed to maintain $0.2 million in a guaranteed investment certificate as collateral for an outside party that is providing certain commercial credit card services for Bolt. The Company is restricted from withdrawing this balance without the prior consent of the outside party during the term of the agreement.
Note 6 – Inventories, net
Inventories, net, consisting primarily of purchased goods which are offered for resale, were as follows: