DISTRIBUTION SOLUTIONS GROUP, INC.
10-Ks and 10-Qs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
| þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2009
or
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from
to
Commission file number: 0-10546
LAWSON PRODUCTS, INC.
(Exact Name of Registrant as Specified in Charter)
| Delaware | 36-2229304 | |
| (State or other jurisdiction of | (I.R.S. Employer | |
| incorporation or organization) | Identification No.) |
1666 East Touhy Avenue, Des Plaines, Illinois 60018
(Address of principal executive offices)
(Address of principal executive offices)
Registrant’s telephone number, including area code:
(847) 827-9666
(847) 827-9666
Securities registered pursuant to Section 12(b) of the Act:
| Title of Each Class | 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:
None
(Title of class)
(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 and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
Yes
o
No
o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to
the best of registrant’s knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K.
þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large
accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one):
| Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o | Smaller reporting Company o | |||
| (Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the
Exchange Act).
Yes
o
No
þ
The aggregate market value of the registrant’s voting stock held by non-affiliates on June 30,
2009 (based upon the per share closing price of $14.21) was approximately $55,300,000.
As of February 15, 2010, 8,522,001 shares of Common Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated into this Form 10-K by reference:
Part III incorporates information by reference to the registrant’s definitive proxy statement,
to be filed with the Securities and Exchange Commission within 120 days after the close of the
fiscal year.
TABLE OF CONTENTS
| Page # | ||||||||
|
PART I
|
||||||||
|
|
||||||||
| 3 | ||||||||
|
|
||||||||
| 8 | ||||||||
|
|
||||||||
| 11 | ||||||||
|
|
||||||||
| 12 | ||||||||
|
|
||||||||
| 12 | ||||||||
|
|
||||||||
| 13 | ||||||||
|
|
||||||||
|
PART II
|
||||||||
|
|
||||||||
| 13 | ||||||||
|
|
||||||||
| 15 | ||||||||
|
|
||||||||
| 16 | ||||||||
|
|
||||||||
| 24 | ||||||||
|
|
||||||||
| 25 | ||||||||
|
|
||||||||
| 48 | ||||||||
|
|
||||||||
| 48 | ||||||||
|
|
||||||||
| 50 | ||||||||
|
|
||||||||
|
PART III
|
||||||||
|
|
||||||||
| 50 | ||||||||
|
|
||||||||
| 50 | ||||||||
|
|
||||||||
| 51 | ||||||||
|
|
||||||||
| 51 | ||||||||
|
|
||||||||
| 51 | ||||||||
|
|
||||||||
|
PART IV
|
||||||||
|
|
||||||||
| 51 | ||||||||
|
|
||||||||
| 52 | ||||||||
|
|
||||||||
| 53 | ||||||||
|
|
||||||||
| Exhibit 21 | ||||||||
| Exhibit 23 | ||||||||
| Exhibit 31.1 | ||||||||
| Exhibit 31.2 | ||||||||
| Exhibit 32 | ||||||||
“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 factor or to publicly announce
the results of any revisions to any forward-looking statements contained herein whether as a result
of new information, future events or otherwise.
2
Table of Contents
| ITEM 1. |
BUSINESS.
|
Overview
Lawson Products, Inc. (“Lawson”, the “Company”, “we” or “us”) was incorporated in Illinois in
1952, and reincorporated in Delaware in 1982. Lawson is a North American distributor of products
and services to the industrial, commercial, institutional, and governmental maintenance repair and
operations (“MRO”) marketplace. The Company also manufactures and distributes production and
specialized component parts to the original equipment marketplace (“OEM”) including the automotive,
appliance, aerospace, construction, and transportation industries. Please see Note 16 —
Segment
Reporting
in the Notes to the Consolidated Financial Statements, included elsewhere in this Annual
Report on Form 10-K, for further information regarding financial results related to the Company’s
geographical and business segments.
MRO Segment
Industry and Competition
The MRO industry consists of companies that buy and stock products in bulk and supply these
products to customers on an as needed basis. The customer benefits from lower costs and convenience
of ordering smaller quantities maintained by MRO suppliers. We estimate the MRO industry in North
America to exceed $100 billion in revenues.
We encounter intense competition from several national distributors and manufacturers and a
large number of regional and local distributors. Some competitors have greater financial and
personnel resources, handle more extensive lines of merchandise, operate larger facilities and
price some merchandise more competitively than we do. We compete for business delivering on the
value proposition we call Smarter Maintenance offering a personal approach to vendor managed
inventory, providing technical expertise and supplying highly
engineered products to our customers.
Operations
We participate in the MRO industry through our Lawson Products business unit and through our
Rutland Tools subsidiary (“Rutland”) which together represented 85% of our net sales for the year
ended December 31, 2009.
The majority of our sales are generated through a network of approximately 1,300 independent
sales agents. Independent sales agents are compensated on a commission only basis and are
responsible for repayment of commissions to the Company on any uncollectible accounts. In addition
to offering high quality products to our customers, these sales agents also offer technical
expertise and on-site problem resolution. Sales agents receive education in the best uses of our
products enabling them to provide customized solutions that address our customers’ needs. This
includes on-site visits to help manage customer inventories, introducing cost saving ideas and
improving our customers’ profitability. Regular inventory analysis and replenishment is conducted
to prevent unnecessary purchases and unplanned downtime. Additionally, we provide customized
storage systems for improved organization and a more efficient workflow. Product demonstrations
that can improve our customers’ productivity are regularly provided by our agents to our customers.
We order product from our suppliers and usually transport the product to our national
packaging center for repackaging, labeling or cross docking before shipping to our distribution
centers. Customer orders are then fulfilled from our distribution centers. We receive product
orders in various ways. Customers can place orders with our agents through our customer service
team via fax, phone or directly through the on-line catalog on our web site.
We sell products in all 50 states, the District of Columbia, Canada and Puerto Rico, and
export products that support U.S. military efforts in Europe and to the United Arab Emirates. An
important factor in attracting and retaining customers is our ability to process orders promptly.
We normally ship to our customers within one to two days of order placement. Products are stocked
in and processed from strategically placed general distribution centers in Des Plaines, Illinois;
Addison, Illinois; Vernon Hills, Illinois; Reno, Nevada; Fairfield, New Jersey; Suwanee, Georgia;
and Mississauga, Ontario.
3
Table of Contents
We carry a significant amount of inventories to ensure product availability and rapid
processing of customer orders. Accurate forecasting of customer demand is necessary 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.
Our engineering department provides technical support
as part of our value proposition for our
extensive product line and on-site problem solving. Material Safety Data Sheets are maintained
electronically and are available to our customers seven days a week, 24 hours a day. Additionally,
product certifications and material test reports are available by contacting the engineering
department at engineering@lawsonproducts.com. Our engineering department also develops and presents
product safety and technical training seminars tailored to meet our customers’ needs.
We distribute printed catalogs to two primary markets. One is the retail market where business
is done with the end user of the product. The other is the wholesale market where the distributor
resells our product to an end customer. In 2009, we delivered printed catalogs to approximately
40,000 retail customers and approximately 65,000 wholesale customers. We also have showrooms
located in Whittier, California; City of Industry, California; San Jose, California; Chatsworth,
California; Phoenix, Arizona; and Houston, Texas.
Products
We offer approximately 240,000 different products for sale of which approximately 180,000
products are maintained in inventory. Sales percentages by broad categories of our product mix are
as follows:
| Percent of Total MRO Sales | ||||||||
| Product Category | 2009 | 2008 | ||||||
|
Fastening systems
|
19 | % | 20 | % | ||||
|
Specialty chemicals
|
12 | 13 | ||||||
|
Cutting tools and abrasives
|
15 | 13 | ||||||
|
Fluid power
|
10 | 11 | ||||||
|
Aftermarket automotive supplies
|
11 | 9 | ||||||
|
Electrical
|
9 | 9 | ||||||
|
Welding and metal repair
|
4 | 6 | ||||||
|
Other
|
20 | 19 | ||||||
|
|
||||||||
|
|
100 | % | 100 | % | ||||
|
|
||||||||
Many of our products are manufactured by others, purchased in bulk and repackaged in smaller
quantities for sale to our customers. During 2009, we purchased products from over 1,000 suppliers.
We generally do not engage in long-term or fixed-price contracts and no single supplier accounted
for more than three percent of our purchases in 2009. However, the loss of one of our core
suppliers could significantly affect our operations by hindering our ability to provide full
service to our customers.
We actively participate in the design and development of products with our manufacturers.
Technology has helped us to develop new items that are application specific. We review applications
and recommend alternative products that are beneficial to our customers. Our quality
control department tests our product offerings to assure they meet our specifications. We also
conduct failure analysis and recommend solutions to help customers maximize product performance and
avoid costly product failures. To promote brand loyalty, we sell products using various private
labels and tradenames including Lawson Products, Kent Automotive, Premier, Cronatron, and Drummond,
among others.
Customers
Our customers include a wide range of purchasers of industrial supply products from small
repair shops to large national and governmental accounts. Our customers operate in a wide variety
of industries including automotive repair, transportation, governmental including the military,
manufacturing, construction, mining, wholesale, service and others.
4
Table of Contents
During 2009, we sold products to over 100,000 customers. No customer accounted for more than
one percent of net sales. In 2009, 93% of our net sales were generated in the United States and 7%
from Canada.
OEM Segment
Two of our subsidiaries, Assembly Component Systems, Inc. (“ACS”) and Automatic Screw Machine
Products Company, Inc. (“ASMP”) compete in the OEM marketplace. The OEM marketplace generally
consists of large manufacturing companies with multiple supply chain needs. ACS and ASMP accounted
for 12% and 3% of the Company’s net sales for the year ended December 31, 2009, respectively.
ACS specializes in providing OEM manufacturers with just-in-time delivery of fasteners,
components and fittings to maximize the efficiency of the customer’s supply chain. ACS seeks
long-term agreements with companies to identify product needs and parameters of use, offer
engineering expertise, provide product sourcing and manage inventory replenishment. Sales support
and dedicated warehousing is provided, enabling partnered companies to focus on manufacturing
operations while affording them a reduction in financial obligations associated with carrying
excess inventory. ACS operates a distribution network that includes Des Plaines, Illinois; Lenexa,
Kansas; Cincinnati, Ohio; and Memphis, Tennessee. Inventory supply rooms staffed by dedicated ACS
personnel located close to, or within a customer’s operating space, are used to facilitate the
selection and transfer of goods that are called for during a production schedule. Additional sales
support is available through sales calls, special needs requests, and pre-determined replenishment
schedules.
ASMP manufactures and distributes components, fasteners and fittings for use by OEM
manufacturers. Based in Decatur, Alabama, ASMP distributes components that are specific to the
customer’s production needs including various nondependent or interdependent components. ASMP seeks
to obtain long-term commitments to enable proper support of the customers’ supply chain. ASMP
products are developed for high strength, critical applications and ASMP also sources externally
produced items if applications call for such goods.
Strategic Initiatives
We are committed to developing and executing an effective long-term strategy to enhance
customer satisfaction, improve profitability and increase the value of the business. To drive these
objectives we plan to focus our resources on our MRO segment. Accordingly we have identified three
major strategic initiatives that we believe will significantly enhance our ability to serve our MRO
customers and improve our business. The initiatives are to re-structure our sales organization,
optimize our distribution network and replace our legacy information systems with a best-in-class
Enterprise Resource Planning (“ERP”) system.
Sales Transformation
Our sales are primarily driven by a force of approximately 1,300 independent sales agents. We
believe the independent sales agent model is an effective sales approach that offers our sales
agents a unique opportunity to operate their own business. Our sales agents are paid a commission
on sales that is based on profitability to align the objectives of the sales force with the
Company’s success. This system of compensation also ensures that the Company’s selling costs are
more directly aligned with sales. However, we believe that there are certain measures we can take
to improve the current sales agent model while retaining its advantages. Specifically, our
transformation initiative will clarify the roles and responsibilities of our sales management team,
develop and standardize certain sales tools offered to our agents, identify and prioritize
high-potential customers, and modify our pricing policies and commission structures to maximize
sales and profitability.
Our sales agents are supported by district managers who are responsible for geographically
defined territories. Currently, these district managers perform a dual role. They spend a portion
of their time managing the district by coaching and supporting the agents within their territory
and also spend time acting as sales agents selling products. We are phasing in a program that will
result in converting district managers into full-time employees who will be able to concentrate
their efforts on managing their territory and working with the agents to develop new and existing
customers. By segregating the managerial and selling functions, we believe that both the district
managers and independent sales agents will be able to better focus on their roles and increase
sales productivity.
5
Table of Contents
Through this transition, we believe that we can strengthen the quality of customer
relationships and improve the consistency of sales execution throughout our organization. We are
developing talent management programs to attract, motivate and retain new sales agents. We are also
improving our sales education programs which are offered to sales agents to integrate our agents’
product knowledge into the selling process. We are reviewing our current territory design and
account allocation policies to optimize territory management while maintaining or increasing our
customer coverage.
Historically, we have been very effective at selling to and servicing small and medium sized
accounts. However, we have had limited success in obtaining large national accounts. We are taking
deliberate steps to gain a share of these larger national accounts. We have assembled a team of
employee sales professionals to aggressively identify and prioritize high-potential customer and
market segments in order to expand our revenue base.
Finally, we are taking steps to improve our pricing structure by migrating from a cost based
method to a market based structure that better reflects the value of our products and services.
This includes strategically pricing products and product groups based on segmentation of both
product and customer groups.
Network Optimization
A large part of our MRO distribution process entails transporting product from our suppliers
to our national packaging center for possible repackaging, labeling or cross docking before
shipping to our distribution centers. Many factors affect the efficiency of this process including
the physical characteristics of the distribution centers, routing logistics, the number of times
the product needs to be handled, transportation costs and the flexibility to meet unique
requirements requested by our customers. Our network optimization initiative involves defining the
optimal location, size, and number of distribution centers to improve customer service, lower
operating expenses and improve working capital investment. We analyzed our distribution network as
it was in 2008 and developed a detailed roadmap to transition from that state to a future optimal
state.
In 2009, we closed our Charlotte, North Carolina and Dallas, Texas MRO distribution centers.
We have also identified and begun to make certain space optimization changes at our distribution
centers and to implement certain process improvement projects and freight strategies which should
further improve our ability to serve our customers while also reducing our inventory levels and
lowering operating costs.
ERP Initiative
During 2009, we conducted a thorough review of all of our MRO functional departments to assess
the effectiveness of our current business processes and supporting information systems. After
extensive study and analysis, we determined that the many benefits achievable by investing in a
state-of-the-art ERP system, that would integrate our data and processes into one single system
based upon best business practices, far exceeded the costs and efforts involved to implement this
change.
We engaged a consulting firm to work with us to evaluate which ERP system would provide us the
maximum long-term benefit. This analysis included multiple factors including how the system modules
aligned with our current organizational structure, transactional transparency and visibility,
flexibility to adapt to future business opportunities, user friendliness and stability of the
underlying data structure. In February 2010 we selected an ERP partner and we are currently in the
process of finalizing a detailed implementation plan for 2010 and 2011.
We have committed a full-time cross-fuctional team of employees to work with our ERP partner
and a systems integrator. This team is responsible for ensuring that the system configuration is
consistent with our business requirements and best business practices, coordinating data migration,
addressing change management issues, testing controls, resolving implementation issues and
developing a user training program. We anticipate the one-time cost of implementation, both capital
and expense, will range from $15 million to $20 million, consisting primarily of software and
hardware costs, implementation costs, internal labor costs and data migration. We plan to implement
the ERP system in a phased approach during 2010 and 2011.
We expect that the new ERP system will provide us reliable, transparent, real-time data access
allowing us the opportunity to make better and quicker business decisions. We anticipate that the
improved data access will lead to more accurate forecasting, shortening order fullfillment time and
optimizing our inventory levels. The new ERP system will fully integrate our revenue cycle, from
initial order through cash receipt and order tracking, from
product sourcing through payment. We expect the integration among various functional areas
will lead to improved communication, productivity and efficiency. These improvements should improve
our ability to respond to our customers’ needs and lead to increased customer satisfaction. Other
advantages we expect to realize by centralizating our current systems into an ERP system are to
eliminate the problem of synchronizing changes between multiple systems, improve coordination of
business processes that cross functional boundaries, provide a top-down view of the enterprise and
reduce the risk of loss of sensitive data by consolidating security into a single structure.
6
Table of Contents
Employees
As of December 31, 2009, we had approximately 1,110 employees, consisting of approximately 280
sales and marketing employees, 630 operations and distribution employees and 200 management and
administrative staff. Approximately 14% of our workforce is represented by four collective
bargaining agreements. We believe that our relations with our employees and their collective
bargaining organizations are good.
Available Information
We file or furnish annual reports on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K and file or furnish amendments to those reports pursuant to Section 13(a) or
15(d) of the Exchange Act and Section 16 reports with the Securities and Exchange Commission
(“SEC”). The public can obtain copies of these materials by visiting the Commission’s Public
Reference Room at 100 F Street, NE, Washington DC 20549 or 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 Commission, we make copies available to the public free of charge through
our website at
www.lawsonproducts.com.
Information on our website is not incorporated by reference
into this report.
Executive Officers of the Registrant
The executive officers of Lawson as of December 31, 2009 were as follows.
| Year First | ||||||
| Elected to | ||||||
| Present | ||||||
| Name | Age | Office | Position | |||
|
Thomas J. Neri
|
58 | 2007 | President, Chief Executive Officer and Director | |||
|
Harry A. Dochelli
|
50 | 2009 | Executive Vice President and Chief Operating Officer | |||
|
Neil E. Jenkins
|
60 | 2004 | Executive Vice President, Secretary and General Counsel | |||
|
Robert O. Border
|
46 | 2009 | Senior Vice President Information Technology | |||
|
Stewart A. Howley
|
48 | 2008 | Senior Vice President Strategic Business Development | |||
|
Ronald J. Knutson
|
46 | 2009 | Senior Vice President and Chief Financial Officer | |||
|
Michelle I. Russell
|
48 | 2007 | Senior Vice President Operations and Supply Chain Management | |||
|
Mary Ellen Schopp
|
47 | 2007 | Senior Vice President Human Resources |
Biographical information for the past five years relating to each of our executive officers is
set forth below.
Mr. Neri
was elected Chief Executive Officer in April 2007 and was elected to the Board of
Directors in December 2007. Mr. Neri was elected President and Chief Operating Officer in
January 2007 and was elected Executive Vice President, Finance, Planning and Corporate Development;
Chief Financial Officer and Treasurer in 2004. Mr. Neri joined the Company in October 2003 as
Executive Vice President, Finance and Corporate Planning.
Mr. Dochelli
was elected Chief Operating Officer effective December 2009 and served as
Executive Vice President Sales and Marketing from April 2008 to December 2009. Previously, Mr.
Dochelli served as Executive Vice President, North America Contract Sales for OfficeMax from 2007
until 2008, Executive Vice President of U.S. Operations for OfficeMax/Boise Cascade Office
Solutions from 2005 to 2007 and in various other management positions with OfficeMax/Boise Cascade
Office Solutions from 1987 to 2005.
Mr. Jenkins
was elected Executive Vice President; Secretary and General Counsel in 2004. From
2000 to 2003 Mr. Jenkins served as Secretary and Corporate Counsel of the Company.
7
Table of Contents
Mr. Border
was elected Senior Vice President Information Technology effective September 2009.
Previously, Mr. Border served as the Managing Director, Information Technology at Midwest
Generation, a subsidiary of Edison Mission Energy, from 2004 until 2009.
Mr. Howley
was elected Senior Vice President Strategic Business Development effective April
2008. Mr. Howley served as Chief Marketing Officer from December 2005 until May 2008. From August
2002 through December 2005, he was Director of Strategic Business Development with Home Depot
Supply.
Mr. Knutson
was elected Senior Vice President and Chief Financial Officer effective November
2009. Mr. Knutson served as Senior Vice President, Chief Financial Officer of Frozen Food Express
Industries, Inc. from January 2009 to November 2009. Mr. Knutson served as Vice President, Finance
of Ace Hardware Corporation from 2006 through 2007 and Vice President, Controller of Ace Hardware
from 2003 to 2005.
Ms. Russell
was elected Senior Vice President Operations and Supply Chain Management in August
2007. Ms. Russell served as Chief Ethics and Compliance Officer from April 2006 until August 2007
and in a consulting capacity from November 2005 through March 2006. Prior to this Ms. Russell held
the role of Vice President of Operations at Associated Materials from 2001 until 2005.
Ms. Schopp
was elected Senior Vice President, Human Resources in April 2007. Prior to this Ms.
Schopp held the role of Vice President, Human Resources at ConAgra Foods from 2003 until 2006.
| 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, 2009, 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.
Our results of operations may continue to be adversely impacted by the worldwide economic
recession.
Throughout 2009, we continued to experience the effects of a severe economic recession in the
U.S. and world economies and a tightening of the credit markets. We cannot predict the duration of
the recession or the timing or strength of a subsequent economic recovery. The recession has
severely impacted and could further impact demand for our products and our financial performance.
Further economic decline and uncertainty may lead to a further decrease in customer spending and
may cause certain customers to cancel or delay placing orders. Some of our customers may file for
bankruptcy protection preventing us from collecting on accounts receivable and may result in our
stocking excess customer specific inventory. The contraction in the credit markets also may cause
some of our customers to experience difficulties in obtaining financing leading to lower sales,
delays in the collection of receivables or result in an increase in bad debt expense.
The adverse economic conditions could also affect our key suppliers, affecting their ability
to supply parts and result in delays of our customer shipments. The economic uncertainty makes it
difficult for us to accurately predict future order activity and affects our ability to effectively
manage inventory levels and identify risks that may affect our business. Our ability to finance our
operations by borrowing through our current credit agreement could also be at risk if the lender is
unable to provide funds under the terms of the agreement due to a bankruptcy or restructuring
caused by the global financial crises. There would be no assurances that we would be able to
establish alternative financing or attain financing with terms similar to our present credit
agreement.
The market price of our common stock may decline.
Our stock price could decrease if the there is a further deterioration in the overall market
for equities or if investors have concerns that our business, financial condition, results of
operations and capital requirements will be negatively impacted by a prolonged recession. A
decrease in our stock price reduces the market value of the Company compared to the book value of
our net assets, which may lead to further impairment of our assets.
8
Table of Contents
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. In addition, we carry varying levels of customer specific
inventory based upon anticipated customer demand. 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 both our ability to maintain
core products in inventory and deliver products to our customers on a timely basis, which may in
turn adversely affect our results of operations. In addition, severe weather conditions could
adversely affect demand for our products.
Changes in our customers and product mix could cause our gross margin percentage to decline in
the future.
From time to time, we have experienced changes in product mix and inventory costs. When our
product mix changes, there can be no assurance that we will be able to maintain our historical
gross profit margins. Changes in our customers, product mix, or the volume of orders could cause
our gross profit margin percentage to decline.
Increases in energy costs and the cost of raw materials used in our products could impact our
cost of goods and distribution and occupancy expenses, which may result in lower operating margins.
Increases in the cost of raw materials used in our products (e.g., steel) and energy costs
raise the production costs of our vendors. Those vendors typically look to pass the higher costs
along to us through price increases. If we are unable to fully pass these increased prices and
costs through to our customers or to modify our activities, the impact would have an adverse effect
on our operating profit margins.
Disruptions of our information and communication systems could adversely affect the Company.
We depend on our information and communication systems to process orders, to manage inventory
and accounts receivable collections, to purchase, sell and ship products, to maintain
cost-effective operations and to service 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. Any disruption 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.
The
inability of management to successfully implement strategic
initiatives, including the installation of a new ERP system, could result in
significant disruptions in the Company’s operations.
We have committed to developing and executing three major strategic initiatives which we
believe will significantly enhance our ability to better serve our customers and improve our
business. The initiatives are to transform our current sales organization, optimize our supply
network and replace our legacy information systems with an ERP system. These initiatives involve a
large investment of capital and resources and significant changes to our current operating
processes. Failure to properly implement one or more of these initiatives could result in lost
business and increased costs.
Failure to retain experienced and productive sales agents could negatively impact our
operating results.
Our MRO sales are
primarily driven by a force of approximately 1,300 independent sales agents.
Our success depends on our ability to attract and retain talented sales
representatives. Failure to
retain a sufficient number of experienced and productive sales agents could
have a materially adverse effect on our business, financial condition and
results of operations.
9
Table of Contents
A limited number of the Company’s stockholders can exert significant influence over the
Company.
Members of the Port family collectively beneficially own over 50% of the outstanding shares of
our common stock. This share ownership would permit these stockholders, if they chose to act
together, to exert significant influence over the outcome of stockholder votes, including votes
concerning the election of directors, by-law amendments, possible mergers, corporate control
contests and other significant corporate transactions. The interests of the Port family may differ
from those of other stockholders.
In March 2009, a member of the Port family announced her intention to divest all of the common
shares under her control and encourage the disposition of the shares of Common Stock over which she
has shared voting or dispositive power. If a transaction cannot be arranged, the Port family member
announced she may seek to replace some or all of the Company’s directors, replace some or all of
the Company’s management and reduce the size of the Company’s board of directors to five. Another
member of the Port family announced he may consider a sale or other disposition of some or all of
the shares over which he has shared voting or dispositive power.
Any breach of our Deferred Prosecution Agreement with the U.S. Attorney’s Office for the
Northern District of Illinois, may adversely affect our business, financial condition, results of
operations and stock price.
We entered into a Deferred Prosecution Agreement (the “DPA”) in August 2008 with the U.S.
Attorney’s Office for the Northern District of Illinois (the “U.S. Attorney’s Office) to resolve
our liability for the actions of our representatives in improperly providing gifts or awards to
purchasing agents through our then-existing customer loyalty programs. Under the terms of the DPA,
if it is determined that we deliberately gave false, incomplete or misleading information under the
DPA or have committed any federal crimes subsequent to the DPA, or otherwise knowingly,
intentionally, and materially violated any provision of the DPA, we may be subject to prosecution
for any federal criminal violation of which the U.S. Attorney’s Office has knowledge.
The Company operates in highly competitive markets.
Our marketplace, although consolidating, still includes large, fragmented industries which are
highly competitive. We believe that customers and competitors may continue to consolidate over the
next few years, which may make the industry even more competitive. Our current or future
competitors include companies with similar or greater market presence, name recognition, and
financial, marketing, and other resources and we believe they will continue to challenge the
marketplace with their product selection, financial resources, and services.
Future acquisitions are subject to integration and other risks.
We anticipate that we may, from time to time, selectively acquire additional businesses or
assets. Acquisitions are accompanied by risks, such as potential exposure to unknown liabilities of
acquired companies and the possible loss of key employees and customers of the acquired business.
In addition, we may not obtain the expected benefits or cost savings from acquisitions.
Acquisitions are subject to risks associated with financing the acquisition and integrating the
operations and personnel of the acquired businesses or assets. If any of these risks materialize,
they may result in disruptions to our business and the diversion of management time and attention,
which could increase the costs of operating our existing or acquired businesses or negate the
expected benefits of the acquisitions.
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.
From time to time we fund our operations from funds borrowed under the terms of our credit
agreement. The credit agreement requires us to comply with certain financial covenants, including
minimum EBITDA, minimum tangible net worth levels, a minimum cash, accounts receivable and
inventory to debt ratio and a minimum debt service coverage ratio. The credit agreement also
contains other customary representations, warranties, covenants and events of default. Any failure
to meet these covenant requirements could lead to higher financing costs, increased restrictions
and reduce or eliminate our ability to borrow funds.
10
Table of Contents
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.
Any violation of Federal, state or local environmental protection regulations could lead to
significant penalties and fines.
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 the products. Failure to comply with these regulations could lead to severe penalties and fines
for each violation.
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 also affect our ability to realize the deferred tax assets on our
balance sheet, which could affect our results of operations.
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 new executives and managers, could have a materially
adverse effect on our business.
| ITEM 1B. |
UNRESOLVED STAFF COMMENTS.
|
None.
11
Table of Contents
| ITEM 2. |
PROPERTIES.
|
Our headquarters is located in Des Plaines, Illinois and our business is currently conducted
from owned or leased facilities at the following locations.
| Location | Segment | Function | Own/Lease | Square Footage | ||||||
|
|
||||||||||
|
Addison, Illinois
|
MRO | Distribution | Own | 85,800 | ||||||
|
Charlotte, North Carolina
|
MRO | Administration | Lease | 3,844 | ||||||
|
Des Plaines, Illinois
|
MRO | Administration/Distribution | Own | 175,000 | ||||||
|
Des Plaines, Illinois
|
MRO | Administration | Own | 45,000 | ||||||
|
Des Plaines, Illinois
|
MRO/OEM | Distribution | Lease | 114,000 | ||||||
|
Fairfield, New Jersey
|
MRO | Distribution | Own | 60,000 | ||||||
|
Independence, Ohio
|
MRO | Call Center | Lease | 9,761 | ||||||
|
Louisville, Kentucky
|
MRO | Distribution | Lease | 6,113 | ||||||
|
Mississauga, Ontario Canada
|
MRO | Distribution | Own | 78,000 | ||||||
|
Vernon Hills, Illinois
|
MRO | Distribution | Own | 107,061 | ||||||
|
Reno, Nevada
|
MRO | Distribution | Own | 244,280 | ||||||
|
Suwanee, Georgia
|
MRO | Distribution | Own | 91,235 | ||||||
|
Whittier, California
|
MRO | Administration | Lease | 22,023 | ||||||
|
Houston, Texas
|
MRO | Warehouse/Showroom | Lease | 21,700 | ||||||
|
San Jose, California
|
MRO | Warehouse/Showroom | Lease | 6,425 | ||||||
|
Phoenix, Arizona
|
MRO | Warehouse/Showroom | Lease | 3,750 | ||||||
|
Chatsworth, California
|
MRO | Warehouse/Showroom | Lease | 11,300 | ||||||
|
City of Industry, California
|
MRO | Warehouse/Showroom | Lease | 20,097 | ||||||
|
Decatur, Alabama
|
OEM | Manufacturing | Own | 65,000 | ||||||
|
Centralia, Missouri
|
OEM | Warehouse | Lease | 26,880 | ||||||
|
Cincinnati, Ohio
|
OEM | Warehouse | Lease | 12,583 | ||||||
|
Dunlap, Tennessee
|
OEM | Warehouse | Lease | 16,569 | ||||||
|
Ettrick, Wisconsin
|
OEM | Warehouse | Lease | 11,504 | ||||||
|
Hopkinsville, Kentucky
|
OEM | Warehouse | Lease | 1,800 | ||||||
|
Laredo, Texas
|
OEM | Warehouse | Lease | 3,068 | ||||||
|
Lenexa, Kansas
|
OEM | Administration/Warehouse | Lease | 38,000 | ||||||
|
Memphis, Tennessee
|
OEM | Warehouse | Lease | 26,250 | ||||||
|
Michigan City, Indiana
|
OEM | Warehouse | Lease | 10,000 | ||||||
|
Nuevo Laredo, Mexico
|
OEM | Warehouse | Lease | 24,220 | ||||||
|
Stuttgart, Arkansas
|
OEM | Warehouse | Lease | 16,000 | ||||||
|
Waite Park, Minnesota
|
OEM | Warehouse | Lease | 2,400 | ||||||
The location and operation of our facilities is frequently reviewed to determine whether they
meet the strategic needs of our business. We believe that our current facilities are adequate to
meet our needs.
| ITEM 3. |
LEGAL PROCEEDINGS.
|
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 or results of operations.
In August 2008, the Company entered into a Deferred Prosecution Agreement (“DPA”) with the
U.S. Attorney’s Office in connection with representatives of the Company improperly providing gifts
or awards to purchasing agents through the Company’s customer loyalty programs. Pursuant to the
DPA, the Company agreed to a $30.0 million penalty. The Company paid $10.0 million in both 2009 and
2008 and the final $10.0 million payment is due on or before August 11, 2010.
12
Table of Contents
During 2009, the
Company identified that it had shipped a limited number of products in violation of
certain state environmental regulations. The Company has begun the
self-reporting process with appropriate regulatory agencies regarding its
findings. The Company has initiated the recall of a limited number of products and is
working with state regulators to take appropriate remedial actions to comply
with these environmental regulations. At December 31, 2009, the Company
has accrued $0.2 million for penalties and expenses related to
environmental matters and at this time, the Company cannot determine if any
further expenses may be incurred.
| ITEM 4. |
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
|
The Annual Meeting of Stockholders of Lawson Products, Inc. was held on December 8, 2009. At
the Annual Meeting, the stockholders voted on the election of three directors, to ratify the
appointment of Ernst & Young LLP as the independent registered public accounting firm of Lawson for
the fiscal year ending December 31, 2009 and to approve the 2009 Equity Compensation Plan. Results
of the election were included in, and hereby incorporated by reference to, the Company’s Current
Report on Form 8-K dated December 8, 2009.
| ITEM 5. |
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES.
|
The Company’s Common Stock is traded on the NASDAQ Global Select Market under the symbol of
“LAWS.” The following table sets forth the high and low closing sale prices as reported on the
NASDAQ Global Select Market along with cash dividends declared for each outstanding share during
the last two years for the periods presented.
| 2009 | 2008 | |||||||||||||||||||||||
| Cash | Cash | |||||||||||||||||||||||
| Dividends | Dividends | |||||||||||||||||||||||
| Declared per | Declared per | |||||||||||||||||||||||
| High | Low | Share | High | Low | Share | |||||||||||||||||||
|
First Quarter
|
$ | 26.68 | $ | 11.68 | $ | 0.03 | $ | 38.00 | $ | 23.21 | $ | 0.20 | ||||||||||||
|
Second Quarter
|
16.94 | 9.96 | 0.03 | 29.39 | 23.77 | 0.20 | ||||||||||||||||||
|
Third Quarter
|
19.93 | 11.58 | 0.06 | 38.49 | 23.90 | 0.20 | ||||||||||||||||||
|
Fourth Quarter
|
20.41 | 12.75 | 0.06 | 32.10 | 11.81 | 0.20 | ||||||||||||||||||
On February 16, 2010 the closing sales price of our common stock was $16.37 and the number of
stockholders of record was 579.
13
Table of Contents
Stock Price Performance Chart
Set forth below is a line graph comparing the yearly change in the cumulative total
stockholder return of the Company’s common stock against the cumulative total return of the S&P
SmallCap 600 Index and a peer group (the “Peer Group”) of the Company for the five prior years. The
Peer Group consists of Barnes Group Inc., Fastenal Company and MSC Industrial Direct. The Company
believes that the Peer Group is representative of the markets it services in terms of product sales
and customers. The chart below represents the cumulative return of a hypothetical $100 invested on
December 31, 2004 in stock or index, including reinvestment of dividends.
Comparison of 5 Year Cumulative Total Return
Among Lawson Products, the S&P SmallCap 600 Index and a Peer Group
Among Lawson Products, the S&P SmallCap 600 Index and a Peer Group
| Indexed Returns Years Ended December 31, | ||||||||||||||||||||||||
| Base Period | ||||||||||||||||||||||||
| Company Name/Index | 2004 | 2005 | 2006 | 2007 | 2008 | 2009 | ||||||||||||||||||
|
Lawson Products
|
100.00 | 76.74 | 94.70 | 79.88 | 49.45 | 38.87 | ||||||||||||||||||
|
S&P Smallcap 600
|
100.00 | 107.68 | 123.96 | 123.60 | 85.19 | 106.97 | ||||||||||||||||||
|
Peer Group
|
100.00 | 125.85 | 123.11 | 144.76 | 116.97 | 144.29 | ||||||||||||||||||
14
Table of Contents
| ITEM 6. |
SELECTED FINANCIAL DATA.
|
The following selected financial data should be read in conjunction with the Consolidated
Financial Statements of the Company and Notes thereto included elsewhere in this Annual Report. The
income statement data and balance sheet data are for, and as of the end of each of, the years in
the five-year period ended December 31, 2009, and are derived from the audited Consolidated
Financial Statements of the Company.
| (Dollars in thousands, except per share data) | ||||||||||||||||||||
| 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
|
|
||||||||||||||||||||
|
Net Sales (1)
|
$ | 378,881 | $ | 485,207 | $ | 512,543 | $ | 514,273 | $ | 443,823 | ||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Income (loss) from
continuing operations
before cumulative effect
of accounting change (2)
(3) (4) (5)
|
$ | (2,616 | ) | $ | (27,060 | ) | $ | 11,332 | $ | 13,702 | $ | 21,944 | ||||||||
|
Income (loss) from
discontinued operations
(6)
|
(120 | ) | (571 | ) | (703 | ) | (729 | ) | 4,794 | |||||||||||
|
|
||||||||||||||||||||
|
Income (loss) before
cumulative effect of
accounting change
|
(2,736 | ) | (27,631 | ) | 10,629 | 12,973 | 26,738 | |||||||||||||
|
Cumulative effect of
accounting change, net of
tax
|
— | — | — | (361 | ) | — | ||||||||||||||
|
|
||||||||||||||||||||
|
Net Income (loss)
|
$ | (2,736 | ) | $ | (27,631 | ) | $ | 10,629 | $ | 12,612 | $ | 26,738 | ||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Basic Income (loss) per
share of common
stock:
|
||||||||||||||||||||
|
Continuing operations
before cumulative effect
of accounting change
|
$ | (0.31 | ) | $ | (3.18 | ) | $ | 1.33 | $ | 1.54 | $ | 2.42 | ||||||||
|
Discontinued operations
|
(0.01 | ) | (0.06 | ) | (0.08 | ) | (0.08 | ) | 0.53 | |||||||||||
|
Cumulative effect of
accounting change
|
— | — | — | (0.04 | ) | — | ||||||||||||||
|
|
||||||||||||||||||||
|
Net Income (loss)
|
$ | (0.32 | ) | $ | (3.24 | ) | $ | 1.25 | $ | 1.42 | $ | 2.94 | ||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Diluted Income (loss) per
share of common stock:
|
||||||||||||||||||||
|
Continuing operations
before cumulative effect
of accounting change
|
$ | (0.31 | ) | $ | (3.18 | ) | $ | 1.33 | $ | 1.54 | $ | 2.41 | ||||||||
|
Discontinued operations
|
(0.01 | ) | (0.06 | ) | (0.08 | ) | (0.08 | ) | 0.53 | |||||||||||
|
Cumulative effect of
accounting change
|
— | — | — | (0.04 | ) | — | ||||||||||||||
|
|
||||||||||||||||||||
|
Net Income (loss)
|
$ | (0.32 | ) | $ | (3.24 | ) | $ | 1.25 | $ | 1.42 | $ | 2.94 | ||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Cash dividends declared
per share
|
$ | 0.18 | $ | 0.80 | $ | 0.80 | $ | 0.80 | $ | 0.80 | ||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Total assets
|
$ | 241,647 | $ | 271,223 | $ | 299,863 | $ | 281,292 | $ | 279,224 | ||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Noncurrent liabilities
|
$ | 41,761 | $ | 64,139 | $ | 52,660 | $ | 48,320 | $ | 41,256 | ||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Stockholders’ equity
|
$ | 136,646 | $ | 138,744 | $ | 174,361 | $ | 170,317 | $ | 185,425 | ||||||||||
|
|
||||||||||||||||||||
| Notes: |
|
|
| (1) |
Results include Rutland net sales since the date of acquisition in December 2005 of $30.7
million, $46.5 million, $54.8 million, $57.7 million and $4.3 million in 2009, 2008, 2007,
2006 and 2005, respectively.
|
|
| (2) |
Severance and other charges, of $6.8 million, $9.3 million, $12.3 million and $1.2 million
were recorded in
2009, 2008, 2007 and 2006, respectively.
|
|
| (3) |
Settlement and related charges of $0.2 million, $31.7 million, $5.8 million and $3.2 million
related to the investigation and Deferred Prosecution Agreement were recorded in 2009, 2008,
2007 and 2006, respectively.
|
|
| (4) |
The 2009 results include a $1.3 million charge for impairment of long-lived assets.
|
|
| (5) |
The 2008 results include a $2.3 million charge for goodwill impairment.
|
|
| (6) |
The 2005 results include a $7.5 million after tax loss related to discontinuation of the UK
business and an after tax gain of $12.2 million related to the gain on the sale of the
Company’s investment in real estate.
|
|
15
Table of Contents
| ITEM 7. |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
|
OVERVIEW
During 2009, the global economic recession and contraction in the credit markets continued to
negatively affect customer demand throughout our industry. Sales declined by 21.9% during 2009
compared to 2008. The recession forced many of our customers to reduce their inventories, suspend
purchases of industrial supplies and downgrade the quality of product purchased due to the overall
deterioration of the economy. Additionally, the contraction in the credit market has made it
difficult for many of our customers to finance purchases or expand
their businesses. In addition, we continued to be impacted by the
lingering effects of the DPA settlement (see Item 3 – Legal
Proceedings) including the loss of several sales agents, as
competitors used the DPA as a recruiting tool to entice agents away from us.
In 2009 we reviewed our strategic and growth alternatives with a focus on our ability to meet
customer demands in the current competitive environment. As a result, we developed a comprehensive
strategic plan focused on increasing the value of the organization. Starting in 2009, we began
transforming our current platform and infrastructure by executing on the following three
initiatives: (1) re-structuring our sales organization, (2) optimizing our distribution network and
(3) replacing our legacy information systems with a best-in-class ERP system. We dedicated a
significant number of internal resources and made investments in these initiatives as we believe they will position us
to better serve our existing customers and grow the organization in the future. Although we believe
this is the right long-term strategy, these focused efforts along with the global economic
recession impacted our ability to drive more positive results in 2009.
Significant progress has been made on the above initiatives. We are taking action to
improve our current sales agent model while retaining its advantages. This includes converting
district managers into full-time employees who will be able to concentrate their efforts on
managing their territory and increasing sales productivity. During 2009, we closed two distribution
centers to better align our supply chain with our customer base and eliminate redundancies within
our distribution network. Additionally, we have performed a comprehensive review of our existing
information systems and have selected a new ERP solution that will be implemented during 2010 and
2011. These initiatives, which are described in Item 1 —
Business
, will require a significant
amount of additional effort and investment over the next two years, but should lead to a much more efficient,
responsive and profitable organization in the future.
In response to the recession and our declining sales, we took a number of steps to realign our
cost structure with the new economic reality. In 2009 we reduced our workforce by over 18%,
temporarily suspended annual compensation increases, curtailed or delayed spending on certain
services and supplies and reduced expenditures on capital equipment. The closure of two of our
distribution centers also resulted in significant cost savings.
Our OEM operations have been particularly hard hit during the current economic downturn.
Operating margins that had been declining even before the recession, further deteriorated
throughout 2009. As a result, the Company has been concentrating on renegotiating contracts that
provide an acceptable rate of return. Due to intense price competition, this has had a near term
impact of reducing sales, as contracts with insufficient returns are not renewed. We are actively
investigating and evaluating a number of strategic options regarding
these operations.
Due to the significant declines in the operations of our OEM and Rutland business units and
the uncertain probability of a quick recovery, we conducted an analysis of the value of their
long-lived assets. Based on this analysis, in the fourth quarter of 2009 we recorded a $1.3 million
non-cash impairment charge to write down the value of the assets to their estimated fair value.
In spite of the difficult economic environment of the past year and executing on our three
initiatives, we generated $25.9 million of cash from operations prior to disbursing $10.0 million
to comply with our obligation under the DPA settlement agreement. The cash generated from
operations and $2.2 million of cash proceeds generated by the sale of our Charlotte, North Carolina
distribution center allowed us to pay down our revolving line of credit by $7.7 million and return
$2.7 million in dividend payments to our stockholders. We were successful in our continuing efforts
to reduce excess inventory, expedite collection of accounts receivable and manage cash outflows.
16
Table of Contents
SUMMARY OF FINANCIAL PERFORMANCE
| (Dollars in thousands) | ||||||||||||||||||||||||
| Year Ended December 31, | ||||||||||||||||||||||||
| 2009 | 2008 | 2007 | ||||||||||||||||||||||
| % of | % of | % of | ||||||||||||||||||||||
| Net | Net | Net | ||||||||||||||||||||||
| Amount | Sales | Amount | Sales | Amount | Sales | |||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Net sales
|
||||||||||||||||||||||||
|
MRO
|
$ | 320,400 | 84.6 | % | $ | 403,584 | 83.2 | % | $ | 429,508 | 83.8 | % | ||||||||||||
|
OEM
|
58,481 | 15.4 | 81,623 | 16.8 | 83,035 | 16.2 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Consolidated total
|
$ | 378,881 | 100.0 | % | $ | 485,207 | 100.0 | % | $ | 512,543 | 100.0 | % | ||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Gross profit
|
||||||||||||||||||||||||
|
MRO
|
$ | 207,103 | 64.6 | % | $ | 266,371 | 66.0 | % | $ | 284,598 | 66.3 | % | ||||||||||||
|
OEM
|
10,674 | 18.3 | 12,627 | 15.5 | 19,231 | 23.2 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Consolidated total
|
217,777 | 57.5 | 278,998 | 57.5 | 303,829 | 59.3 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Operating expenses:
|
||||||||||||||||||||||||
|
Selling, general and
administrative expenses
|
215,123 | 56.8 | 256,060 | 52.8 | 265,267 | 51.8 | ||||||||||||||||||
|
Severance and other charges
|
6,820 | 1.8 | 9,252 | 1.9 | 12,328 | 2.4 | ||||||||||||||||||
|
Settlement related costs
|
154 | — | 31,666 | 6.5 | 5,793 | 1.1 | ||||||||||||||||||
|
Impairment of long-lived
assets
|
1,267 | 0.4 | — | — | — | — | ||||||||||||||||||
|
Impairment of goodwill
|
— | — | 2,251 | 0.5 | — | — | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Operating income (loss)
|
(5,587 | ) | (1.5 | ) | (20,231 | ) | (4.2 | ) | 20,441 | 4.0 | ||||||||||||||
|
Other expenses, net
|
(150 | ) | — | (469 | ) | (0.1 | ) | (369 | ) | (0.1 | ) | |||||||||||||
|
|
||||||||||||||||||||||||
|
Income (loss) from continuing
operations before income tax
expense
|
(5,737 | ) | (1.5 | ) | (20,700 | ) | (4.3 | ) | 20,072 | 3.9 | ||||||||||||||
|
Income tax (benefit) expense
|
(3,121 | ) | (0.8 | ) | 6,360 | 1.3 | 8,740 | 1.7 | ||||||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Income (loss) from continuing
operations
|
$ | (2,616 | ) | (0.7 | )% | $ | (27,060 | ) | (5.6 | )% | $ | 11,332 | 2.2 | % | ||||||||||
|
|
||||||||||||||||||||||||
17
Table of Contents
RESULTS OF OPERATIONS FOR 2009 AS COMPARED TO 2008
Sales and Gross Profit
Sales and gross profit results for the years ended December 31, 2009 and 2008 were as follows:
| (Dollars in thousands) | ||||||||||||||||
| Year ended December 31, | Decrease | |||||||||||||||
| 2009 | 2008 | Amount | % | |||||||||||||
|
|
||||||||||||||||
|
Net sales
|
||||||||||||||||
|
MRO
|
$ | 320,400 | $ | 403,584 | $ | (83,184 | ) | (20.6 | )% | |||||||
|
OEM
|
58,481 | 81,623 | (23,142 | ) | (28.4 | ) | ||||||||||
|
|
||||||||||||||||
|
Consolidated
|
$ | 378,881 | $ | 485,207 | $ | (106,326 | ) | (21.9 | ) | |||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Gross profit
|
||||||||||||||||
|
MRO
|
$ | 207,103 | $ | 266,371 | $ | (59,268 | ) | (22.3 | )% | |||||||
|
OEM
|
10,674 | 12,627 | (1,953 | ) | (15.5 | ) | ||||||||||
|
|
||||||||||||||||
|
Consolidated
|
$ | 217,777 | $ | 278,998 | $ | (61,221 | ) | (21.9 | ) | |||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Gross profit margin
|
||||||||||||||||
|
MRO
|
64.6 | % | 66.0 | % | ||||||||||||
|
OEM
|
18.3 | 15.5 | ||||||||||||||
|
Consolidated
|
57.5 | 57.5 | ||||||||||||||
Net sales for 2009 decreased 21.9% to $378.9 million, from $485.2 million in 2008 as the
global economic recession and contraction in the credit markets continued to weaken customer demand
throughout our industry. The duration of the recession is uncertain and the depressed industry
demand may continue to create downward pressure on sales throughout 2010.
The sales decline was reflected in both the MRO and the OEM segments. MRO net sales decreased
$83.2 million or 20.6% in 2009 to $320.4 million from $403.6 million in 2008. OEM net sales
decreased $23.1 million or 28.4% in 2009 to $58.5 million from $81.6 million in 2008.
Gross profit decreased $61.2 million in 2009 to $217.8 million from $279.0 million in 2008.
The gross profit margin for both 2009 and 2008 was 57.5%. MRO gross profit decreased $59.3 million
in 2009 to $207.1 million from $266.4 million in 2008. MRO gross profit as a percent of net sales
decreased to 64.6% in 2009 from 66.0% in 2008 primarily due to an increasingly competitive pricing
environment and a change in the sales mix to lower margin products.
OEM gross profit decreased $1.9 million in 2009 to $10.7 million from $12.6 million in 2008.
Gross profit as a percent of net sales increased to 18.3% in 2009 from 15.5% in 2008. The increase
in the gross profit percentage is primarily attributable to more aggressive pricing of sales
contracts and improved costs negotiated with our vendors. Due to intense price competition, the
increased pricing, while raising the overall gross profit percentage, has had a near term impact of
reducing sales as contracts with insufficient returns are not renewed.
Selling, General and Administrative Expenses
SG&A expenses were $215.1 million or 56.8% of net sales and $256.1 million or 52.8% of net
sales in 2009 and 2008, respectively. The $40.9 million reduction in 2009 includes a $21.0 million
reduction in sales agent compensation and $19.9 million due to cost containment initiatives. Agent
commissions as a percent of sales remained relatively consistent at 19.1% for 2009 compared to
19.2% for 2008. Cost containment initiatives included a reduction in workforce, a temporary
suspension in annual compensation increases and curtailment or delayed spending on certain services
and supplies. We also recognized savings through the closure of two of our distribution centers.
SG&A as a percent of net sales increased 4.0 percentage points in 2009 as fixed costs were not
reduced in proportion to the overall decrease in net sales.
18
Table of Contents
Severance and Other Charges
During 2009 we implemented certain cost reduction measures in response to the deteriorating
economic conditions. These measures included a reduction in force across the organization including
the closure of our Charlotte, North Carolina and Dallas, Texas distribution centers. The upfront
cost we incurred in 2009 to implement these measures was $6.8 million, primarily related to the
work force reduction.
In 2008, the Company recorded $9.3 million of severance and other charges. Of this amount,
$5.4 million related to severance costs associated with the departure of certain executives and
employees and operational efficiency improvement initiatives and $3.9 million related to unclaimed
property liabilities primarily associated with years prior to 2003.
Settlement
and
Related Costs
Settlement costs relate to the investigation by the U.S. Attorney’s Office for the Northern
District of Illinois as to whether our sales representatives provided improper gifts or awards to
purchasing agents (including government purchasing agents) through our customer loyalty programs.
In August 2008, in connection with the investigation, we entered into the DPA with the U.S.
Attorney’s Office and agreed to pay a $30.0 million penalty. Per the agreement, we paid $10.0
million in 2008, $10.0 million in 2009 and with the final $10.0 million due on or before August 11,
2010. In addition to the penalty, we incurred legal and other expenses of $0.2 million in 2009 and
$1.7 million in 2008 in connection with the investigation.
Impairment of Long-Lived Assets
Due to the weakened economy and decreased forecasts of future operating results, we reviewed the
recoverability of our long-lived assets. In performing the review for recoverability, we determined
that the future expected undiscounted cash flows of our OEM and Rutland business units were less than
the carrying amount of the assets. As a result, we recorded an impairment charge of $1.3 million of
which $1.1 million related to property, plant and equipment and $0.2 million related to other intangible
assets, in order to reduce the carrying value of the assets to fair value. The fair value of these assets,
or the estimated amount that each asset could be bought or sold in a current transaction by a market
participant, was determined using an independent appraisal and other methods. Of the $1.3 million
impairment charge, $0.7 million related to the MRO segment and $0.6 million related to the OEM segment.
Impairment of Goodwill
We review goodwill annually for impairment during the fourth quarter, or when events occur or
circumstances change that would more likely than not reduce the fair value of the reporting unit
below its carrying value. In 2008, due to increases in commodity costs and the onset of the
recession and based on revised forecasts of future operating results, we determined that the
goodwill balance associated with a 1999 acquisition was fully impaired and recorded a charge of
$2.3 million in our OEM segment for the year ended December 31, 2008.
Other Expense, Net
Other expense, net was $0.2 million in 2009 compared to $0.5 million in 2008. The $0.3 million
decrease was primarily due to a $0.6 million gain on sale of an investment in 2009 partially offset
by increased interest expense.
Income Tax Expense
The effective tax rates for continuing operations for 2009 and 2008 were 54.4% and (30.7)%,
respectively. The 2009 effective tax rate reflects the effect of the agreement reached with the
Internal Revenue Service Appeals Office for the years 2000 through 2003, as well as a decrease in
the valuation allowance recorded for the capital loss carryforward, due to the Company’s ability to
realize a portion of the capital loss against future capital gains prior to expiration in 2012. The
2008 effective tax rate reflects the effect of $29.2 million related to the penalty under the DPA
which was non-deductible and a $6.1 million non-deductible expense related to a decline in the cash
value of life insurance. Excluding these items, the 2008 effective tax rate would have been 43.7%.
19
Table of Contents
RESULTS OF OPERATIONS FOR 2008 AS COMPARED TO 2007
Sales and Gross Profit
Sales and gross profit results for the years ended December 31, 2008 and 2007 were as follows:
| (Dollars in thousands) | ||||||||||||||||
| MRO | Year ended December 31, | Decrease | ||||||||||||||
| (Dollars in thousands) | 2008 | 2007 | Amount | % | ||||||||||||
|
|
||||||||||||||||
|
Net sales
|
||||||||||||||||
|
MRO
|
$ | 403,584 | $ | 429,508 | $ | (25,924 | ) | (6.0 | )% | |||||||
|
OEM
|
81,623 | 83,035 | (1,412 | ) | (1.7 | ) | ||||||||||
|
|
||||||||||||||||
|
Consolidated
|
$ | 485,207 | $ | 512,543 | $ | (27,336 | ) | (5.3 | ) | |||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Gross profit
|
||||||||||||||||
|
MRO
|
$ | 266,371 | $ | 284,598 | $ | (18,227 | ) | (6.4 | )% | |||||||
|
OEM
|
12,627 | 19,231 | (6,604 | ) | (34.3 | ) | ||||||||||
|
|
||||||||||||||||
|
Consolidated
|
$ | 278,998 | $ | 303,829 | $ | (24,831 | ) | (8.2 | ) | |||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Gross profit margin
|
||||||||||||||||
|
MRO
|
66.0 | % | 66.3 | % | ||||||||||||
|
OEM
|
15.5 | 23.2 | ||||||||||||||
|
Consolidated
|
57.5 | 59.3 | ||||||||||||||
The 5.3% decrease in net sales to $485.2 million in 2008 compared to $512.5 million in 2007
resulted from decreases in both the MRO and OEM segments as our businesses were negatively impacted
by the slowdown in the global economy, primarily in the fourth quarter. Net sales of our MRO
business experienced a decline of 14.3% in the fourth quarter of 2008 compared to 2007 as our
customers, affected by overall weakness in the economy and a much more restrictive credit
environment, reduced their purchasing requirements. Net sales of our OEM segment decreased $1.4
million due to customer losses and the economic slowdown in the fourth quarter, partially offset by
increased sales generated from some of our current customers.
Gross profit decreased $24.8 million to $279.0 million in 2008 and gross profit as a percent
of net sales declined by 1.8 percentage points. The decline was primarily attributable to higher
product and commodity costs that were not able to be passed along to our customer base.
Selling, General and Administrative Expenses
Selling, general and administrative costs declined by 3.5% to $256.1 million in 2008 compared
to $265.3 million in 2007 primarily due to decreases in sales commissions and compensation
expenses. Selling, general and administrative costs as a percent of sales increased 1.0 percentage
points to 52.8% in 2008 as fixed costs were not reduced in direct proportion to the overall
decrease in net sales.
Severance and Other Charges
In 2008, the Company recorded $9.3 million of severance and other charges. Of this amount,
$5.4 million related to severance costs associated with the departure of certain executives and
employees and operational efficiency improvement initiatives and $3.9 million related to unclaimed
property liabilities primarily associated with years prior to 2003. During 2007, the Company
implemented several initiatives designed to improve operating efficiencies. As a result of these
initiatives, certain positions and departments were eliminated and restructured, resulting in $12.3
million of severance costs and other charges.
Settlement
and
Related Costs
Settlement costs relate to the investigation by the U.S. Attorney’s Office for the Northern
District of Illinois as to whether our sales representatives provided improper gifts or awards to
purchasing agents (including government purchasing agents) through our customer loyalty programs.
In August 2008, in connection with the investigation, we
entered into the DPA with the U.S. Attorney’s Office and agreed to pay a $30.0 million penalty
of which $10.0 million was paid in 2008. In addition to the penalty, we incurred legal and other
expenses of $1.7 million in 2008 and $5.8 million in 2007 in connection with the investigation.
20
Table of Contents
Impairment of Goodwill
We review goodwill annually for impairment during the fourth quarter, or when events occur or
circumstances change that would more likely than not reduce the fair value of the reporting unit
below its carrying value. In 2008, due to increases in commodity costs and the onset of the
recession and based on revised forecasts of future operating results, we determined that the
goodwill balance associated with a 1999 acquisition was fully impaired and recorded a charge of
$2.3 million in our OEM segment for the year ended December 31, 2008.
Other Expense, Net
Other expense, net of $0.5 million in 2008 was relatively unchanged compared to 2007. A $0.2
million decrease in interest income was partially offset by a $0.1 million decrease in interest
expense.
Income Tax Expense
The effective tax rates for continuing operations for 2008 and 2007 were (30.7)% and 43.5%,
respectively. The 2008 effective tax rate reflects the effect of $29.2 million related to the
penalty under the DPA which was non-deductible and a $6.1 million non-deductible expense related to
a decline in the cash value of life insurance. Excluding these items, the 2008 effective tax rate
would have been 43.7%.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities for 2009, 2008 and 2007 was $15.9 million, $15.7 million
and $11.5 million, respectively. Cash from operations was net of a $10.0 million settlement payment
in both 2009 and 2008. Cash was generated in 2009 and 2008 primarily through the streamlining of
our working capital by reducing excess inventories and expediting collection of accounts
receivable.
Working
capital at December 31, 2009 and 2008 was $75.1 million and
$89.5 million,
respectively. The $14.4 million decrease in working capital is primarily attributable to a $12.7
million reduction in inventory and an $8.8 million reduction in accounts receivable, partially
offset by decreases in other liabilities. Initiatives taken to improve the inventory management
process led to the lower inventory balance, while increased attention to collections and a
reduction in sales led to the decrease in the amount of outstanding accounts receivable.
Cash used to purchase property, plant and equipment was $2.8 million in 2009 compared to $3.5
million in 2008 and $17.7 million in 2007 which included $12.1 million related to the Reno, Nevada
facility expansion. Capital spending was reduced in 2009 in response to the economic downturn that
began in the second half of 2008. However, we expect capital expenditures to significantly increase
in 2010 due to anticipated expenditures on the implementation of a new ERP system. In 2009, we
received $2.2 million of proceeds from the sale of our Charlotte, North Carolina property.
Financing activities included a $7.7 million paydown of our line of credit in 2009 compared to
the $3.3 million paydown of the line of credit in 2008. The Company paid dividends of $2.7 million,
$6.8 million and $6.8 million to stockholders of its common stock in 2009, 2008 and 2007,
respectively.
In August 2009, we entered into a new credit agreement with The PrivateBank and Trust Company
(“Credit Agreement”). The Credit Agreement provides us with a total borrowing capacity of $55.0
million in the form of a revolving line of credit and letters of credit and expires on August 21,
2012. Additionally, we have a one-time option, subject to the agent’s consent, to increase the
maximum borrowing capacity by an additional $20.0 million, thus increasing the maximum borrowing
capacity to $75.0 million. The Credit Agreement is secured by cash, accounts receivable and
inventory. At December 31, 2009, we had no borrowings outstanding on our revolving line of credit
and $3.2 million of outstanding letters of credit, leaving borrowing availability at $51.8 million.
21
Table of Contents
The interest rate under the Credit Agreement was initially set at either LIBOR plus three
percent or the prime rate through December 31, 2009. Thereafter, the interest rate will be adjusted
based on our debt to EBITDA ratio. The Credit Agreement requires us to comply with certain
financial covenants, as defined in the Credit Agreement, including minimum EBITDA, minimum tangible
net worth levels, minimum cash plus accounts receivable and inventory to debt ratio and a minimum
debt service coverage ratio. The Credit Agreement also contains other customary representations,
warranties, covenants and events of default and limits our annual dividend distribution to $7.0
million. Also, in August 2009, we terminated the First Amended and Restated Credit Agreement with
Bank of America, N.A. dated as of November 7, 2008 and paid all related outstanding loans. No
prepayment penalties were incurred as part of the termination. As a result of the termination, we
recorded a $0.2 million expense to write off the remaining deferred financing fees related to the
terminated credit agreement.
In January 2010, the Company modified certain terms of the Credit Agreement. The applicable
interest rate margin of 3.00% for LIBOR Loans and zero percent for Prime Loans was extended through
June 30, 2010. Thereafter, the applicable margins will be adjusted based on the Company’s debt to
EBITDA ratio to a range of 2.25% for LIBOR and minus 0.25% for Prime to 3.00% for LIBOR and zero
percent for Prime. The minimum EBITDA level, including a $5.3 million add back in 2010 for the
anticipated expense related to the implementation of an ERP system, was set at $8.0 million for the
twelve month period ending December 31, 2009 and increases to $9.5 million for the twelve month
period ended March 31, 2010 and $10.0 million for the twelve month periods ending June 30, 2010,
September 30, 2010 and December 31, 2010, respectively. The ratio of cash plus accounts receivable
and inventory to outstanding debt was increased from 1.75:1.00 to 2.00:1.00 in 2010, while the
minimum tangible net worth level remained at $55.0 million and the minimum debt service coverage
ratio of 1.20 commences with fiscal year ending December 31, 2010. On December 31, 2009 we were in
compliance with all covenants as detailed below:
| Covenant | Requirement | Actual | ||||||
|
Minimum EBITDA, as defined in the amended Credit
Agreement
|
$8.0 million | $12.3 million | ||||||
|
Cash plus accounts receivable and inventory to debt ratio
|
1.75:1.00 | 38.39:1.00 | ||||||
|
Minimum tangible net worth
|
$55.0 million | $75.3 million | ||||||
We believe that cash provided by operations and the $55.0 million revolving line of credit
will be sufficient to fund our operating requirements, strategic initiatives, DPA settlement
payment and capital improvements for the upcoming fiscal year.
CONTRACTUAL OBLIGATIONS
Contractual obligations on December 31, 2009 that require payment over future periods are as
follows:
| (Dollars in thousands) | ||||||||||||||||||||
| Payments due in years ended December 31, | ||||||||||||||||||||
| Total | 2010 | 2011 – 2012 | 2013 – 2014 | Thereafter | ||||||||||||||||
|
Operating leases
|
$ | 5,172 | $ | 2,394 | $ | 2,483 | $ | 295 | $ | — | ||||||||||
|
Capital leases
|
2,120 | 1,034 | 959 | 127 | — | |||||||||||||||
|
Deferred compensation
|
13,563 | 3,189 | 3,070 | 1,590 | 5,714 | |||||||||||||||
|
Security bonus plan *
|
26,121 | 190 | — | — | 25,931 | |||||||||||||||
|
Severance obligation
|
4,145 | 3,105 | 1,008 | 32 | — | |||||||||||||||
|
Long term incentive plan
|
2,984 | 1,492 | 1,492 | — | — | |||||||||||||||
|
Purchase commitments
|
3,949 | 3,949 | — | — | — | |||||||||||||||
|
Deferred Prosecution
Agreement
|
10,000 | 10,000 | — | — | — | |||||||||||||||
|
|
||||||||||||||||||||
|
Total contractual
cash obligations
|
$ | 68,054 | $ | 25,353 | $ | 9,012 | $ | 2,044 | $ | 31,645 | ||||||||||
|
|
||||||||||||||||||||
| * |
Payments to participants of the security bonus plan are made on a lump sum basis at time of
separation from the Company. Payouts for known separation dates have been included in the
scheduled year of payout, while payouts for unknown separation dates are reflected in the
thereafter column.
|
22
Table of Contents
OFF-BALANCE SHEET ARRANGEMENTS
As of December 31, 2009, we had future minimum operating lease commitments of $5.2 million,
principally for facilities and equipment. We also had contractual commitments to purchase $3.9
million of product from our suppliers in 2010.
CRITICAL ACCOUNTING POLICIES
We have disclosed our significant accounting policies in Note 2 to the Consolidated Financial
Statements. The following provides supplemental information to these accounting policies as well as
information on the accounts requiring more significant estimates.
Allowance for Doubtful Accounts
— We evaluate the collectibility 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 by a material amount. At December 31,
2009, our allowance reserve was 3.4% of our trade receivables outstanding. A hypothetical change of
one percent to our reserve allowance would have affected our annual doubtful accounts expense by
approximately $0.4 million.
Inventory Reserves
— Inventories consist principally of finished goods and are stated at the
lower of cost (first-in-first-out method) or market. 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. In addition, we carry varying levels of customer specific
inventory.
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 current inventory
activity. We use estimates to determine the necessity of recording these reserves based on periodic
detailed analysis reviews 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 classification, whether or not an item is in
a catalog or website and product obsolescence. In general, depending on product classification, we
reserve inventory with low turnover at higher rates than inventory with high turnover. Our policy
is to not re-value inventory to the original cost basis subsequent to establishing a new cost
basis.
At December 31, 2009, our inventory allowance reserve was $10.9 million equal to approximately
13% of our total inventory. A hypothetical change of one percent to our reserve allowance would
have affected our cost of goods sold by approximately $0.8 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 tax rates expected to be in effect when the temporary
differences reverse. A valuation allowance is established to offset any deferred tax assets if,
based upon the available evidence, it is more likely than not that some or all of the deferred tax
assets will not be realized. The determination of the amount of a valuation allowance to be
provided on recorded deferred tax assets involves estimates regarding (1) the timing and amount of
the reversal of taxable temporary differences, (2) expected future taxable income, and (3) the
impact of tax planning strategies. In assessing the need for a valuation allowance, 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.
23
Table of Contents
Goodwill Impairment
— Goodwill, all of which is included in our Lawson Products business unit,
is tested annually during the fourth quarter, or when events occur or circumstances change that
would more likely than not reduce the fair value of the reporting unit below its carrying
value. Impairment of goodwill is evaluated using a two step process. First the fair value of the
reporting unit is compared with its carrying amount, including goodwill. If the fair value of the
reporting unit exceeds its carrying amount, goodwill of the reporting unit is not considered
impaired, and thus, the second step of the impairment test is unnecessary. If the carrying amount
of the reporting unit exceeds its fair value, the second step of the goodwill impairment test is
performed to measure the amount of impairment loss, if any.
We estimate the fair value of the Lawson Products business unit using a market approach, which
relies on the market value of companies that are engaged in the same line of business. We also
prepare a discounted cash flow (“DCF”) analysis based on the operating plan presented to our Board
of Directors, to determine a range of fair values. The DCF model relies on a number of assumptions
that have a significant affect on the resulting fair value calculation and may change in future
periods. Estimated future cash flows are affected both by future economic conditions outside the
control of management and operating results directly related to management’s execution of our
business strategy. Our DCF model is also affected by our estimate of a discount rate that is
consistent with the weighted average cost of capital that we anticipate a potential market
participant would use.
We then assess the reasonableness of our estimate of the fair value of the Lawson Products business
unit. This is done by applying the same valuation methodology and estimates described above to the
entire Company and reconciling the resulting estimated fair value of the consolidated Company to
its market capitalization based on the trading range of the Company’s stock near the measurement date.
Currently, the calculated fair value of the Lawson business unit exceeds its carrying value by
over $45 million using our most conservative estimate and, therefore, is not considered impaired.
Changes in the assumptions used in our DCF calculation could have a material affect on the fair
value estimate and could change our assessment of impairment. A hypothetical 10% decrease in the
estimated future annual cash flows generated by the Lawson business unit would decrease its
estimated fair value by $13.9 million. A hypothetical 100 basis point increase in the discount rate
would decrease its estimated fair value by $13.3 million.
| ITEM 7A. |
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
|
One of our subsidiaries is located and operates 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. A hypothetical 10% change in the Canadian
foreign currency exchange rate would have affected our 2009 net sales by $3.3 million and total
assets by $2.5 million.
A number of our current and past employees have opted to defer a portion of their earned
compensation to be paid at a future date. These individuals have the ability to invest the funds in
one or more portfolios that track the performance of various mutual funds. Lawson has recorded a
$13.6 million liability equal to the market value amount of the funds owed as of December 31, 2009.
Additionally, we have invested funds in life insurance policies on certain executives. The cash
surrender value of the policies is invested in various investment instruments and the $17.0 million
market value of these investment instruments has been recorded as an asset on our financial
statements as of December 31, 2009. The change in the market value of the funds supporting our
deferred compensation plan and the cash surrender value of the life insurance policies is recorded
as a component of income and a hypothetical 10% increase or decrease in the investment portfolios
of both the cash value of life insurance asset and the deferred compensation liability would have
affected our 2009 net loss by $0.3 million.
We are exposed to market risk relating to increased commodity and energy costs affecting the
production costs of our vendors. These vendors typically look to pass their increased costs along
to us and if we are unable to fully pass these costs through to our customers or to modify our
activities, the impact would have an adverse effect on our operating profit margins.
On December 31, 2009, we had no borrowings outstanding on our revolving line of credit.
However, in future years, operating results may be exposed to the market risk of fluctuations in
the variable interest rate charged on our revolving line of credit.
24
Table of Contents
| ITEM 8. |
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
|
The following information is presented in this item:
| 26 | ||||
|
|
||||
| 27 | ||||
|
|
||||
| 28 | ||||
|
|
||||
| 29 | ||||
|
|
||||
| 30 | ||||
|
|
||||
| 31 | ||||
|
|
||||
| 47 |
25
Table of Contents
Report of Independent Registered Public Accounting Firm
on Consolidated Financial Statements
on Consolidated Financial Statements
To the Stockholders and Board of Directors
Lawson Products, Inc.
Lawson Products, Inc.
We have audited the accompanying consolidated balance sheets of Lawson Products, Inc. as of
December 31, 2009 and 2008, and the related consolidated statements of operations, changes in
stockholders’ equity, and cash flows for each of the three years in the period ended December 31,
2009. Our audits also included the financial statement schedule listed in the Index at Item 15(a).
These financial statements and schedule are the responsibility of the Company’s management. Our
responsibility is to express an opinion on the financial statements and schedule based on our
audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Lawson Products, Inc. at December 31, 2009 and
2008, and the consolidated results of its operations and its cash flows for each of the three years
in the period ended December 31, 2009, in conformity with U.S. generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Lawson Products, Inc’s. internal control over financial reporting
as of December 31, 2009, based on criteria established in Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated
February 25, 2010, expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Chicago, Illinois
February 25, 2010
February 25, 2010
26
Table of Contents
Lawson Products, Inc.
(Dollars in thousands)
| December 31, | ||||||||
| 2009 | 2008 | |||||||
|
ASSETS
|
||||||||
|
|
||||||||
|
Current assets:
|
||||||||
|
Cash and cash equivalents
|
$ | 8,787 | $ | 4,300 | ||||
|
Accounts receivable, less allowance for
doubtful accounts of $1,341 and $1,680
respectively
|
39,804 | 48,634 | ||||||
|
Inventories
|
73,696 | 86,435 | ||||||
|
Miscellaneous receivables and prepaid expenses
|
10,423 | 12,039 | ||||||
|
Deferred income taxes
|
4,819 | 6,127 | ||||||
|
Property held for sale
|
332 | — | ||||||
|
Discontinued current assets
|
459 | 296 | ||||||
|
|
||||||||
|
Total current assets
|
138,320 | 157,831 | ||||||
|
|
||||||||
|
Property, plant and equipment, less
accumulated depreciation and amortization
|
40,576 | 47,783 | ||||||
|
|
||||||||
|
Other assets:
|
||||||||
|
Cash value of life insurance
|
17,021 | 17,970 | ||||||
|
Deferred income taxes
|
15,249 | 18,159 | ||||||
|
Goodwill
|
27,957 | 25,748 | ||||||
|
Other
|
2,524 | 3,732 | ||||||
|
|
||||||||
|
|
||||||||
|
Total assets
|
$ | 241,647 | $ | 271,223 | ||||
|
|
||||||||
|
|
||||||||
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
||||||||
|
|
||||||||
|
Current liabilities:
|
||||||||
|
Accounts payable
|
$ | 19,968 | $ | 20,078 | ||||
|
Settlement payable — current
|
10,000 | 10,000 | ||||||
|
Accrued expenses and other liabilities
|
33,272 | 38,209 | ||||||
|
Discontinued current liabilities
|
— | 53 | ||||||
|
|
||||||||
|
Total current liabilities
|
63,240 | 68,340 | ||||||
|
|
||||||||
|
|
||||||||
|
Noncurrent liabilities and deferred credits
|
||||||||
|
Revolving line of credit
|
— | 7,700 | ||||||
|
Security bonus plan
|
25,931 | 25,312 | ||||||
|
Deferred compensation
|
10,374 | 9,379 | ||||||
|
Settlement payable — noncurrent
|
— | 10,000 | ||||||
|
Other
|
5,456 | 11,748 | ||||||
|
|
||||||||
|
|
41,761 | 64,139 | ||||||
|
|
||||||||
|
Commitments and contingencies — Note 13
|
||||||||
|
|
||||||||
|
Stockholders’ equity:
|
||||||||
|
Preferred stock, $1 par value:
|
||||||||
|
Authorized — 500,000 shares, Issued and
outstanding — None
|
— | — | ||||||
|
Common stock, $1 par value:
|
||||||||
|
Authorized — 35,000,000 shares, Issued
and outstanding — 8,522,001 shares
|
8,522 | 8,522 | ||||||
|
Capital in excess of par value
|
4,780 | 4,774 | ||||||
|
Retained earnings
|
121,888 | 126,158 | ||||||
|
Accumulated other comprehensive income (loss)
|
1,456 | (710 | ) | |||||
|
|
||||||||
|
Total stockholders’ equity
|
136,646 | 138,744 | ||||||
|
|
||||||||
|
Total liabilities and stockholders’ equity
|
$ | 241,647 | $ | 271,223 | ||||
|
|
||||||||
See notes to Consolidated Financial Statements
27
Table of Contents
Lawson Products, Inc.
(Dollars in thousands, except per share data)
| Year Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Net sales
|
$ | 378,881 | $ | 485,207 | $ | 512,543 | ||||||
|
Cost of goods sold
|
161,104 | 206,209 | 208,714 | |||||||||
|
|
||||||||||||
|
Gross profit
|
217,777 | 278,998 | 303,829 | |||||||||
|
|
||||||||||||
|
Operating expenses:
|
||||||||||||
|
Selling, general and administrative expenses
|
215,123 | 256,060 | 265,267 | |||||||||
|
Severance and other charges
|
6,820 | 9,252 | 12,328 | |||||||||
|
Settlement and related costs
|
154 | 31,666 | 5,793 | |||||||||
|
Impairment of long-lived assets
|
1,267 | — | — | |||||||||
|
Impairment of goodwill
|
— | 2,251 | — | |||||||||
|
|
||||||||||||
|
Operating income (loss)
|
(5,587 | ) | (20,231 | ) | 20,441 | |||||||
|
|
||||||||||||
|
Interest expense
|
(1,037 | ) | (789 | ) | (910 | ) | ||||||
|
Other income, net
|
887 | 320 | 541 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Income (loss) from continuing operations before
income taxes
|
(5,737 | ) | (20,700 | ) | 20,072 | |||||||
|
Income tax (benefit) expense
|
(3,121 | ) | 6,360 | 8,740 | ||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Income (loss) from continuing operations
|
(2,616 | ) | (27,060 | ) | 11,332 | |||||||
|
Discontinued operations, net
|
(120 | ) | (571 | ) | (703 | ) | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Net income (loss)
|
$ | (2,736 | ) | $ | (27,631 | ) | $ | 10,629 | ||||
|
|
||||||||||||
|
|
||||||||||||
|
Basic income (loss) per share of common stock:
|
||||||||||||
|
Continuing operations
|
$ | (0.31 | ) | $ | (3.18 | ) | $ | 1.33 | ||||
|
Discontinued operations
|
(0.01 | ) | (0.06 | ) | (0.08 | ) | ||||||
|
|
||||||||||||
|
Net Income (loss)
|
$ | (0.32 | ) | $ | (3.24 | ) | $ | 1.25 | ||||
|
|
||||||||||||
|
|
||||||||||||
|
Diluted income (loss) per share of common stock:
|
||||||||||||
|
Continuing operations
|
$ | (0.31 | ) | $ | (3.18 | ) | $ | 1.33 | ||||
|
Discontinued operations
|
(0.01 | ) | (0.06 | ) | (0.08 | ) | ||||||
|
|
||||||||||||
|
Net Income (loss)
|
$ | (0.32 | ) | $ | (3.24 | ) | $ | 1.25 | ||||
|
|
||||||||||||
See notes to Consolidated Financial Statements
28
Table of Contents
Lawson Products, Inc.
Consolidated Statements of Changes in Stockholders’ Equity
(Dollars in thousands)
(Dollars in thousands)
| Accumulated | ||||||||||||||||||||
| Common | Capital in | Other | ||||||||||||||||||
| Stock, | Excess of Par | Retained | Comprehensive | Comprehensive | ||||||||||||||||
| $1 par value | Value | Earnings | Income (loss) | Income (loss) | ||||||||||||||||
|
|
||||||||||||||||||||
|
Balance at January 1, 2007
|
$ | 8,521 | $ | 4,749 | $ | 158,008 | $ | (961 | ) | |||||||||||
|
|
||||||||||||||||||||
|
Net income
|
— | — | 10,629 | — | $ | 10,629 | ||||||||||||||
|
Other comprehensive income,
net of tax:
|
||||||||||||||||||||
|
Cumulative translation
adjustment related to
closure of Mexico
operations
|
— | — | — | 403 | 403 | |||||||||||||||
|
Adjustment for foreign
currency translation
|
— | — | — | 1,017 | 1,017 | |||||||||||||||
|
|
||||||||||||||||||||
|
Comprehensive income for the
year
|
$ | 12,049 | ||||||||||||||||||
|
|
||||||||||||||||||||
|
Adjustment for FIN 48 adoption
|
— | — | (1,213 | ) | — | |||||||||||||||
|
Cash dividends declared
|
— | — | (6,818 | ) | — | |||||||||||||||
|
Stock issued under employee
stock plans
|
1 | 25 | — | — | ||||||||||||||||
|
|
||||||||||||||||||||
|
Balance at December 31, 2007
|
8,522 | 4,774 | 160,606 | 459 | ||||||||||||||||
|
|
||||||||||||||||||||
|
Net loss
|
— | — | (27,631 | ) | — | $ | (27,631 | ) | ||||||||||||
|
Other comprehensive loss,
net of tax:
|
||||||||||||||||||||
|
Adjustment for foreign
currency translation
|
— | — | — | (1,169 | ) | (1,169 | ) | |||||||||||||
|
|
||||||||||||||||||||
|
Comprehensive loss for the year
|
— | — | — | — | $ | (28,800 | ) | |||||||||||||
|
|
||||||||||||||||||||
|
Cash dividends declared
|
— | — | (6,817 | ) | — | |||||||||||||||
|
|
||||||||||||||||||||
|
Balance at December 31, 2008
|
$ | 8,522 | $ | 4,774 | $ | 126,158 | $ | (710 | ) | |||||||||||
|
|
||||||||||||||||||||
|
Net loss
|
— | — | (2,736 | ) | — | $ | (2,736 | ) | ||||||||||||
|
Other comprehensive loss,
net of tax:
|
||||||||||||||||||||
|
Adjustment for foreign
currency translation
|
— | — | — | 2,166 | 2,166 | |||||||||||||||
|
|
||||||||||||||||||||
|
Comprehensive loss for the
year
|
— | — | — | — | $ | (570 | ) | |||||||||||||
|
|
||||||||||||||||||||
|
Stock based compensation
|
— | 6 | — | — | ||||||||||||||||
|
Cash dividends declared
|
— | — | (1,534 | ) | — | |||||||||||||||
|
|
||||||||||||||||||||
|
Balance at December 31, 2009
|
$ | 8,522 | $ | 4,780 | $ | 121,888 | $ | 1,456 | ||||||||||||
|
|
||||||||||||||||||||
See notes to Consolidated Financial Statements
29
Table of Contents
Lawson Products, Inc.
(Dollars in thousands)
| Year Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Operating activities
|
||||||||||||
|
Net income (loss)
|
$ | (2,736 | ) | $ | (27,631 | ) | $ | 10,629 | ||||
|
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
|
||||||||||||
|
Depreciation and amortization
|
7,216 | 8,282 | 7,435 | |||||||||
|
Provision for allowance for doubtful accounts
|
1,851 | 1,481 | 954 | |||||||||
|
Deferred income taxes
|
1,752 | 1,859 | (1,249 | ) | ||||||||
|
Deferred compensation and security bonus
plan expense (benefit)
|
4,493 | (526 | ) | 5,000 | ||||||||
|
Payments under deferred compensation and
security bonus plans
|
(4,494 | ) | (6,255 | ) | (4,922 | ) | ||||||
|
Stock based compensation
|
11 | (843 | ) | (427 | ) | |||||||
|
Settlement payment
|
(10,000 | ) | (10,000 | ) | — | |||||||
|
Provision for settlement
|
— | 30,000 | — | |||||||||
|
Loss on disposal of property and equipment
|
179 | 56 | — | |||||||||
|
Impairment of long-lived assets
|
1,267 | — | — | |||||||||
|
Impairment of goodwill
|
— | 2,251 | — | |||||||||
|
Changes in operating assets and liabilities:
|
||||||||||||
|
Accounts receivable
|
7,591 | 7,956 | 1,120 | |||||||||
|
Inventories
|
13,484 | 9,368 | (5,955 | ) | ||||||||
|
Prepaid expenses and other assets
|
3,599 | 2,050 | (5,732 | ) | ||||||||
|
Accounts payable and accrued expenses
|
(2,968 | ) | (7,586 | ) | 960 | |||||||
|
Other
|
(5,301 | ) | 5,276 | 3,735 | ||||||||
|
|
||||||||||||
|
Net cash provided by operating activities
|
15,944 | 15,738 | 11,548 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Investing activities
|
||||||||||||
|
Purchases of property, plant and equipment
|
(2,768 | ) | (3,549 | ) | (17,694 | ) | ||||||
|
Proceeds from sale of property
|
2,179 | — | — | |||||||||
|
Other
|
— | 36 | 90 | |||||||||
|
|
||||||||||||
|
Net cash used in investing activities
|
(589 | ) | (3,513 | ) | (17,604 | ) | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Financing activities
|
||||||||||||
|
Net (payments on) proceeds from revolving
line of credit
|
(7,700 | ) | (3,300 | ) | 11,000 | |||||||
|
Dividends paid
|
(2,727 | ) | (6,817 | ) | (6,817 | ) | ||||||
|
Other
|
(420 | ) | — | 26 | ||||||||
|
|
||||||||||||
|
Net cash (used in) provided by financing
activities
|
(10,847 | ) | (10,117 | ) | 4,209 | |||||||
|
|
||||||||||||
|
|
||||||||||||
|
Increase (decrease) in cash and cash equivalents
|
4,508 | 2,108 | (1,847 | ) | ||||||||
|
|
||||||||||||
|
Cash and cash equivalents at beginning of year
|
4,581 | 2,473 | 4,320 | |||||||||
|
|
||||||||||||
|
Cash and cash equivalents at end of year
|
9,089 | 4,581 | 2,473 | |||||||||
|
Cash held by discontinued operations
|
(302 | ) | (281 | ) | (802 | ) | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Cash and cash equivalents held by continuing
operations at end of year
|
$ | 8,787 | $ | 4,300 | $ | 1,671 | ||||||
|
|
||||||||||||
See notes to Consolidated Financial Statements
30
Table of Contents
Lawson Products, Inc.
Notes to Consolidated Financial Statements
Lawson Products, Inc. (“Lawson” or the “Company”) is a North American distributor of products
and services to the industrial, commercial, institutional and governmental maintenance, repair and
operations (“MRO”) marketplace. The Company also manufactures and distributes specialized component
parts to the original equipment marketplace (“OEM”).
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
prior period amounts have been reclassified to conform to the current year presentation.
Revenue Recognition
— Revenue includes product sales, billings for freight and handling
charges and fees earned for services provided. Sales and associated cost of goods sold are
generally recognized when products are shipped and title passes to customers. We accrue for returns
based on historical evidence of rates of return.
Shipping and Handling Fees and Costs
— Shipping and handling fees charged to customers totaled
$14.5 million, $18.6 million and $17.1 million in 2009, 2008 and 2007, respectively, and are
included in the caption “Net sales” on the Consolidated Statements of Operations. Costs related to
shipping and handling fees of $12.8 million, $17.0 million and $15.9 million in 2009, 2008 and
2007, respectively, are included in the caption “Selling, general and administrative expenses”.
Cash Equivalents
— The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents. The Company has $4.0 million invested
in money market funds that are valued based on unadjusted quoted market prices.
Allowance for Doubtful Accounts Methodology
— The Company evaluates the collectibility of
accounts receivable based on a combination of factors. In circumstances where the Company is aware
of a specific customer’s inability to meet its financial obligations (e.g., bankruptcy filings,
substantial down-grading of credit ratings), a specific reserve for bad debts is recorded against
amounts due to reduce the receivable to the amount the Company reasonably believes will be
collected. For all other customers, the Company recognizes reserves for bad debts based on the
Company’s historical experience of bad debt write-offs as a percent of accounts receivable
outstanding. If circumstances change (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 by a material amount.
Inventories
— Inventories consist principally of finished goods and are stated at the lower of
cost (first-in-first-out method) or market. To reduce inventory to a lower of cost or market value,
a reserve is recorded for slow-moving and obsolete inventory based on historical experience and
monitoring 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 classification,
whether or not an item is in a catalog or website and product obsolescence. It is the Company’s
policy to not re-value inventory to the original cost basis subsequent to establishing a new cost
basis.
Property Held for Sale
— Property that is actively marketed for sale is valued at the lower of
carrying amount or estimated net realizable value (proceeds less cost to sell), and is not
depreciated after being classified as held for sale.
Property, Plant and Equipment
— Property, plant and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation expense is computed by the straight-line
method for buildings and improvements using useful lives of 20 to 30 years and using the
straight-line and double declining balance methods
for machinery and equipment, furniture and fixtures and vehicles using useful lives of 3 to
10 years. Amortization of capitalized leases is included in depreciation expense. Depreciation
expense was $4.7 million, $5.4 million and $4.3 million for 2009, 2008 and 2007, respectively.
31
Table of Contents
Lawson Products, Inc.
Notes to Consolidated Financial Statements
Capitalized software is amortized over estimated useful lives of 3 to 5 years using the
straight-line method. Amortization expense of capitalized software was $2.3 million, $2.7 million
and $2.9 million for 2009, 2008 and 2007, respectively.
Cash Value of Life Insurance
— The Company has invested funds in life insurance policies on
certain current and former executives. The cash surrender value of the policies is invested in
various investment instruments and is recorded as an asset on our financial statements. The change
in the cash surrender value of the life insurance policies, which is based on the market value of
investment instruments, is recorded as a component of selling, general and administrative expenses.
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 participants’ Account
Balances. The increase or decrease is recorded as a component of selling, general and
administrative expenses.
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 are
redeemable in cash.
Goodwill
— 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 chief decision maker responsible for
reviewing operating performance and allocating resources. Goodwill is tested annually during the
fourth quarter, or when events occur or circumstances change that would more likely than not reduce
the fair value of the reporting unit below its carrying value. Impairment of goodwill is evaluated
using a two step process. First the fair value of the reporting unit is compared with its carrying
amount, including goodwill. If the fair value of the reporting unit exceeds its carrying amount,
goodwill of the reporting unit is not considered impaired, and thus, the second step of the
impairment test is unnecessary. If the carrying amount of the reporting unit exceeds its fair
value, the second step of the goodwill impairment test is performed to measure the amount of
impairment loss, if any.
Other Intangibles
— Intangible assets with a finite life are amortized on a straight-line
basis over the asset’s useful life. Amortization expense for intangible assets was $0.3 million per
year for 2009, 2008 and 2007 and amortization on the existing intangibles at December 31, 2009 is
expected to be $0.1 million per year until 2021.
Impairment of Long-Lived Assets
— The Company reviews its long-lived assets, including
property, plant and equipment and 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.
Income Taxes
— Deferred tax assets or liabilities reflect temporary differences between
amounts of assets and liabilities for financial and tax reporting. Such amounts are adjusted, as
appropriate, to reflect changes in tax rates expected to be in effect when the temporary
differences reverse. A valuation allowance is established to offset any deferred tax assets if,
based upon the available evidence, it is more likely than not that some or all of the deferred tax
assets will not be realized. The determination of the amount of a valuation allowance to be
provided on recorded deferred tax assets involves estimates regarding (1) the timing and amount of
the reversal of taxable temporary differences, (2) expected future taxable income, and (3) the
impact of tax planning strategies. In assessing the need for a valuation allowance, the Company
considers all available positive and negative evidence, including past operating results,
projections of future taxable income and the feasibility of ongoing tax planning strategies. The
projections of future taxable income include a number of estimates and assumptions regarding our
volume, pricing
and costs. Additionally, valuation allowances related to deferred tax assets can be impacted
by changes to tax laws.
32
Table of Contents
Lawson Products, Inc.
Notes to Consolidated Financial Statements
Significant judgment is required in determining income tax provisions and in evaluating tax
positions. In the normal course of business, the Company and its subsidiaries are examined by
various Federal, State and foreign tax authorities. The Company regularly assesses the potential
outcomes of these examinations and any future examinations for the current or prior years in
determining the adequacy of our provision for income taxes. The Company continually assesses the
likelihood and amount of potential adjustments and adjusts the income tax provision, the current
tax liability and deferred taxes in the period in which the facts that give rise to a revision
become known.
Effective January 1, 2007, the Company adopted a pronouncement by the Financial Accounting
Standards Board (“FASB”) that requires the Company to recognize the impact of a tax position in its
financial statements, if that position is more likely than not of being sustained on audit, based
on the technical merits of the position. As a result of the implementation of this policy, the
Company recorded an additional liability of $1,213 for unrecognized tax benefits relating to
uncertain tax positions which was accounted for as a reduction to the January 1, 2007 balance of
retained earnings.
Earnings per Share
— Basic earnings per share is computed by dividing net income by the
weighted average number of common shares outstanding during the period. Diluted earnings per share
reflect the potential dilution from the exercise or conversion of outstanding stock options and
restricted stock awards into common stock.
Foreign Currency
— The accounts of foreign subsidiaries are measured using the local currency
as the functional currency. All balance sheet amounts have been translated into U.S. dollars using
the exchange rates in effect at the applicable period end. Income statement amounts have been
translated using the average exchange rate for the applicable period. The gains and losses
resulting from the changes in exchange rates from the translation of subsidiary accounts in local
currency to U.S. dollars have been reported as a component of “Accumulated other comprehensive
income (loss)” in the Consolidated Balance Sheets. Foreign currency transaction gains and losses
result from the effect of exchange rate changes on transactions denominated in currencies other
than the functional currency. These gains and losses are included in the Consolidated Statements of
Operations and were immaterial for all years presented.
Use of Estimates
— Preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make estimates and
assumptions that affect the amounts reported in the consolidated financial statements and
accompanying notes. Actual results could differ from these estimates.
Recent Accounting Pronouncements
In June 2009, the FASB issued FASB 168,
The FASB Accounting Standards Codification and the
Hierarchy of Generally Accepted Accounting Principles,
which established the Accounting Standards
Codification (“ASC”). The ASC supersedes all existing accounting
standard documents and has become the single source of U.S. GAAP used by nongovernmental entities
in the preparation of financial statements, except for rules and interpretive releases of the SEC
under authority of federal securities laws, which are sources of authoritative accounting guidance
for SEC registrants. This pronouncement, updated as ASC 105, became effective for
financial statements issued for interim and annual periods ending after September 15, 2009. We
have conformed our consolidated financial statements and related Notes to the new codification.
In May 2009, the FASB issued ASC 855,
Subsequent Events,
which provides guidance on events
that occur after the balance sheet date but prior to the issuance of the financial statements. ASC
855 distinguishes events requiring recognition in the financial statements and those that may
require disclosure in the financial statements. Furthermore, ASC 855 requires disclosure of the
date through which subsequent events were evaluated. These requirements were effective for interim
and annual periods after June 15, 2009. The Company adopted these requirements for the quarter
ended June 30, 2009 and has evaluated subsequent events through February 25, 2010, the filing date
of this Form 10-K and has determined that there were two subsequent events to recognize in the
financial statements that have been disclosed in Note 19 —
Subsequent Events
.
33
Table of Contents
Lawson Products, Inc.
Notes to Consolidated Financial Statements
Components of inventories were as follows:
| (Dollars in thousands) | ||||||||
| December 31, | ||||||||
| 2009 | 2008 | |||||||
|
Finished goods
|
$ | 81,621 | $ | 92,565 | ||||
|
Work in progress
|
1,227 | 1,791 | ||||||
|
Raw materials
|
1,759 | 2,146 | ||||||
|
|
||||||||
|
Total
|
84,607 | 96,502 | ||||||
|
Reserve for obsolete and excess inventory
|
(10,911 | ) | (10,067 | ) | ||||
|
|
||||||||
|
|
$ | 73,696 | $ | 86,435 | ||||
|
|
||||||||
Components of property, plant and equipment were as follows:
| (Dollars in thousands) | ||||||||
| December 31, | ||||||||
| 2009 | 2008 | |||||||
|
Land
|
$ | 8,712 | $ | 9,197 | ||||
|
Buildings and improvements
|
51,007 | 54,069 | ||||||
|
Machinery and equipment
|
32,637 | 32,754 | ||||||
|
Capitalized software
|
11,627 | 13,246 | ||||||
|
Furniture and fixtures
|
6,073 | 6,708 | ||||||
|
Capital leases
|
3,451 | 3,736 | ||||||
|
Vehicles
|
325 | 354 | ||||||
|
Construction in progress
|
348 | 1,014 | ||||||
|
|
||||||||
|
|
114,180 | 121,078 | ||||||
|
Accumulated depreciation and amortization
|
(73,604 | ) | (73,295 | ) | ||||
|
|
||||||||
|
|
$ | 40,576 | $ | 47,783 | ||||
|
|
||||||||
In 2009, the Company closed its Charlotte, North Carolina and Dallas, Texas distribution
centers. The Company sold its Charlotte, North Carolina distribution center receiving proceeds of
$2.2 million in cash. The $0.4 million gain realized on the sale partially offset $0.6 million of
losses recorded on the disposal of equipment which was included in Severance and other charges. The
$0.3 million net book value related to the Company’s Dallas, Texas distribution center has been
reclassified to “Property held for sale” in the Consolidated Balance Sheets. The property is valued
at the lower of carrying amount or estimated net realizable value, proceeds less cost to sell, and
was not depreciated after being classified as held for sale. See Note 19 —
Subsequent Events.
The Company reviews goodwill annually during the fourth quarter, or when events occur or
circumstances change that would more likely than not reduce the fair value of the reporting unit
below its carrying value. Goodwill impairment is deemed to exist if the carrying amount of a
reporting unit exceeds its estimated fair value and the goodwill impairment charge, if any, is
measured as the difference between the carrying amount of the goodwill as compared to its estimated
fair value. In 2008, the Assembly Component Systems (“ACS”) business unit carried a $2.3 million
goodwill balance related to a 1999 acquisition. In previous years, the operating results of ACS
supported the goodwill balance based on market prices of comparable businesses and discounted cash
flow forecasts. During 2008, ACS began to experience increases in commodity costs that led to lower
gross margins and declining operating results. Then, with the onset of the global worldwide
recession in the fourth quarter of 2008, the Company revised its forecast of future operating
results to reflect the new unfavorable economic environment and determined, based on market prices
of comparable businesses and revised discounted cash flow forecasts, that the
goodwill associated with ACS was fully impaired. The Company recorded a charge of $2.3 million
for the year ended December 31, 2008.
34
Table of Contents
Lawson Products, Inc.
Notes to Consolidated Financial Statements
In 2009, the Company reviewed its remaining $28.0 million goodwill balance, all of which
relates to our Lawson Products business unit due to a 2001 acquisition. The Company estimated the
fair value of the Lawson Products business unit using a market approach, which relies on the market
value of companies that are engaged in the same line of business and also prepared a discounted
cash flow (“DCF”) analysis based on the operating plan, presented to the Board of Directors, to
determine a range of fair values. The Company then reconciled the estimated fair value of the business
unit to the market capitalization of the consolidated Company based on the trading range of the Company’s
stock. After reviewing the analysis, the Company concluded that the
calculated fair value of the Lawson business unit exceeded its carrying value by over $45 million
using the most conservative estimate and, therefore, the goodwill was not considered impaired.
Goodwill by business segment consisted of the following:
| (Dollars in thousands) | ||||||||||||
| (Dollars in thousands) | MRO | OEM | Total | |||||||||
|
|
||||||||||||
|
Balance at December 31, 2007
|
$ | 25,748 | $ | 2,251 | $ | 27,999 | ||||||
|
Impairment loss
|
— | (2,251 | ) | (2,251 | ) | |||||||
|
|
||||||||||||
|
Balance at December 31, 2008
|
$ | 25,748 | $ | — | $ | 25,748 | ||||||
|
Translation adjustment
|
2,209 | — | 2,209 | |||||||||
|
|
||||||||||||
|
Balance at December 31, 2009
|
$ | 27,957 | $ | — | $ | 27,957 | ||||||
|
|
||||||||||||
Due to the weakened economy and decreased forecasts of future operating results, the Company
reviewed the recoverability of its long-lived assets. In performing the review for recoverability,
the Company determined that the future expected undiscounted cash flows of our OEM and Rutland
business units were less than the carrying amount of the assets. The Company then estimated the
fair value of these assets primarily based on independent appraisals and reduced the carrying value
of the assets to fair value. As a result, the Company recorded an impairment charge of $1.3 million
in 2009, $1.1 million related to property, plant and equipment and $0.2 million related to other
intangible assets. Of the $1.3 million, $0.7 million related to the MRO segment and $0.6 million
related to the OEM segment.
Income (loss) from continuing operations before income taxes for the years ended December 31,
consisted of the following:
| (Dollars in thousands) | ||||||||||||
| Year Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
|
||||||||||||
|
United States
|
$ | (5,027 | ) | $ | (23,901 | ) | $ | 15,741 | ||||
|
Canada
|
(710 | ) | 3,201 | 4,331 | ||||||||
|
|
||||||||||||
|
|
$ | (5,737 | ) | $ | (20,700 | ) | $ | 20,072 | ||||
|
|
||||||||||||
35
Table of Contents
Lawson Products, Inc.
Notes to Consolidated Financial Statements
Provision (benefit) for income taxes from continuing operations for the years ended
December 31, consisted of the following:
| (Dollars in thousands) | ||||||||||||
| Year Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
|
||||||||||||
|
Current income tax expense (benefit):
|
||||||||||||
|
U.S. Federal
|
$ | (4,677 | ) | $ | 2,920 | $ | 6,485 | |||||
|
U.S. State
|
(94 | ) | 666 | 1,960 | ||||||||
|
Canada
|
(102 | ) | 915 | 1,544 | ||||||||
|
|
||||||||||||
|
Total
|
$ | (4,873 | ) | $ | 4,501 | $ | 9,989 | |||||
|
|
||||||||||||
|
|
||||||||||||
|
Deferred income tax expense (benefit):
|
||||||||||||
|
U.S. Federal
|
$ | 1,760 | $ | 1,874 | $ | (1,500 | ) | |||||
|
U.S. State
|
103 | 21 | 177 | |||||||||
|
Canada
|
(111 | ) | (36 | ) | 74 | |||||||
|
|
||||||||||||
|
Total
|
$ | 1,752 | $ | 1,859 | $ | (1,249 | ) | |||||
|
|
||||||||||||
|
|
||||||||||||
|
Total income tax expense (benefit):
|
||||||||||||
|
U.S. Federal
|
$ | (2,917 | ) | $ | 4,794 | $ | 4,985 | |||||
|
U.S. State
|
9 | 687 | 2,137 | |||||||||
|
Canada
|
(213 | ) | 879 | 1,618 | ||||||||
|
|
||||||||||||
|
Total
|
$ | (3,121 | ) | $ | 6,360 | $ | 8,740 | |||||
|
|
||||||||||||
The reconciliation between the effective income tax rate and the statutory federal rate for
continuing operations was as follows:
| Year Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
|
||||||||||||
|
Statutory federal rate
|
35.0 | % | 35.0 | % | 35.0 | % | ||||||
|
Increase (decrease) resulting from:
|
||||||||||||
|
State income taxes, net of federal income tax benefit
|
(0.3 | ) | (3.7 | ) | 7.4 | |||||||
|
Executive life insurance
|
8.6 | (10.3 | ) | (3.4 | ) | |||||||
|
Canadian subsidiaries
|
(0.2 | ) | 0.2 | 0.2 | ||||||||
|
Appeals settlement, net
|
7.0 | (4.3 | ) | — | ||||||||
|
Change in valuation allowance
|
19.3 | — | — | |||||||||
|
Expiration of loss carryforwards
|
(10.0 | ) | — | — | ||||||||
|
Fines and penalties
|
(3.2 | ) | (49.3 | ) | — | |||||||
|
Other items, net
|
(1.8 | ) | 1.7 | 4.3 | ||||||||
|
|
||||||||||||
|
Provision for income taxes
|
54.4 | % | (30.7 | )% | 43.5 | % | ||||||
|
|
||||||||||||
Income taxes paid for the years ended December 31, 2009, 2008, and 2007 amounted to $2.8
million, $7.0 million and $14.0 million, respectively. In 2009 the Company received $5.6 million in
income tax refunds primarily related to Federal income tax overpayments from prior years.
Deferred income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and the amounts used
for income tax purposes. The Company also has a $4.4 million capital loss carryforward remaining
related to the closure of its Mexico operations. A valuation allowance is recorded for all of the
capital loss carryforward due to the uncertainty of the Company’s ability to realize the capital
loss against future capital gains prior to expiration in 2012.
36
Table of Contents
Lawson Products, Inc.
Notes to Consolidated Financial Statements
Deferred income tax assets and liabilities contain the following temporary differences:
| (Dollars in thousands) | ||||||||
| December 31, | ||||||||
| 2009 | 2008 | |||||||
|
Deferred tax assets:
|
||||||||
|
Compensation and benefits
|
$ | 19,293 | $ | 20,879 | ||||
|
Inventory reserve
|
4,055 | 6,142 | ||||||
|
Capital loss
|
2,166 | 2,854 | ||||||
|
Accounts receivable reserve
|
455 | 594 | ||||||
|
Property, plant and equipment
|
184 | 260 | ||||||
|
Net operating loss carryforward
|
193 | — | ||||||
|
Other
|
1,423 | 903 | ||||||
|
|
||||||||
|
Total deferred tax assets
|
27,769 | 31,632 | ||||||
|
Valuation allowance for deferred tax assets
|
(1,744 | ) | (2,854 | ) | ||||
|
|
||||||||
|
Net deferred tax assets
|
26,025 | 28,778 | ||||||
|
|
||||||||
|
|
||||||||
|
Deferred tax liabilities:
|
||||||||
|
Goodwill
|
4,756 | 3,687 | ||||||
|
Other
|
1,201 | 805 | ||||||
|
|
||||||||
|
Total deferred liabilities
|
5,957 | 4,492 | ||||||
|
|
||||||||
|
|
||||||||
|
Total net deferred assets
|
$ | 20,068 | $ | 24,286 | ||||
|
|
||||||||
|
|
||||||||
|
Net deferred tax assets:
|
||||||||
|
Net current deferred income taxes
|
4,819 | 6,127 | ||||||
|
Net noncurrent deferred income taxes
|
15,249 | 18,159 | ||||||
|
|
||||||||
|
|
$ | 20,068 | $ | 24,286 | ||||
|
|
||||||||
Net deferred tax assets include the tax impact of items in comprehensive income (loss) of
$(0.9) million and $0.4 million on December 31, 2009 and 2008, respectively.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as
follows:
| (Dollars in thousands) | ||||||||
| December 31, | ||||||||
| 2009 | 2008 | |||||||
|
|
||||||||
|
Balance at beginning of year
|
$ | 3,197 | $ | 923 | ||||
|
Additions for tax positions of current year
|
627 | 248 | ||||||
|
Additions for tax positions of prior years
|
(1,440 | ) | 2,026 | |||||
|
Settlements
|
(1,154 | ) | — | |||||
|
|
||||||||
|
Balance at end of year
|
$ | 1,230 | $ | 3,197 | ||||
|
|
||||||||
The recognition of the $1.2 million unrecognized tax benefits would have a favorable effect on
the effective tax rate. Due to the uncertainty of both timing and resolution of income tax
examinations, the Company is unable to determine whether any amounts included in the December 31,
2009 balance of unrecognized tax benefits represent tax positions that could significantly change
during the next twelve months.
The Company recognizes interest and penalties related to unrecognized tax benefits as a
component of income tax expense. At December 31, 2009, the Company had accrued $0.5 million for the
potential payment of interest and penalties related to unrecognized tax benefits.
The Company and its subsidiaries are subject to U.S. federal income tax as well as income tax
of multiple state and Canadian jurisdictions. As of December 31, 2009, the Company was subject to
income tax examinations for the tax years 2006 through 2008.
37
Table of Contents
Lawson Products, Inc.
Notes to Consolidated Financial Statements
Accrued expenses and other liabilities consisted of the following:
| (Dollars in thousands) | ||||||||
| December 31, | ||||||||
| 2009 | 2008 | |||||||
|
|
||||||||
|
Salaries, commissions and other compensation
|
$ | 14,560 | $ | 15,471 | ||||
|
Accrued severance
|
3,105 | 4,889 | ||||||
|
Accrued and withheld taxes, other than income taxes
|
2,407 | 2,774 | ||||||
|
Accrued profit sharing contributions
|
2,066 | 2,372 | ||||||
|
Accrued stock performance rights
|
1,210 | 1,206 | ||||||
|
Accrued self-insured health benefits
|
927 | 1,055 | ||||||
|
Cash dividends payable
|
511 | 1,704 | ||||||
|
Other
|
8,486 | 8,738 | ||||||
|
|
||||||||
|
|
$ | 33,272 | $ | 38,209 | ||||
|
|
||||||||
Prior to August 2009, the Company had a $75.0 million committed credit facility under a First
Amended and Restated Credit Agreement dated as of November 7, 2008 with Bank of America, N.A.
(“Prior Credit Agreement”).
In August 2009 the Company entered into a new credit agreement (“Credit Agreement”) with The
PrivateBank and Trust Company as agent and lender. The Credit Agreement provides the Company with a
total borrowing capacity of $55.0 million in the form of revolving loans and letters of credit and
expires on August 21, 2012. Additionally, the Company has a one-time option, subject to the agent’s
consent, to increase the maximum borrowing capacity by an additional $20.0 million to a maximum
borrowing capacity $75.0 million. The Credit Agreement is secured by the Company’s accounts
receivable and inventory. The Company has agreed not to place any lien on its real estate.
The interest rate was initially set at, either LIBOR plus 3.0%, or the prime rate through
December 31, 2009. Thereafter, the interest rate will be adjusted based on the Company’s debt to
EBITDA ratio. The Credit Agreement restricts the amount of annual dividends to $7.0 million. The
Credit Agreement requires the Borrowers to comply with certain financial covenants, as defined in
the Credit Agreement, including minimum EBITDA, minimum tangible net worth levels, a minimum cash
plus accounts receivable and inventory to debt ratio and a minimum debt service coverage ratio. The
Credit Agreement also contains other customary representations, warranties, covenants and events of
default. The Company is in compliance with all covenants. On December 31, 2009, the Company had no
borrowings outstanding on its revolving line of credit and $3.2 million of outstanding letters of
credit, leaving borrowing availability of $51.8 million.
In conjunction with signing the new Credit Agreement, in August 2009, the Company terminated
its Prior Credit Agreement and paid all related outstanding loans. No prepayment penalties were
incurred as part of the termination. As a result of the termination the Company recorded a $0.2
million expense to write off the remaining deferred financing fees related to the Prior Credit
Agreement.
On January 29, 2010, the Company amended the Credit Agreement. The applicable interest rate
margin of three percent for LIBOR Loans and zero percent for Prime Loans was extended through June
30, 2010. Thereafter, the Applicable Margin for LIBOR Loans and Prime Loans will be adjusted based
on the Company’s debt to EBITDA ratio as set forth in the Credit Agreement. The minimum EBITDA
level, including a $5.3 million add back in 2010 for the anticipated expense related to the
implementation of an ERP system, was set at $8.0 million for the twelve month period ending
December 31, 2009 and increases to $9.5 million for the twelve month period ended March 31, 2010
and $10.0 million for the twelve month periods ending June 30, 2010, September 30, 2010 and
December 31, 2010, respectively. The ratio of cash plus accounts receivable and inventory to
outstanding debt was increased from 1.75:1.00 to 2.00:1.00 for 2010, while the minimum tangible net
worth level remained at $55.0 million. The minimum debt service coverage ratio of 1.20 commences
with fiscal year ending December 31, 2010.
38
Table of Contents
Lawson Products, Inc.
Notes to Consolidated Financial Statements
The Company had no outstanding balance under the revolving line at December 31, 2009 and paid
interest of $0.3 million, $0.5 million and $0.9 million in 2009, 2008 and 2007, respectively. For
the year ended December 31, 2009, the weighted average interest rate charged on outstanding loans
was 3.25% for the current Credit Agreement and 3.10% for the Prior Agreement.
Severance charges, net, related to management realignment and reorganization of $6.7 million,
$5.3 million and $10.8 million were recorded in 2009, 2008 and 2007, respectively. The severance
costs are primarily related to the MRO segment. The table below reflects the activity in the
Company’s reserve for severance and related payments.
| (Dollars in thousands) | ||||||||||||
| Year Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
|
||||||||||||
|
Beginning balance
|
$ | 6,111 | $ | 7,058 | $ | 962 | ||||||
|
Charged to earnings current year
|
7,027 | 5,378 | 10,886 | |||||||||
|
Cash paid
|
(8,642 | ) | (6,264 | ) | (4,670 | ) | ||||||
|
Adjustment to prior year reserves
|
(351 | ) | (61 | ) | (120 | ) | ||||||
|
|
||||||||||||
|
Ending balance
|
$ | 4,145 | $ | 6,111 | $ | 7,058 | ||||||
|
|
||||||||||||
Accrued severance charges were included in the line items of the Consolidated Balance Sheets
at December 31, 2009 and 2008 as follows:
| (Dollars in thousands) | ||||||||
| December 31, | ||||||||
| 2009 | 2008 | |||||||
|
Accrued severance included in:
|
||||||||
|
Accrued expenses and other liabilities
|
$ | 3,105 | $ | 4,889 | ||||
|
Noncurrent other
|
1,040 | 1,222 | ||||||
|
|
||||||||
|
Total accrued severance
|
$ | 4,145 | $ | 6,111 | ||||
|
|
||||||||
The Company anticipates the remaining benefits outstanding as of December 31, 2009 will be
substantially paid out by 2013.
The Company has a retirement plan with a profit sharing feature for certain sales office and
warehouse employees. The amounts of the Company’s annual contributions are determined annually by
the Board of Directors. Provisions for the profit sharing plan were $2.0 million, $2.2 million and
$4.0 million for the years ended December 31, 2009, 2008 and 2007, respectively.
The Company provides 401(k) defined contribution benefit plans to allow employees a pre-tax
investment vehicle to save for retirement. Certain subsidiaries contributed matching funds of $0.2
million in each of the years ended December 31, 2009, 2008 and 2007.
The Company has a security bonus plan for the benefit of its independent sales agents, under
the terms of which participants are credited with a percentage of their yearly net commissions. The
aggregate amounts credited to participants’ accounts vest 25% after five years and an additional 5%
vests each year thereafter. For financial reporting purposes, amounts are charged to operations
over the vesting period. Provisions for the security bonus plan were $2.1 million, $2.6 million and
$2.1 million for the years ended December 31, 2009, 2008 and 2007, respectively.
39
Table of Contents
Lawson Products, Inc.
Notes to Consolidated Financial Statements
Lease Commitments
Total rental expense for the years ended December 31, 2009, 2008 and 2007 amounted to $3.3
million, $3.5 million and $4.1 million, respectively. The Company’s future minimum lease
commitments, principally for facilities and equipment, as of December 31, 2009, were as follows:
| (Dollars in thousands) | ||||||||
| Year ended December 31, | Operating Leases | Capital Leases | ||||||
|
|
||||||||
|
2010
|
$ | 2,394 | $ | 1,034 | ||||
|
2011
|
1,690 | 752 | ||||||
|
2012
|
793 | 207 | ||||||
|
2013
|
222 | 73 | ||||||
|
2014
|
73 | 54 | ||||||
|
|
||||||||
|
Total
|
$ | 5,172 | 2,120 | |||||
|
|
||||||||
|
Less: Interest portion
|
(233 | ) | ||||||
|
|
||||||||
|
Liability
|
$ | 1,887 | ||||||
|
|
||||||||
Litigation and regulatory matters
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 or results of operations.
In August 2008, the Company entered into a Deferred Prosecution Agreement (“DPA”) with the
U.S. Attorney’s Office in connection with representatives of the Company improperly providing gifts
or awards to purchasing agents through the Company’s customer loyalty programs. Pursuant to the
DPA, the Company agreed to a $30.0 million penalty. The Company paid $10.0 million in both 2009 and
2008 and the final $10.0 million payment is due on or before August 11, 2010. The Company continues
to comply with the DPA.
During 2009, the
Company identified that it had shipped a limited number of products in violation of
certain state environmental regulations. The Company has begun the
self-reporting process with appropriate regulatory agencies regarding its
findings. The Company has initiated the recall of a limited number of products and is
working with state regulators to take appropriate remedial actions to comply
with these environmental regulations. At December 31, 2009, the Company
has accrued $0.2 million for penalties and expenses related to
environmental matters and at this time, the Company cannot determine if any
further expenses may be incurred.
Tax matters
Recently, the Internal
Revenue Service notified the Company that its income tax returns for the years
2007 and 2008 were selected for examination. In connection with that
examination, an Employment Tax Examination, including a review of worker
classification, was initiated for one of the Company’s subsidiaries,
Drummond American LLC, for the years 2006 through 2008. It is not possible at
this time to predict the final outcome of this audit or to establish a
reasonable estimate of possible additional taxes owed, if any.
In November 2008, the Company became aware that it had not properly withheld state income tax
from a small number of employees in approximately 15 states. The Company may have exposure for
penalties and interest for state income tax withholdings and payroll tax returns. In reviewing this
potential exposure, the Company determined that certain subsidiaries had not properly remitted
sales and use taxes in certain states, creating an exposure for penalties and interest. The Company
has filed voluntary disclosure agreements with certain states. At December 31, 2009, the Company
had finalized 14 agreements, and has recorded $0.4 million in interest and penalties.
The
Company has identified certain services and benefits that were not
properly reported on
information returns with respect to its independent sales agents. The Company
notified the Internal Revenue Service Employment Tax Division and is currently reviewing its information reporting practices. At this
time, the Company cannot determine if further actions may result from this review.
40
Table of Contents
Lawson Products, Inc.
Notes to Consolidated Financial Statements
The Company has a Stock Performance Rights Plan (“SPR Plan”) that provides for the issuance of
Stock Performance Rights (“SPRs”) that allow non-employee directors, officers and key employees to
receive cash awards, subject to certain restrictions, equal to the appreciation of the Company’s
common stock. The SPR Plan is administered by the Compensation Committee of the Board of Directors.
On December 8, 2009, the Company’s stockholders approved the adoption of the 2009 Equity
Compensation Plan (“Equity Plan”). The Equity Plan provides for the grant of nonqualified and
incentive stock options, stock awards and stock units to officers and employees of the Company. The
Equity Plan also provides for the grant of option rights and restricted stock to non-employee
directors. Under the Equity Plan 500,000 shares of common stock are available to be awarded with
no participant being granted more than 40,000 shares of common stock in any calendar year. The
Equity Plan is administered by the Compensation Committee, or its designee, which as administrator
of the plan, has the authority to select plan participants, grant awards, and determine the terms
and conditions of the awards.
The Company has stock options outstanding from the Incentive Stock Plan (“Stock Plan”)
that expired in 2006. Stock options granted under the Stock Plan continue to vest and are
exercisable in accordance with their original terms and conditions.
Stock Performance Rights
SPRs have a seven or ten year life and vest ratably over three years beginning on the first
anniversary of the date of the grant. SPRs entitle the recipient to receive a cash payment equal to
the excess of the market value of the Company’s common stock over the SPR exercise price when the
SPRs are surrendered. Expense, equal to the fair market value of the SPR at the measurement date,
is recorded ratably over the vesting period. Employees and non-employee directors who are
retirement eligible, defined as age 65 or older, are permitted to retain their awards after
retirement and exercise them during the remaining contractual life. All expense is recognized on
the date of grant for SPRs granted to retirement eligible recipients.
On December 31, 2009, the SPRs outstanding were remeasured at fair value using the
Black-Scholes valuation model. This model requires the input of subjective assumptions that may
have a significant impact on the fair value estimate. The weighted-average estimated value of SPRs
outstanding as of December 31, 2009 was $5.80 per SPR using the Black-Scholes valuation model with
the following assumptions:
|
Expected volatility
|
57.4% to 101.7% | |
|
Risk-free rate of return
|
0.2% to 2.7% | |
|
Expected term (in years)
|
0.5 to 5.2 | |
|
Expected annual dividend
|
$0.24 |
The expected volatility was based on the historic volatility of the Company’s stock price
commiserate with the expected life of the SPR. The risk-free rate of return reflects the interest
rate offered for zero coupon treasury bonds over the expected life of the SPR. The expected life
represents the period of time that options granted are expected to be outstanding and was
calculated using the simplified method allowed by the SEC due to insufficient historical data. The
estimated annual dividend was based on the recent dividend payout trend.
Compensation income, netted against Selling, general and administrative expense, was
$0.8 million and $0.4 million for the years ended December 31, 2008 and 2007, respectively, as the
overall decline in the fair value of the SPRs exceeded the amortization expense related to the
unvested SPRs. No expense or benefit was incurred in 2009 as the decrease in the SPRs value was
offset by the amortization expense. Cash paid out due to the exercise of SPRs was immaterial for
the years ended December 31, 2009, 2008 and 2007.
41
Table of Contents
Lawson Products, Inc.
Notes to Consolidated Financial Statements
Activity related to the Company’s SPRs during the year ended 2009 was as follows:
| Weighted | ||||||||
| Number | Average | |||||||
| of SPRs | Exercise Price | |||||||
|
|
||||||||
|
Outstanding on December 31, 2008
|
307,600 | $ | 31.40 | |||||
|
Granted
|
92,300 | 17.76 | ||||||
|
Cancelled
|
(11,600 | ) | 26.34 | |||||
|
|
||||||||
|
Outstanding on December 31, 2009
|
388,300 | 28.31 | ||||||
|
|
||||||||
|
|
||||||||
|
Exercisable on December 31, 2009
|
224,666 | $ | 33.14 | |||||
|
|
||||||||
The SPRs outstanding had no aggregate intrinsic value as of December 31, 2009 since all
exercise prices equaled or exceeded the closing market price of the Company’s stock at that date.
Unrecognized compensation cost related to non-vested SPRs was $0.9 million at December 31, 2009,
which will be recognized over a weighted average period of 1.9 years. During the year ended
December 31, 2009, 52,998 SPRs with a fair value of $0.3 million, vested. At December 31, 2009, the
weighted average remaining contractual term was 6.5 years for all outstanding SPRs and 5.7 years
for the SPRs that are exercisable.
Restricted Stock Awards
Restricted stock awards vest ratably over a three year period beginning on the first
anniversary of the date of the grant. On each vesting date the vested restricted stock awards are
exchanged for an equal number of the Company’s common stock. Common stock received by the
participant cannot be transferred until either the end of the three year term or employment with
the Company is terminated without cause. The participants have no voting or dividend rights with
the restricted stock awards or the common shares received through vesting until the third
anniversary of the date of the grant. The restricted stock awards are valued at the closing price
of the common stock on the date of grant and the expense is recorded ratably over the vesting
period. On December 22, 2009, the Company issued 40,400 restricted stock awards to certain
employees which remained outstanding on December 31, 2009. The awards issued had a grant date fair
value of $17.65 per share. As of December 31, 2009, there was $0.7 million of total unrecognized
compensation cost related to the outstanding restricted shares that will be recognized over a
weighted average period of three years.
Stock Options
At December 31, 2009 there were 3,000 stock options outstanding with an exercise price of
$23.56 and an expiration date of May 16, 2010. During 2009, 2,000 stock options with an exercise
price of $22.44 expired. There was no compensation expense related to stock options in 2009, 2008
or 2007.
42
Table of Contents
Lawson Products, Inc.
Notes to Consolidated Financial Statements
The computation of basic and diluted earnings (loss) per share consisted of the following:
| (Amounts in thousands except for per share data) | ||||||||||||
| Year Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Weighted average shares:
|
||||||||||||
|
Basic weighted average shares outstanding
|
8,522 | 8,522 | 8,522 | |||||||||
|
Effect of dilutive securities outstanding
|
— | — | 2 | |||||||||
|
|
||||||||||||
|
Diluted weighted average shares outstanding
|
8,522 | 8,522 | 8,524 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Earnings (loss):
|
||||||||||||
|
Continuing operations
|
$ | (2,616 | ) | $ | (27,060 | ) | $ | 11,332 | ||||
|
Discontinued operations
|
(120 | ) | (571 | ) | (703 | ) | ||||||
|
|
||||||||||||
|
Net Income (loss)
|
$ | (2,736 | ) | $ | (27,631 | ) | $ | 10,629 | ||||
|
|
||||||||||||
|
|
||||||||||||
|
Basic earnings (loss) per share of common stock:
|
||||||||||||
|
Continuing operations
|
$ | (0.31 | ) | $ | (3.18 | ) | $ | 1.33 | ||||
|
Discontinued operations
|
(0.01 | ) | (0.06 | ) | (0.08 | ) | ||||||
|
|
||||||||||||
|
Net Income (loss)
|
$ | (0.32 | ) | $ | (3.24 | ) | $ | 1.25 | ||||
|
|
||||||||||||
|
|
||||||||||||
|
Diluted earnings (loss) per share of common stock:
|
||||||||||||
|
Continuing operations
|
$ | (0.31 | ) | $ | (3.18 | ) | $ | 1.33 | ||||
|
Discontinued operations
|
(0.01 | ) | (0.06 | ) | (0.08 | ) | ||||||
|
|
||||||||||||
|
Net Income (loss)
|
$ | (0.32 | ) | $ | (3.24 | ) | $ | 1.25 | ||||
|
|
||||||||||||
The effect of future stock option exercises for the years ended December 31, 2009 and 2008 and
the effect of restricted share awards outstanding for the year ended December 31, 2009 would have
been anti-dilutive and therefore, were excluded from the computation of diluted earnings per share.
43
Table of Contents
Lawson Products, Inc.
Notes to Consolidated Financial Statements
The Company’s operating units have been aggregated into two reportable segments: MRO and OEM.
The Company’s MRO segment is a distributor of products and services to the industrial, commercial,
institutional, and governmental maintenance repair and operations marketplace. The Company’s OEM
segment manufactures, sells and distributes production and specialized component parts to the
original equipment marketplace. The Company’s two reportable segments are distinguished by the
nature of products distributed and sold, types of customers and manner of servicing them. The
Company evaluates performance and allocates resources to reportable segments primarily based on
operating income.
Financial information for the Company’s reportable segments from continuing operations
consisted of the following:
| (Dollars in thousands) | ||||||||||||
| Year Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Net sales
|
||||||||||||
|
MRO
|
$ | 320,400 | $ | 403,584 | $ | 429,508 | ||||||
|
OEM
|
58,481 | 81,623 | 83,035 | |||||||||
|
|
||||||||||||
|
Consolidated total
|
$ | 378,881 | $ | 485,207 | $ | 512,543 | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Operating income (loss)
|
||||||||||||
|
MRO
|
$ | 6,999 | $ | 26,113 | $ | 34,366 | ||||||
|
OEM
|
(4,345 | ) | (3,175 | ) | 4,196 | |||||||
|
Severance and other charges
|
(6,820 | ) | (9,252 | ) | (12,328 | ) | ||||||
|
Settlement and related costs
|
(154 | ) | (31,666 | ) | (5,793 | ) | ||||||
|
Impairment of long-lived assets
|
(1,267 | ) | — | — | ||||||||
|
Impairment of goodwill
|
— | (2,251 | ) | — | ||||||||
|
|
||||||||||||
|
Consolidated total
|
(5,587 | ) | (20,231 | ) | 20,441 | |||||||
|
|
||||||||||||
|
Interest expense
|
(1,037 | ) | (789 | ) | (910 | ) | ||||||
|
Other income, net
|
887 | 320 | 541 | |||||||||
|
|
||||||||||||
|
Income (loss) from
continuing operations
before income taxes
|
$ | (5,737 | ) | $ | (20,700 | ) | $ | 20,072 | ||||
|
|
||||||||||||
|
|
||||||||||||
|
Capital expenditures
|
||||||||||||
|
MRO
|
$ | 2,008 | $ | 2,809 | $ | 16,943 | ||||||
|
OEM
|
760 | 740 | 751 | |||||||||
|
|
||||||||||||
|
Consolidated total
|
$ | 2,768 | $ | 3,549 | $ | 17,694 | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Depreciation and amortization
|
||||||||||||
|
MRO
|
$ | 6,485 | $ | 7,509 | $ | 6,692 | ||||||
|
OEM
|
731 | 773 | 743 | |||||||||
|
|
||||||||||||
|
Consolidated total
|
$ | 7,216 | $ | 8,282 | $ | 7,435 | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Total assets
|
||||||||||||
|
MRO
|
$ | 181,717 | $ | 202,640 | $ | 221,274 | ||||||
|
OEM
|
39,402 | 44,000 | 52,955 | |||||||||
|
|
||||||||||||
|
Segment total
|
221,119 | 246,640 | 274,229 | |||||||||
|
Corporate
|
20,069 | 24,287 | 24,570 | |||||||||
|
|
||||||||||||
|
Consolidated total
|
$ | 241,188 | $ | 270,927 | $ | 298,799 | ||||||
|
|
||||||||||||
44
Table of Contents
Lawson Products, Inc.
Notes to Consolidated Financial Statements
Financial information related to the Company’s continuing operations by geographic area
consisted of the following:
| (Dollars in thousands) | ||||||||||||
| Year Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Net sales
|
||||||||||||
|
United States
|
$ | 353,228 | $ | 455,028 | $ | 482,491 | ||||||
|
Canada
|
25,653 | 30,179 | 30,052 | |||||||||
|
|
||||||||||||
|
Consolidated total
|
$ | 378,881 | $ | 485,207 | $ | 512,543 | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Long-lived assets
|
||||||||||||
|
United States
|
$ | 59,160 | $ | 67,076 | $ | 73,971 | ||||||
|
Canada
|
9,936 | 7,468 | 8,322 | |||||||||
|
|
||||||||||||
|
Consolidated total
|
$ | 69,096 | $ | 74,544 | $ | 82,293 | ||||||
|
|
||||||||||||
Net sales are attributed to countries based on the location of customers. Long-lived assets
consist of total property, plant and equipment, goodwill and other intangible assets.
The Company closed its operations in Mexico in 2007. Accordingly, the Consolidated Balance
Sheets and Consolidated Statements of Operations reflect those assets and liabilities and operating
results as discontinued operations.
45
Table of Contents
Lawson Products, Inc.
Notes to Consolidated Financial Statements
Unaudited quarterly results of operations for the years ended December 31, 2009 and 2008 are
summarized as follows:
| (Dollars in thousands, except for per share amounts) | ||||||||||||||||
| 2009 Quarter Ended | ||||||||||||||||
| Dec. 31 | Sep. 30 | June 30 | Mar. 31 | |||||||||||||
|
|
||||||||||||||||
|
Net sales
|
$ | 89,342 | $ | 95,125 | $ | 95,033 | $ | 99,381 | ||||||||
|
Gross profit
|
51,344 | 56,397 | 55,869 | 54,167 | ||||||||||||
|
|
||||||||||||||||
|
Income (loss) from continuing operations
|
$ | (114 | ) | $ | 1,521 | $ | 1,896 | $ | (5,919 | ) | ||||||
|
Loss from discontinued operations
|
(24 | ) | (18 | ) | (49 | ) | (29 | ) | ||||||||
|
|
||||||||||||||||
|
Net income (loss)
|
$ | (138 | ) | $ | 1,503 | $ | 1,847 | $ | (5,948 | ) | ||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Basic and diluted income (loss) per share
of common stock:
|
||||||||||||||||
|
Continuing operations
|
$ | (0.01 | ) | $ | 0.18 | $ | 0.22 | $ | (0.70 | ) | ||||||
|
Discontinued operations
|
(0.01 | ) | — | — | — | |||||||||||
|
|
||||||||||||||||
|
Net income (loss)
|
$ | (0.02 | ) | $ | 0.18 | $ | 0.22 | $ | (0.70 | ) | ||||||
|
|
||||||||||||||||
| 2008 Quarter Ended | ||||||||||||||||
| Dec. 31 | Sep. 30 | June 30 | Mar. 31 | |||||||||||||
|
|
||||||||||||||||
|
Net sales
|
$ | 106,825 | $ | 125,364 | $ | 127,148 | $ | 125,870 | ||||||||
|
Gross profit
|
60,337 | 71,089 | 73,444 | 74,128 | ||||||||||||
|
|
||||||||||||||||
|
Income (loss) from continuing operations
|
$ | (5,417 | ) | $ | 3,068 | $ | (29,235 | ) | $ | 4,524 | ||||||
|
Income (loss) from discontinued operations
|
(8 | ) | 10 | (418 | ) | (155 | ) | |||||||||
|
|
||||||||||||||||
|
Net Income (loss)
|
$ | (5,425 | ) | $ | 3,078 | $ | (29,653 | ) | $ | 4,369 | ||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Basic and diluted Income (loss) per share
of common stock:
|
||||||||||||||||
|
Continuing operations
|
$ | (0.64 | ) | $ | 0.36 | $ | (3.43 | ) | $ | 0.53 | ||||||
|
Discontinued operations
|
— | — | (0.05 | ) | (0.02 | ) | ||||||||||
|
|
||||||||||||||||
|
Net Income (loss)
|
$ | (0.64 | ) | $ | 0.36 | $ | (3.48 | ) | $ | 0.51 | ||||||
|
|
||||||||||||||||
On January 29, 2010, the Company amended its Credit Agreement. Certain modifications were made
to the minimum EBITDA and ratio of cash plus accounts receivable and inventory to outstanding debt
level covenants and the applicable interest rate margin was extended through June 30, 2010. Further
details are included in Note 10 —
Revolving Line of Credit.
On February 16, 2010, the Company sold its Dallas, Texas distribution center receiving cash
proceeds of $2.0 million resulting in a gain of $1.7 million.
46
Table of Contents
Lawson Products, Inc. and Subsidiaries
Schedule II — Valuation and Qualifying Accounts
The roll forward of valuation accounts were as follows:
| (Dollars in thousands) | ||||||||||||||||
| Balance at | Charged to | Balance at | ||||||||||||||
| Beginning of | Costs and | End of | ||||||||||||||
| Description | Period | Expenses | Deductions | Period | ||||||||||||
|
|
||||||||||||||||
|
Allowance for
doubtful accounts:
|
||||||||||||||||
|
Year ended
December 31,
2009
|
$ | 1,680 | $ | 1,851 | $ | (2,190 | )(1) | $ | 1,341 | |||||||
|
Year ended
December 31,
2008
|
1,376 | 1,461 | (1,157 | )(1) | 1,680 | |||||||||||
|
Year ended
December 31,
2007
|
1,332 | 928 | (884 | )(1) | 1,376 | |||||||||||
|
|
||||||||||||||||
|
Allowance for
excess and
obsolete inventory:
|
||||||||||||||||
|
Year ended
December 31,
2009
|
$ | 10,067 | $ | 1,994 | $ | (1,150 | )(2) | $ | 10,911 | |||||||
|
Year ended
December 31,
2008
|
10,024 | 2,486 | (2,443 | )(2) | 10,067 | |||||||||||
|
Year ended
December 31,
2007
|
9,233 | 2,455 | (1,664 | )(2) | 10,024 | |||||||||||
|
|
||||||||||||||||
|
Valuation allowance
for deferred tax
assets:
|
||||||||||||||||
|
Year ended
December 31,
2009
|
$ | 2,854 | $ | (536 | ) | $ | (574 | )(3) | $ | 1,744 | ||||||
|
Year ended
December 31,
2008
|
3,337 | (483 | ) | — | 2,854 | |||||||||||
|
Year ended
December 31,
2007
|
1,318 | 2,763 | (744 | )(3) | 3,337 | |||||||||||
| (1) |
Uncollected receivables written off, net of recoveries and translation adjustment.
|
|
| (2) |
Disposal of excess and obsolete inventory and translation adjustment.
|
|
| (3) |
Capital loss carryforward written off.
|
47
Table of Contents
| ITEM 9. |
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
|
None.
| ITEM 9A. |
CONTROLS AND PROCEDURES.
|
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our senior management, including our Chief
Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of
the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e)
and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the
end of the period covered by this annual report (the “Evaluation Date”). Based on this evaluation,
our Chief Executive Officer and Chief Financial Officer concluded as of the Evaluation Date that
our disclosure controls and procedures were effective such that (i) the information relating to
Lawson, including our consolidated subsidiaries, required to be disclosed in our SEC reports is
recorded, processed, summarized and reported within the time periods specified in SEC rules and
forms, and (ii) include, without limitation, controls and procedures designed to ensure
that information required to be disclosed is accumulated and communicated to our management,
including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely
decisions regarding required disclosure.
Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining an adequate system of internal
control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities
Exchange Act of 1934, as amended, for Lawson Products, Inc. and subsidiaries (the “Company”). This
system is designed to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with U.S. generally
accepted accounting principles.
The Company’s internal control over financial reporting includes those policies and procedures
that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements
in accordance with generally accepted accounting principles, and that receipts and expenditures of
the Company are being made only in accordance with authorizations of management and directors of
the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the Company’s assets that could have a material
effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may
not prevent or detect misstatements and even when determined to be effective, can only provide
reasonable assurance with respect to financial statement preparation and presentation. Also,
projection of any evaluation of the effectiveness of internal control over financial reporting to
future periods is subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management, with the participation of the Company’s Chief Executive Officer and Chief
Financial Officer, evaluated the effectiveness of the Company’s internal control over financial
reporting as of December 31, 2009. In making this evaluation, management used the criteria set
forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in
Internal
Control — Integrated Framework.
Based on this assessment, management concluded that the Company’s
internal control over financial reporting was effective as of December 31, 2009. The Company’s
independent registered public accounting firm, Ernst & Young LLP, has audited and issued a report
on the Company’s internal controls over financial reporting as set forth in this annual report.
Changes in Internal Controls
There were no changes in our internal control over financial reporting that occurred during
the last fiscal quarter that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
48
Table of Contents
Report of Independent Registered Public Accounting Firm on Internal Control Over Financial
Reporting
To the Stockholders and Board of Directors
Lawson Products, Inc.
Lawson Products, Inc.
We have audited Lawson Products, Inc.’s (the “Company”) internal control over financial
reporting as of December 31, 2009 based on criteria established in Internal Control — Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the
“COSO” criteria). Lawson Products, Inc.’s management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting included in the accompanying Management’s Report on Internal
Control Over Financial Reporting. Our responsibility is to express an opinion on the effectiveness
of the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk,
and performing such other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that the transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting principles, and that receipts
and expenditures of the company are being made only in accordance with authorizations of management
and directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s assets that could have
a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate. In our opinion, Lawson
Products, Inc. maintained in all material respects, effective internal control over financial
reporting as of December 31, 2009, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Lawson Products, Inc. as of
December 31, 2009 and 2008 and the related consolidated statements of operations, changes in
stockholders’ equity, and cash flows for each of the three years in the period ended December 31,
2009 and our report dated February 25, 2010 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Chicago, Illinois
February 25, 2010
February 25, 2010
49
Table of Contents
| ITEM 9B. |
OTHER INFORMATION.
|
None.
| ITEM 10. |
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
|
a.
Directors
The information required by this Item is set forth in the Company’s Proxy Statement for the
Annual Meeting of Stockholders to be held on May 11, 2010, under the caption “Election of
Directors” and “Section 16(a) Beneficial Ownership Reporting Compliance,” which information is
incorporated herein by reference.
b.
Executive Officers
The information required by this Item is set forth under the caption Item 1 —
Business
under
“Executive Officers of the Registrant.”
c.
Audit Committee
Information on the Company’s Audit Committee is contained under the caption “Board of
Directors Meetings and Committees” in the Company’s Proxy Statement for the Annual Meeting of
Stockholders to be held on May 11, 2010, which is incorporated herein by reference.
The Board of Directors has determined that Thomas Postek, member of the Audit Committee of the
Board of Directors, qualifies as an “audit committee financial expert” as defined in
Item 407(d)(5)(ii) of Regulation S-K, and that Mr. Postek is “independent” as the term is defined
in the listing standards of the NASDAQ Global Select Market.
d.
Code of Business Conduct
The Company has adopted a Code of Business Conduct applicable to all employees and sales
agents. The Company’s Code of Business Conduct is applicable to senior financial executives
including the principal executive officer, principal financial officer and principal accounting
officer of the Company. The Company’s Code of Business Conduct is available on the Corporate
Governance page in the Investor Relations section of the Company’s website at
www.lawsonproducts.com
. The Company intends to post on its website any amendments to, or waivers
from its Code of Business Conduct applicable to senior financial executives. The Company will
provide any persons with a copy of its Code of Business Conduct without charge upon written request
directed to the Company’s Secretary at the Company’s address.
| ITEM 11. |
EXECUTIVE COMPENSATION.
|
The information required by this Item is set forth in the Company’s Proxy Statement for the
Annual Meeting of Stockholders to be held on May 11, 2010, under the caption “Remuneration of
Executive Officers,” which information is incorporated herein by reference.
50
Table of Contents
| ITEM 12. |
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS.
|
The information required by this Item is set forth in the Company’s Proxy Statement for the
Annual Meeting of Stockholders to be held on May 11, 2010 under the caption “Securities
Beneficially Owned by Principal Stockholders and Management” which information is incorporated
herein by reference.
Equity Compensation Plan Information
The following table provides information as of December 31, 2009 regarding the number of
shares of common stock that were available for issuance under the Company’s equity compensation
plans.
| Number of securities | ||||||||||||
| Number of securities | Weighted-average | remaining available for future | ||||||||||
| to be issued upon | exercise price of | issuance under equity | ||||||||||
| exercise of | outstanding | compensation plans | ||||||||||
| outstanding options, | options, warrants | (excluding securities reflected | ||||||||||
| Plan category | warrants and rights | and rights | in the first column) | |||||||||
|
|
||||||||||||
|
Equity
compensation plans
approved by
security holders
|
43,400 | * | $ | 23.56 | ** | 459,600 | ||||||
|
Equity compensation
plans not approved
by security holders
|
— | — | — | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Total
|
43,400 | * | $ | 23.56 | ** | 459,600 | ||||||
|
|
||||||||||||
| * |
Includes common stock to cover conversion of 40,400 restricted stock awards and 3,000 stock
options.
|
|
| ** |
Exercise price of 3,000 stock options outstanding on December 31, 2009.
|
| ITEM 13. |
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
|
The information required by this Item is set forth in the Company’s Proxy Statement for the
Annual Meeting of Stockholders to be held on May 11, 2010 under the caption “Election of Directors”
and “Certain Relationships and Related Transactions” which information is incorporated herein by
reference.
| ITEM 14. |
PRINCIPAL ACCOUNTING FEES AND SERVICES.
|
The information required under this Item is set forth in the Company’s Proxy Statement for the
Annual Meeting of Stockholders to be held on May 11, 2010 under the caption “Fees Paid to
Independent Auditors” which information is incorporated herein by reference.
| ITEM 15. |
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
|
| (a) | (1 | ) | See Index to Financial Statements in Item 8 on page 25. | |||
| (2 | ) | See Schedule II in Item 8 on page 47. | ||||
| (3 | ) | See the Exhibit Index immediately following the signature page of this Annual Report on Form 10-K. |
51
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
|
LAWSON PRODUCTS, INC.
|
||||
| By: | /s/ Thomas J. Neri | |||
| Thomas J. Neri | ||||
|
President, Chief Executive Officer and
Director
(principal executive officer) Date: February 25, 2010 |
||||
| By: | /s/ Ronald J. Knutson | |||
| Ronald J. Knutson | ||||
|
Senior Vice President and Chief Financial
Officer
(principal financial and accounting officer) Date: February 25, 2010 |
||||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below this 25th day of February, 2010, by the following persons on behalf of the registrant and in
the capacities indicated.
| Signature | Title | |
|
|
||
|
/s/ Thomas J. Neri
|
President, Chief Executive Officer and Director | |
|
Thomas J. Neri
|
(principal executive officer) | |
|
|
||
|
/s/ Ronald B. Port
|
Chairman of the Board | |
|
Ronald B. Port
|
||
|
|
||
|
/s/ Andrew B. Albert
|
Director | |
|
Andrew B. Albert
|
||
|
|
||
|
/s/ I. Steven Edelson
|
Director | |
|
I. Steven Edelson
|
||
|
|
||
|
/s/ James S. Errant
|
Director | |
|
James S. Errant
|
||
|
|
||
|
/s/ Lee S. Hillman
|
Director | |
|
Lee S. Hillman
|
||
|
|
||
|
/s/ Thomas S. Postek
|
Director | |
|
Thomas S. Postek
|
||
|
|
||
|
/s/ Robert G. Rettig
|
Director | |
|
Robert G. Rettig
|
||
|
|
||
|
/s/ Wilma J. Smelcer
|
Director | |
|
Wilma J. Smelcer
|
52
Table of Contents
EXHIBIT INDEX
| Exhibit | ||||
| Number | Description of Exhibit | |||
| 3.1 |
Certificate of Incorporation of the Company, as amended,
incorporated herein by reference to Exhibit 3(a) to the Company’s
Annual Report on Form 10-K for the fiscal year ended December 31,
1988.
|
|||
|
|
||||
| 3.2 |
Amended and Restated By-laws of the Company, incorporated herein
by reference to the Company’s Current Report on Form 8-K dated
September 15, 2008.
|
|||
|
|
||||
| 3.3 |
Amended and Restated By-laws of the Company, incorporated herein
by reference to the Company’s Current Report on Form 8-K dated
October 20, 2009.
|
|||
|
|
||||
| 10.1 | * |
Lawson Products, Inc. Incentive Stock Plan, incorporated herein by
reference to Appendix A to the Company’s Proxy Statement for the
Annual Meeting of Stockholders held on May 11, 1999.
|
||
|
|
||||
| 10.2 | * |
Amended and Restated Executive Deferral Plan, incorporated herein
by reference from Exhibit 10(c)(7) to the Company’s Annual Report
on Form 10-K for the fiscal year ended December 31, 1995.
|
||
|
|
||||
| 10.3 | * |
Lawson Products, Inc. Stock Performance Plan, incorporated herein
by reference from Exhibit 10(c)(8) to the Company’s Annual Report
on Form 10-K for the fiscal year ended December 31, 2000.
|
||
|
|
||||
| 10.4 | * |
Lawson Products, Inc. Long-Term Capital Accumulation Plan,
incorporated herein by reference from Exhibit 10(c)(10) to the
Company’s Current Report on Form 8-K dated October 21, 2004.
|
||
|
|
||||
| 10.5 | * |
Form of Shareholder Value Appreciation Rights Award Agreement,
incorporated by reference to
Exhibit 10(c)(14)
to the Company’s
Annual Report on Form 10-K for the fiscal year ended December 31,
2004.
|
||
|
|
||||
| 10.6 | * |
Form Letter regarding Stock Performance Rights, incorporated by
reference to Exhibit 10(c)(16) to the Company’s Annual Report on
Form 10-K for the fiscal year ended December 31, 2004.
|
||
|
|
||||
| 10.7 | * |
Executive Employment Agreement dated December 5, 2005 between the
Company and Stewart Howley, incorporated herein by reference to
Exhibit 10.11 to the Company’s Annual Report on Form 10-K for the
fiscal year ended December 31, 2008.
|
||
|
|
||||
| 10.8 | * |
Employment Agreement dated February 29, 2008 between the Company
and Harry Dochelli, incorporated herein by reference to
Exhibit 10.12 to the Company’s Annual Report on Form 10-K for the
fiscal year ended December 31, 2008.
|
||
|
|
||||
| 10.9 | * |
Lawson Products, Inc. Long-Term Incentive Plan, incorporated
herein by reference to Exhibit 10.1 to the Company’s Current
Report on Form 8-K dated May 13, 2008.
|
||
|
|
||||
| 10.10 | * |
Executive Services Agreement dated June 23, 2008 between the
Company and Tatum, LLC, incorporated herein by reference to
Exhibit 10.14 to the Company’s Annual Report on Form 10-K for the
fiscal year ended December 31, 2008.
|
||
|
|
||||
| 10.11 |
Deferred Prosecution Agreement, dated August 11, 2008 between the
Company and the United States District Court, Northern District of
Illinois Eastern Division, incorporated by reference to
Exhibit 10.1 to the Company’s Form 10-Q for the quarter ended June
30, 2008.
|
|||
53
Table of Contents
| Exhibit | ||||
| Number | Description of Exhibit | |||
| 10.12 | * |
Form of Indemnification Agreement for Directors and Officers
incorporated herein by reference to the Company’s Current Report
on Form 8-K dated September 15, 2008.
|
||
|
|
||||
| 10.13 |
First Amended and Restated Credit Agreement dated November 7, 2008
between the Company and Bank of America, N.A. Successor by Merger
to LaSalle Bank National Association, incorporated by reference to
Exhibit 10.1 to the Company’s Current Report on Form 8-K dated
November 7, 2008.
|
|||
|
|
||||
| 10.14 | * |
Amendment No. 1 to Lawson Products, Inc. Long-Term Capital
Accumulation Plan, incorporated by reference to Exhibit 10.1 to
the Company’s Current Report on Form 8-K dated February 12, 2009.
|
||
|
|
||||
| 10.15 | * |
Form of Amended and Restated Award Agreement, incorporated by
reference to Exhibit 10.2 to the Company’s Current Report on
Form 8-K dated February 12, 2009.
|
||
|
|
||||
| 10.16 | * |
Amended and Restated Employment Agreement dated as of February 12,
2009 by and between the Company and Thomas Neri, incorporated by
reference to Exhibit 10.3 to the Company’s Current Report on
Form 8-K dated February 12, 2009.
|
||
|
|
||||
| 10.17 | * |
Amended and Restated Employment Agreement dated as of February 12,
2009 by and between the Company and Neil E. Jenkins, incorporated
by reference to Exhibit 10.4 to the Company’s Current Report on
Form 8-K dated February 12, 2009.
|
||
|
|
||||
| 10.18 | * |
Change in Control Agreement dated as of February 12, 2009 by and
between the Company and Harry Dochelli, incorporated by reference
to Exhibit 10.5 to the Company’s Current Report on Form 8-K dated
February 12, 2009.
|
||
|
|
||||
| 10.19 | * |
Change in Control Agreement dated as of February 12, 2009 by and
between the Company and Stewart Howley, incorporated by reference
to Exhibit 10.6 to the Company’s Current Report on Form 8-K dated
February 12, 2009.
|
||
|
|
||||
| 10.20 |
Amendment No. 1 to Deferred Prosecution Agreement dated July 31,
2009, incorporated by reference to Exhibit 10.1 to the Company’s
Current Report on Form 8-K dated July 31, 2009.
|
|||
|
|
||||
| 10.21 |
Credit Agreement dated as of August 21, 2009, by and among Lawson
Products, Inc. and certain of its subsidiaries and The PrivateBank
And Trust Company, incorporated by reference to Exhibit 10.1 to
the Company’s Current Report on Form 8-K dated August 21, 2009 and
with all exhibits and schedules, incorporated by reference to
Exhibit 10.2 to the Company’s Current Report on Form 8-K dated
January 29, 2010.
|
|||
|
|
||||
| 10.22 |
Consent, Waiver and First Amendment to the Credit Agreement dated
December 31, 2009 between the Company and The PrivateBank And
Trust Company, incorporated herein by reference to Exhibit 10.1 to
the Company’s Current Report on Form 8-K dated December 31, 2009.
|
|||
|
|
||||
| 10.23 | * |
Change in Control Agreement dated January 29, 2010 between the
Company and Mr. Ronald Knutson, incorporated herein by reference
to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated
January 29, 2010.
|
||
|
|
||||
| 10.24 |
Second Amendment to the Credit Agreement dated January 29, 2010
between the Company and The PrivateBank And Trust Company,
incorporated herein by reference to Exhibit 10.1 to the Company’s
Current Report on Form 8-K dated January 29, 2010.
|
|||
|
|
||||
| 21 |
Subsidiaries of the Company.
|
|||
|
|
||||
| 23 |
Consent of Ernst & Young LLP.
|
|||
54
Table of Contents
| Exhibit | ||||
| Number | Description of Exhibit | |||
| 31.1 |
Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350 as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|||
|
|
||||
| 31.2 |
Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350 as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|||
|
|
||||
| 32 |
Certification of Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
|
|||
| * |
Indicates management employment contracts or compensatory plans or arrangements.
|
55
TABLE OF CONTENTS
Part IItem 1. BusinessItem 1A. Risk FactorsItem 1B. Unresolved Staff CommentsItem 2. PropertiesItem 3. Legal ProceedingsItem 4. Submission Of Matters To A Vote Of Security HoldersPart IIItem 5. Market For Registrant S Common Equity, Related Stockholder Matters and Issuer Purchases Of Equity SecuritiesItem 6. Selected Financial DataItem 7. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 7A. Quantitative and Qualitative Disclosures About Market RiskItem 8. Financial Statements and Supplementary DataNote 1 Description Of BusinessNote 2 Summary Of Significant Accounting PoliciesNote 3 InventoriesNote 4 Property, Plant and EquipmentNote 5 Sale Of Property and Property Held For SaleNote 6 GoodwillNote 7 Impairment Of Long-lived AssetsNote 8 Income TaxesNote 9 Accrued Expenses and Other LiabilitiesNote 10 Revolving Line Of CreditNote 11 Reserve For SeveranceNote 12 Retirement and Security Bonus PlansNote 13 Commitments and ContingenciesNote 14 Stock Compensation PlansNote 15 Earnings (loss) Per ShareNote 16 Segment ReportingNote 17 Discontinued OperationsNote 18 Summary Of Unaudited Quarterly Results Of OperationsNote 19 Subsequent EventsItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A. Controls and ProceduresItem 9B. Other InformationPart IIIItem 10. Directors, Executive Officers and Corporate GovernanceItem 11. Executive CompensationItem 12. Security Ownership Of Certain Beneficial Owners and Management and Related Stockholder MattersItem 13. Certain Relationships and Related Transactions, and Director IndependenceItem 14. Principal Accounting Fees and ServicesPart IVItem 15. Exhibits and Financial Statement Schedules