DISTRIBUTION SOLUTIONS GROUP, INC.
10-Ks and 10-Qs
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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, 2010
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
(Do not check if a smaller reporting company) |
Smaller reporting Company o |
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,
2010 (based upon the per share closing price of $16.98) was approximately $68,300,000.
As of January 31, 2011, 8,534,028 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
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PART I
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PART II
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PART III
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PART IV
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| Exhibit 18 | ||||||||
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| Exhibit 23 | ||||||||
| Exhibit 31.1 | ||||||||
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| 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”, “our”, 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
aerospace, off-road equipment, military and oil and gas exploration industries. In 2010, the
Company discontinued operations of two of its subsidiaries, Assembly Component Systems, Inc.
(“ACS”) and Rutland Tool & Supply Company (“Rutland”). Accordingly, references within this Annual
Report consist of continuing operations unless otherwise noted.
Industry and Competition
The MRO industrial distribution 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 industrial distribution 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.
Operations
Sales through our MRO segment represented 96% of our total net sales for the year ended
December 31, 2010. We compete for business in our industry by delivering on the value proposition
we call “Smarter Maintenance” under which we offer a personal approach to vendor managed inventory,
provide technical expertise and supply quality products to our customers.
The majority of our sales are generated through a network of approximately 1,100 independent
sales agents. Independent sales agents are compensated on a variable 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, as part of our “Smarter Maintenance”
proposition, 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.
Customers place orders primarily through our agents; however, they can also order directly
through the on-line catalog on our web site or through our customer service team via fax or phone.
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. 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 distribution centers in Addison, Illinois; Vernon Hills,
Illinois; Reno, Nevada; Fairfield, New Jersey; Suwanee, Georgia; and Mississauga, Ontario.
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Our engineering department, as part of our “Smarter Maintenance” proposition, provides
technical support for our extensive product line and on-site problem solutions. Our engineering
department also develops and presents product safety and technical training seminars tailored to
meet our customers’ needs. Material Safety Data Sheets are maintained electronically and are
available to our customers seven days a week, 24 hours a day. Our labs also provide the environment
to perform quality checks on our products and to simulate customer situations that allow our
engineers to provide remote technical problem solving. Product certifications and material test
reports are available by contacting the engineering department at engineering@lawsonproducts.com.
One of our subsidiaries, Automatic Screw Machine Products Company (“ASMP”), manufactures and
distributes components, fasteners, and fittings for use by OEM customers. Based in Decatur,
Alabama, ASMP distributes components that are specific to the customers’ production needs. 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. ASMP accounted for approximately 4%
of the Company’s net sales for 2010.
Products
Our MRO product offerings are listed in our on-line catalog on our web site and in
approximately 30,000 catalogs that were distributed to our customers in 2010. All of our MRO
products are manufactured by others, purchased in bulk and repackaged in smaller quantities for
sale 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.
Sales percentages by broad categories of our MRO product mix are as follows:
| Percent of total MRO sales | ||||||||
| Product Category | 2010 | 2009 | ||||||
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Fastening systems
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21 | % | 22 | % | ||||
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Specialty chemicals
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12 | 13 | ||||||
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Cutting tools and abrasives
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13 | 13 | ||||||
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Fluid power
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12 | 11 | ||||||
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Aftermarket automotive supplies
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10 | 10 | ||||||
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Electrical
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10 | 10 | ||||||
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Welding and metal repair
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5 | 5 | ||||||
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Other
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17 | 16 | ||||||
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100 | % | 100 | % | ||||
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We offer approximately 330,000 different products for sale of which approximately 70,000
products are maintained in inventory. We carry sufficient inventory 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.
During 2010, we purchased products from over 900 suppliers. We generally do not engage in
long-term or fixed-price contracts and no single supplier accounted for more than seven percent of
our purchases in 2010. However, the loss of one of our core suppliers could 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, Cronatron, and Drummond, among
others.
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Customers
During 2010, we sold products to over 100,000 customers. No customer accounted for more than
two percent of net sales. In 2010, 91% of our net sales were generated in the United States and 9%
from Canada. 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 variety
of industries including automotive repair, transportation, governmental including the military,
manufacturing, food processing, distribution, construction, oil and gas, mining, wholesale, service
and others.
Strategic Initiatives
We are committed to developing and executing an effective long-term strategy to enhance
customer satisfaction, improve profitability and grow aggressively. As part of developing our
strategy we undertook an extensive customer research project to help better understand our
customers’ value drivers. As a result of this project we are
working to strengthen our relationships with our customers by
responding to their needs and offering additional methods of doing
business including an effective website. We plan to focus our
resources and construct a foundation for growth around: (1) building the team, (2) strengthening
the core MRO business, (3) focusing the portfolio of businesses and (4) growing aggressively.
Build the Team
Over the last few years, we have established a new organizational culture that emphasizes
continuous improvement, producing positive results and, most of all, one that is focused on our
customers. In order to develop this new environment, we needed to attract and retain team members
with the right blend of company, industry and leadership experience to drive our business forward.
We have successfully recruited a number of key executives to develop and execute our strategy.
New additions to the senior leadership team over the last three years include our Chief Operating
Officer, Chief Financial Officer, Chief Information Officer and Senior Vice President, Human
Resources. In addition to the senior leadership team, over 50% of our current vice presidents and
directors have joined the Company within the last three years. Going forward, we are committed to
continuing to develop our already strong team and culture.
Strengthen the Core MRO Business
We have identified three major initiatives that we believe will significantly strengthen our
core business and enhance our ability to serve our MRO customers, drive more efficient operations
and improve our business. The initiatives are to restructure our sales organization and
go-to-market strategy, 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 1,100 independent sales agents who
have an average tenure with us of 12 years. These independent agents have the primary
responsibility for delivering on the technical expertise that our customers value. They are
supported by an engineering team that provides a higher level of either remote or on-site technical
expertise. We continue to improve our sales education programs which are offered to sales agents to
integrate our agents’ product knowledge into the selling process to ensure that we continually
provide a high level of technical knowledge to our customers.
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Our sales agents are paid a commission on sales that is based on profitability to align the
objectives of the sales force with our success. This system of compensation also ensures that our
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, develop new sales channels, improve our product offering,
create new sales roles, and modify our pricing policies and commission structures to maximize sales
and profitability. We plan to continue to review and evaluate our sales model to maximize sales and
enhance customer satisfaction.
Our sales agents are supported by district sales managers who are responsible for
geographically defined territories. Historically, these district sales managers performed a dual
role. They spent a portion of their time managing the district by coaching and supporting the
agents within their territory and also spent time acting as sales agents selling products. During
2010, we completed the transition of independent district sales managers into full-time employees
who are now concentrating their efforts on driving sales within their territory and working with
the agents to develop new and existing customers. By segregating the managerial and selling
functions, we believe that the district sales managers and independent sales agents will be able to
better focus on their roles and increase sales productivity.
With this transition complete, we believe 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
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. As we look at our growth opportunities, we believe there are significant opportunities
with larger, multi-location national accounts. We are taking deliberate steps to gain a share of
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. During 2010, strategic accounts sales volume grew by 13% over 2009 and represents
approximately 9% of net sales.
We also have historically serviced the military branches of the government. We have taken
action with a goal to accelerate our growth in this area by adding new resources and a new product
offering for the military segment. During 2010, sales from our government segment (including
military) grew by 33% and generated approximately 7% of our net sales.
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 to allow for more consistency amongst our sales team and agents.
Network Optimization
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 where orders are picked, packed and shipped to our customers. 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. The goal of our
network optimization initiative is to define the optimal location, size, inventory, material
handling needs, and number of distribution centers to improve customer service and speed of
delivery, lower operating expenses and improve working capital investment. We analyzed our
distribution network as it was in 2008 and developed a detailed roadmap intended to transition from
that state to a future optimal state. The optimal future state may include relocation or
consolidation of our existing network locations to better serve our customers.
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, manage our inventory levels and lower operating
costs.
6
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Implementation of ERP System
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 industry 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
with the maximum long-term benefit. This analysis included multiple factors including how the
system would improve the ease of conducting business from a customer’s perspective, how 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 SAP as our ERP solution.
We have committed a full-time cross-fuctional team of employees to work with our ERP partner
and our 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 $20 million to $25 million, consisting primarily of software and
hardware costs, implementation costs, internal labor costs and data migration.
The project consists of five phases: Project Preparation, Blueprint, Realization (e.g.
configuration), Final Preparation and Go Live & Support. During 2010, we completed the Project
Preparation and Blueprint phases and we have also completed the Realization phase for the first
wave of implementation. We anticipate completing the ERP project by the end of 2011. Since the
commencement of the project, we have expended $10.3 million of our one-time implementation costs of
which $6.5 million represents capital.
We expect that the new ERP system will provide us reliable, transparent, real-time data access
providing us with the opportunity to make better and faster 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 is expected to 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 enhance 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 and provide a top-down view of the enterprise.
Focus the Portfolio of Businesses
We have been actively evaluating various strategic options regarding our non-core operations.
Over the past few years, these operations were hit particularly hard by the economic downturn,
needed capital investment, had limited opportunity to leverage growth, provided minimal synergistic
value and operated at lower margins than the core MRO business. As a result, during 2010, the
Company sold substantially all of the assets of two of its business units, ACS and Rutland, in two
separate transactions for an aggregate sales price of $30.0 million and the assumption of certain
liabilities. We plan to use these proceeds to invest in internal growth and strategic acquisitions
in our core MRO business. We plan to continue to evaluate alternatives regarding our remaining OEM
operation.
Grow Aggressively
By developing a strong team and strengthening the core MRO business, we believe we are
positioning ourselves to grow aggressively in the future. Through these initiatives, we have
established the foundation necessary to aggressively grow sales. We believe we have an opportunity
to capture market share by focusing on certain sales channels and customer segments. In 2011, we
plan to develop a channel strategy and design a new website for launch in late 2011 or 2012, we
estimate this new website will improve our sales agent productivity and facilitate meeting our
customers’ unplanned purchase demand. The new website will allow us to expand our sales to new
customers, increase sales team productivity by shifting certain types of sales through the website,
improve retention of existing customers and capture a larger portion of our existing customers’
“unplanned” spend.
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We are also working aggressively to improve our sales agent productivity. In 2010, the average
annual sales generated per agent was approximately $240,000. Our goal is to continue to increase
sales per agent by identifying new sales channels, increasing sales to larger strategic accounts,
developing sales tools to improve the productivity of the day-to-day activities of the sales team,
identifying new product categories and focusing on customer retention.
Finally, given our current capital structure, $40.6 million in cash, access to funding under
our credit facility and no outstanding debt, we are well positioned for growth.
Employees
As of December 31, 2010, our workforce included approximately 930 employees, comprised of
approximately 290 in sales and marketing, 500 in operations and distribution and 140 management and
administrative staff. Approximately 17% of our workforce is covered 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 SEC’s Public Reference
Room at 100 F Street, NE, Washington DC 20549 or by accessing the SEC’s website at
http://www.sec.gov. The public may obtain information on the operation of the SEC’s Public
Reference Room by calling (800) SEC-0330. 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.
8
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Executive Officers of the Registrant
The executive officers of Lawson as of January 31, 2011 were as follows.
| Year First | ||||||||||
| Elected to | ||||||||||
| Present | ||||||||||
| Name | Age | Office | Position | |||||||
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Thomas J. Neri
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59 | 2007 | President, Chief Executive Officer and Director | |||||||
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Harry A. Dochelli
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51 | 2009 | Executive Vice President, Chief Operating Officer | |||||||
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Neil E. Jenkins
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61 | 2004 | Executive Vice President, Secretary and General Counsel | |||||||
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Robert O. Border
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47 | 2010 | Senior Vice President, Chief Information Officer | |||||||
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Stewart A. Howley
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49 | 2008 | Senior Vice President, Strategic Business Development | |||||||
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Ronald J. Knutson
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47 | 2009 | Senior Vice President, Chief Financial Officer | |||||||
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Lawrence J. Krema
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50 | 2010 | Senior Vice President, Human Resources | |||||||
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Michelle I. Russell
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49 | 2007 | Senior Vice President, Operations and Supply Chain Management | |||||||
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.
Mr. Border
was elected Senior Vice President, Chief Information Officer in December 2010 and
served as Senior Vice President, Information Technology from September 2009 to December 2010.
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, 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.
Mr. Krema
was elected Senior Vice President, Human Resources in December 2010 and served as
Vice President, Human Resources from August 2010 to December 2010. Previously Mr. Krema served as
interim President and Chief Executive Officer of The Anixter Center, a non-profit organization from
July 2009 through June 2010. From April 2008 through October 2008, he served as a Senior Vice
President with Hub International and from March 2001 through December 2007, he served in senior
executive roles with Equity Office Properties.
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.
9
Table of Contents
| 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, 2010, 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 be adversely impacted by a downturn in the worldwide economy.
During 2008 and 2009, we experienced the effects of a severe economic recession in the U.S.
and world economies and a tightening of the credit markets. Although the economy has stabilized and
improved somewhat in 2010, we cannot predict the continued strength of a recovery. Any future
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. Continued contraction in the credit markets may also cause some
of our customers to experience difficulties in obtaining financing leading to lower sales, delays
in the collection of receivables or result in an increase in bad debt expense.
Adverse economic conditions could also affect our key suppliers, hindering their ability to
supply parts and result in delays of our customer shipments. Economic uncertainty can make it
difficult for us to accurately predict future order activity and affect 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 a restructuring.
There are 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 there is deterioration in the overall market for equities or
if investors have concerns that our business, financial condition, results of operations and
capital requirements are negatively impacted by an economic downturn. 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 impairment of our assets.
A significant portion of our inventory may become obsolete.
Our business strategy requires us to carry a significant amount of inventory in order to meet
rapid processing of customer orders. If our inventory forecasting and production planning processes
result in inventory levels exceeding the levels demanded by customers or should our customers
decrease their orders with us, our operating results could be adversely affected due to costs of
carrying the inventory and additional inventory write-downs for excess and obsolete inventory.
Work stoppages and other disruptions at transportation centers or shipping ports may adversely
affect our ability to obtain inventory and make deliveries to our customers.
Our ability to rapidly process customer orders is an integral component of our overall
business strategy. Interruptions at our company operated facilities or disruptions at a major
transportation center or shipping port, due to events such as severe weather, labor interruptions,
natural disasters, acts of terrorism or other events, could affect 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.
10
Table of Contents
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, purchase and manage
inventory, maintain cost-effective operations, sell and ship products, manage accounts receivable
collections and 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 and increase our costs.
We have committed to developing and executing three major strategic initiatives to strengthen
our core MRO operations which we believe will significantly enhance our ability to better serve our
customers and improve our business. The initiatives are expected to transform our current sales
organization, optimize our supply network and replace our legacy information systems with an ERP
system. We plan to complete the Realization, Final Preparation, and Go Live phases in the new ERP
system throughout 2011. 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 disruptions in our operations, loss of business and increased
costs.
Failure to manage changes within the organization
We are undergoing significant change including the implementation of a new ERP system, the
transition of its district sales managers to full-time employees, various business policy changes,
introducing new sales channels and focus segments, and other changes that could impact our business
model. These changes will impact the culture of the organization to emphasize continuous
improvements, being results driven and an increased focus on our end customer. Failure to manage
through these changes with our team could adversely affect our financial position and 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 material
adverse effect on our business.
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 1,100 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 material adverse
effect on our business, financial condition and results of operations.
11
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
stock 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. These transactions could disrupt
and adversely affect our business and the price of our common stock.
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 continues to comply with the terms
of the DPA which expires in August 2011.
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 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.
12
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.
The Company is under an employment tax examination for the years 2007 and 2008 of the
long-standing treatment by a Company subsidiary of its sales agents as independent contractors. An
unfavorable outcome of this examination could have a material adverse effect on our business,
financial condition and results of operations.
| ITEM 1B. |
UNRESOLVED STAFF COMMENTS.
|
None.
| 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.
| Square | ||||||||||
| Location | Segment | Function | Own/Lease | Footage | ||||||
|
|
||||||||||
|
Addison, Illinois
|
MRO | Distribution | Own | 85,800 | ||||||
|
Des Plaines, Illinois
|
MRO | Packaging/Administration | Own | 175,000 | ||||||
|
Des Plaines, Illinois
|
MRO | Administration | Own | 45,000 | ||||||
|
Des Plaines, Illinois
|
MRO | Administration (1) | Lease | 114,000 | ||||||
|
Fairfield, New Jersey
|
MRO | Distribution | Own | 60,000 | ||||||
|
Independence, Ohio
|
MRO | Call Center | Lease | 9,761 | ||||||
|
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 | ||||||
|
Decatur, Alabama
|
OEM | Manufacturing | Own | 65,000 | ||||||
| (1) |
Lease expires in March 2012
|
While we believe that our current facilities are adequate to
meet our needs, the location and operation of our facilities are frequently reviewed to determine whether they
meet the strategic needs of our business.
13
Table of Contents
| 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 2010, 2009,
and 2008 in accordance with this agreement. The Company continues to comply with the terms of the
DPA which expires in August 2011.
During 2009, the Company identified that it had shipped a limited number of products in
violation of certain state environmental regulations. The Company reported its findings to
appropriate regulatory agencies. The Company also recalled 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, 2010, 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.
14
Table of Contents
| 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.
| 2010 | 2009 | |||||||||||||||||||||||
| Cash | Cash | |||||||||||||||||||||||
| Dividends | Dividends | |||||||||||||||||||||||
| Declared per | Declared per | |||||||||||||||||||||||
| High | Low | Share | High | Low | Share | |||||||||||||||||||
|
First Quarter
|
$ | 18.40 | $ | 15.10 | $ | 0.06 | $ | 26.68 | $ | 11.68 | $ | 0.03 | ||||||||||||
|
Second Quarter
|
18.88 | 12.64 | 0.06 | 16.94 | 9.96 | 0.03 | ||||||||||||||||||
|
Third Quarter
|
18.60 | 13.41 | 0.08 | 19.93 | 11.58 | 0.06 | ||||||||||||||||||
|
Fourth Quarter
|
27.11 | 14.19 | 0.12 | 20.41 | 12.75 | 0.06 | ||||||||||||||||||
On January 31, 2011 the closing sales price of our common stock was $23.37 and the number of
stockholders of record was 570.
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 hypothetical return, including reinvestment of
dividends, on $100 if it was invested on December 31, 2005 in the respective stocks or index fund.
| Indexed Returns Years Ended December 31, | ||||||||||||||||||||||||
| Base Period | ||||||||||||||||||||||||
| Company Name/Index | 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | ||||||||||||||||||
|
Lawson Products
|
100.00 | 123.41 | 104.09 | 64.44 | 50.66 | 72.61 | ||||||||||||||||||
|
S&P Smallcap 600
|
100.00 | 115.12 | 114.78 | 79.11 | 99.34 | 106.63 | ||||||||||||||||||
|
Peer Group
|
100.00 | 97.82 | 115.02 | 92.95 | 114.65 | 165.03 | ||||||||||||||||||
15
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, 2010, and are derived from the audited Consolidated
Financial Statements of the Company. The results of discontinued operations have been reclassified
from continuing operations for all periods presented.
| (Dollars in thousands, except per share data) | ||||||||||||||||||||
| (as adjusted) | (as adjusted) | (as adjusted) | (as adjusted) | |||||||||||||||||
| 2010 (1) | 2009 | 2008 (2) | 2007 | 2006 | ||||||||||||||||
|
|
||||||||||||||||||||
|
Net sales
|
$ | 316,780 | $ | 301,769 | $ | 376,572 | $ | 390,307 | $ | 386,780 | ||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Income (loss) from continuing
operations before cumulative effect
of accounting change (3)
|
$ | 9,590 | $ | 1,912 | $ | (23,679 | ) | $ | 8,262 | $ | 9,364 | |||||||||
|
Income (loss) from discontinued
operations
|
(2,653 | ) | (4,648 | ) | (3,952 | ) | 2,367 | 3,609 | ||||||||||||
|
|
||||||||||||||||||||
|
Income (loss) before cumulative
effect of accounting change
|
6,937 | (2,736 | ) | (27,631 | ) | 10,629 | 12,973 | |||||||||||||
|
Cumulative effect of accounting
change, net of tax
|
— | — | — | — | (361 | ) | ||||||||||||||
|
|
||||||||||||||||||||
|
Net income (loss)
|
$ | 6,937 | $ | (2,736 | ) | $ | (27,631 | ) | $ | 10,629 | $ | 12,612 | ||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Basic income (loss) per
share of common stock:
|
||||||||||||||||||||
|
Continuing operations before
cumulative effect of accounting
change
|
$ | 1.13 | $ | 0.22 | $ | (2.78 | ) | $ | 0.97 | $ | 1.05 | |||||||||
|
Discontinued operations
|
(0.32 | ) | (0.54 | ) | (0.46 | ) | 0.28 | 0.41 | ||||||||||||
|
Cumulative effect of accounting change
|
— | — | — | — | (0.04 | ) | ||||||||||||||
|
|
||||||||||||||||||||
|
Net income (loss)
|
$ | 0.81 | $ | (0.32 | ) | $ | (3.24 | ) | $ | 1.25 | $ | 1.42 | ||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Diluted income
(loss) per share of
common stock:
|
||||||||||||||||||||
|
Continuing operations before
cumulative effect of
accounting change
|
$ | 1.12 | $ | 0.22 | $ | (2.78 | ) | $ | 0.97 | $ | 1.05 | |||||||||
|
Discontinued operations
|
(0.31 | ) | (0.54 | ) | (0.46 | ) | 0.28 | 0.41 | ||||||||||||
|
Cumulative effect of accounting change
|
— | — | — | — | (0.04 | ) | ||||||||||||||
|
|
||||||||||||||||||||
|
Net income (loss)
|
$ | 0.81 | $ | (0.32 | ) | $ | (3.24 | ) | $ | 1.25 | $ | 1.42 | ||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Cash dividends declared per share
|
$ | 0.32 | $ | 0.18 | $ | 0.80 | $ | 0.80 | $ | 0.80 | ||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Total assets
|
$ | 236,384 | $ | 241,647 | $ | 271,223 | $ | 299,863 | $ | 281,292 | ||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Noncurrent liabilities
|
$ | 37,968 | $ | 41,761 | $ | 64,139 | $ | 52,660 | $ | 48,320 | ||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Stockholders’ equity
|
$ | 142,865 | $ | 136,646 | $ | 138,744 | $ | 174,361 | $ | 170,317 | ||||||||||
|
|
||||||||||||||||||||
|
Notes:
|
||
| (1) |
The 2010 results include a $4.1 million benefit from legal settlements and a $1.7 million
gain on sale of assets.
|
|
| (2) |
The 2008 results include a $4.0 million charge related to unclaimed property liabilities.
|
|
| (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.
|
|
16
Table of Contents
| ITEM 7. |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
|
OVERVIEW
In 2010, the economy improved modestly from the global recession that affected previous
periods, particularly in the latter half of the year. Sales from continuing operations increased by
5.0% during 2010 compared to 2009 versus a decline of 19.9% in 2009 from 2008. During this period,
many of our customers reduced their inventories, suspended purchases of industrial supplies and
downgraded the quality of product purchased due to the overall deterioration of the economy.
Additionally, the contraction in the credit market made it difficult for many of our customers to
finance purchases or expand their businesses.
We continue to review our strategic alternatives with a focus on our ability to meet customer
demands in the current competitive environment. As a result, we developed a comprehensive plan
focused on driving sales and improving our operating margins. During 2009 and 2010, we began
transforming our current platform and infrastructure by executing on the following three
initiatives to improve our core MRO business: (1) restructuring 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 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. We believe this is the right long-term strategy and, in 2010, we began
to realize early benefits from these initiatives, including sales agent productivity improvements and reduced distribution expenses.
We are taking action to improve our current sales agent model while attempting to retain its
advantages. During 2010, we completed the conversion of district sales managers into full-time
employees who are now able to concentrate their efforts on managing their respective territories
and increasing sales productivity. We also continued to streamline our cost structure including
efficiencies in our distribution center network while maintaining high service levels to our
customers. During 2009, we closed two distribution centers to better align our supply chain with
our customer base and eliminate redundancies within our distribution network allowing us to realize
cost savings throughout 2010. Along with these savings, the Company also implemented comprehensive
cost control measures throughout the organization. Additionally, we have performed a comprehensive
review of our existing information systems and have selected a new ERP solution that is planned for
implementation in a phased approach throughout 2011. These initiatives, which are described in Item
1 —
Business
, will require additional effort and investment over the next few years, but should
lead to a much more efficient, responsive and profitable organization in the future. These efforts, contributed to our improved operating income of $16.9 million in 2010 from $1.4 million in
2009.
In 2010, we sold substantially all of the assets of ACS and Rutland in two separate
transactions for an aggregate sales price of $30.0 million plus the assumption of certain
liabilities. These proceeds should allow us to re-invest in our core MRO business to drive internal
growth and strategic acquisitions. We continue to evaluate alternatives regarding our remaining OEM
operation, Automatic Screw Machine Products.
In addition to the cash received from the sale of the ACS and Rutland assets, we generated
$21.3 million of cash from operations prior to making our last payment obligation under the DPA
settlement agreement of $10.0 million. We ended the year with $40.6 million of cash and no
outstanding borrowings. We shared these strong cash flows with our
stockholders by increasing our
quarterly dividend in 2010 to $0.12 per share.
17
Table of Contents
SUMMARY OF FINANCIAL PERFORMANCE
| (Dollars in thousands) | ||||||||||||||||||||||||
| Year Ended December 31, | ||||||||||||||||||||||||
| (as adjusted) | (as adjusted) | |||||||||||||||||||||||
| 2010 | 2009 | 2008 | ||||||||||||||||||||||
| % of | % of | % of | ||||||||||||||||||||||
| Net | Net | Net | ||||||||||||||||||||||
| Amount | Sales | Amount | Sales | Amount | Sales | |||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Net sales
|
||||||||||||||||||||||||
|
MRO
|
$ | 303,138 | 95.7 | % | $ | 289,715 | 96.0 | % | $ | 357,092 | 94.8 | % | ||||||||||||
|
OEM
|
13,642 | 4.3 | 12,054 | 4.0 | 19,480 | 5.2 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Consolidated total
|
$ | 316,780 | 100.0 | % | $ | 301,769 | 100.0 | % | $ | 376,572 | 100.0 | % | ||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Gross profit
|
||||||||||||||||||||||||
|
MRO
|
$ | 192,544 | 63.5 | % | $ | 184,430 | 63.7 | % | $ | 233,525 | 65.4 | % | ||||||||||||
|
OEM
|
2,282 | 16.7 | 1,129 | 9.4 | 3,262 | 16.8 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Consolidated total
|
194,826 | 61.5 | 185,559 | 61.5 | 236,787 | 62.9 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Operating expenses:
|
||||||||||||||||||||||||
|
Selling, general and
administrative expenses
|
180,021 | 56.8 | 177,421 | 58.8 | 211,100 | 56.1 | ||||||||||||||||||
|
Severance expenses
|
3,629 | 1.2 | 6,228 | 2.1 | 5,238 | 1.4 | ||||||||||||||||||
|
Loss (gain) on sale of assets
|
(1,701 | ) | (0.5 | ) | 16 | — | 44 | — | ||||||||||||||||
|
Other operating (income)
expenses
|
(4,050 | ) | (1.3 | ) | 481 | 0.1 | 35,616 | 9.4 | ||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total operating expenses
|
177,899 | 56.2 | 184,146 | 61.0 | 251,998 | 66.9 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Operating income (loss)
|
16,927 | 5.3 | 1,413 | 0.5 | (15,211 | ) | (4.0 | ) | ||||||||||||||||
|
|
||||||||||||||||||||||||
|
Interest expense
|
(391 | ) | (0.1 | ) | (1,037 | ) | (0.3 | ) | (789 | ) | (0.2 | ) | ||||||||||||
|
Other income
|
160 | 0.1 | 1,029 | 0.3 | 626 | 0.1 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Income (loss) from continuing
operations before income tax
expense
|
16,696 | 5.3 | 1,405 | 0.5 | (15,374 | ) | (4.1 | ) | ||||||||||||||||
|
|
||||||||||||||||||||||||
|
Income tax expense (benefit)
|
7,106 | 2.3 | (507 | ) | (0.1 | ) | 8,305 | 2.2 | ||||||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Income (loss) from continuing
operations
|
$ | 9,590 | 3.0 | % | $ | 1,912 | 0.6 | % | $ | (23,679 | ) | (6.3 | )% | |||||||||||
|
|
||||||||||||||||||||||||
18
Table of Contents
Previously reported annual results of operations have been reclassified to reflect the effect
of discontinuing the ACS and Rutland businesses and the change in accounting policy to classify
costs associated with shipping and handling fees billed to our customers from SG&A to Cost of goods
sold.
| (Dollars in thousands) | ||||||||||||||||
| Less: | Less: outbound | |||||||||||||||
| Previously | discontinued | shipping | ||||||||||||||
| reported | operations | re-class | As adjusted | |||||||||||||
|
Year Ended December 31, 2009
|
||||||||||||||||
|
|
||||||||||||||||
|
Net sales
|
||||||||||||||||
|
MRO
|
$ | 320,400 | $ | 30,685 | $ | — | $ | 289,715 | ||||||||
|
OEM
|
58,481 | 46,427 | — | 12,054 | ||||||||||||
|
|
||||||||||||||||
|
Consolidated total
|
$ | 378,881 | $ | 77,112 | $ | — | $ | 301,769 | ||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Gross profit
|
||||||||||||||||
|
MRO
|
$ | 207,103 | $ | 12,459 | $ | 10,214 | $ | 184,430 | ||||||||
|
OEM
|
10,674 | 9,441 | 104 | 1,129 | ||||||||||||
|
|
||||||||||||||||
|
Consolidated total
|
217,777 | 21,900 | 10,318 | 185,559 | ||||||||||||
|
|
||||||||||||||||
|
Total operating expenses
|
223,364 | 28,900 | 10,318 | 184,146 | ||||||||||||
|
|
||||||||||||||||
|
Operating income (loss)
|
(5,587 | ) | (7,000 | ) | — | 1,413 | ||||||||||
|
Interest expense
|
(1,037 | ) | — | — | (1,037 | ) | ||||||||||
|
Other income
|
887 | (142 | ) | — | 1,029 | |||||||||||
|
|
||||||||||||||||
|
Income (loss) from continuing
operations before income tax expense
|
(5,737 | ) | (7,142 | ) | — | 1,405 | ||||||||||
|
Income taxes
|
(3,121 | ) | (2,614 | ) | — | (507 | ) | |||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Income (loss) from continuing operations
|
$ | (2,616 | ) | $ | (4,528 | ) | $ | — | $ | 1,912 | ||||||
|
|
||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||
| Less: | Less: outbound | |||||||||||||||
| Previously | discontinued | shipping | ||||||||||||||
| reported | operations | re-class | As adjusted | |||||||||||||
|
Year Ended December 31, 2008
|
||||||||||||||||
|
|
||||||||||||||||
|
Net sales
|
||||||||||||||||
|
MRO
|
$ | 403,584 | $ | 46,492 | $ | — | $ | 357,092 | ||||||||
|
OEM
|
81,623 | 62,143 | — | 19,480 | ||||||||||||
|
|
||||||||||||||||
|
Consolidated total
|
$ | 485,207 | $ | 108,635 | $ | — | $ | 376,572 | ||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Gross profit
|
||||||||||||||||
|
MRO
|
$ | 266,371 | $ | 19,739 | $ | 13,107 | $ | 233,525 | ||||||||
|
OEM
|
12,627 | 9,208 | 157 | 3,262 | ||||||||||||
|
|
||||||||||||||||
|
Consolidated total
|
278,998 | 28,947 | 13,264 | 236,787 | ||||||||||||
|
|
||||||||||||||||
|
Total operating expenses
|
299,229 | 33,967 | 13,264 | 251,998 | ||||||||||||
|
|
||||||||||||||||
|
Operating loss
|
(20,231 | ) | (5,020 | ) | — | (15,211 | ) | |||||||||
|
Interest expense
|
(789 | ) | — | — | (789 | ) | ||||||||||
|
Other income
|
320 | (306 | ) | — | 626 | |||||||||||
|
|
||||||||||||||||
|
Loss from continuing
operations before income tax
expense
|
(20,700 | ) | (5,326 | ) | — | (15,374 | ) | |||||||||
|
Income taxes
|
6,360 | (1,945 | ) | — | 8,305 | |||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Loss from continuing operations
|
$ | (27,060 | ) | $ | (3,381 | ) | $ | — | $ | (23,679 | ) | |||||
|
|
||||||||||||||||
19
Table of Contents
RESULTS OF OPERATIONS FOR 2010 AS COMPARED TO 2009
Net Sales and Gross Profit
Sales and gross profit results for the years ended December 31, 2010 and 2009 were as follows:
| (Dollars in thousands) | ||||||||||||||||
| Year ended December 31, | Change | |||||||||||||||
| (as adjusted) | ||||||||||||||||
| 2010 | 2009 | Amount | % | |||||||||||||
|
|
||||||||||||||||
|
Net sales
|
||||||||||||||||
|
MRO
|
$ | 303,138 | $ | 289,715 | $ | 13,423 | 4.6 | % | ||||||||
|
OEM
|
13,642 | 12,054 | 1,588 | 13.2 | ||||||||||||
|
|
||||||||||||||||
|
Consolidated
|
$ | 316,780 | $ | 301,769 | $ | 15,011 | 5.0 | |||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Gross profit
|
||||||||||||||||
|
MRO
|
$ | 192,544 | $ | 184,430 | $ | 8,114 | 4.4 | % | ||||||||
|
OEM
|
2,282 | 1,129 | 1,153 | 102.1 | ||||||||||||
|
|
||||||||||||||||
|
Consolidated
|
$ | 194,826 | $ | 185,559 | $ | 9,267 | 5.0 | |||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Gross profit margin
|
||||||||||||||||
|
MRO
|
63.5 | % | 63.7 | % | ||||||||||||
|
OEM
|
16.7 | 9.4 | ||||||||||||||
|
Consolidated
|
61.5 | 61.5 | ||||||||||||||
Net sales for 2010 increased 5.0% to $316.8 million from $301.8 million in 2009. MRO net
sales increased $13.4 million or 4.6% in 2010 to $303.1 million from $289.7 million in 2009 driven
by sales increases in the Strategic, Government and Automotive sectors of our business. A modest
improvement in the economy also contributed to the net sales increase, particularly in the second
half of the year. An improvement in average daily sales per agent and average orders per day drove
average MRO daily sales from $1.150 million in 2009 to $1.203 million in 2010.
OEM net sales increased $1.6 million or 13.2% in 2010 to $13.6 million from $12.1 million in
2009 primarily driven by growth within our existing customer base and the addition of new
customers.
Consistent with the increase in sales, overall gross profit increased 5.0% in 2010 to $194.8
million from $185.6 million in 2009. As a percent of sales, gross profit margin remained constant
for both 2010 and 2009 at 61.5%. MRO gross profit increased $8.1 million in 2010 to $192.5 million
from $184.4 million in 2009. As a percent of net sales, MRO gross profit decreased slightly to
63.5% in 2010 from 63.7% in 2009 primarily due to an increased volume of business from strategic
customers that generate lower gross margins.
OEM gross profit increased $1.2 million in 2010 to $2.3 million from $1.1 million in 2009.
Gross profit as a percent of net sales increased to 16.7% in 2010 from 9.4% in 2009. The increase
in the gross profit percentage is primarily attributable to more aggressive pricing of sales
contracts and higher sales volume spread over a partially fixed overhead structure.
Selling, General and Administrative Expenses
SG&A expenses were $180.0 million or 56.8% of net sales and $177.4 million or 58.8% of net
sales in 2010 and 2009, respectively. Commission expenses decreased to $67.9 million in 2010 from
$70.4 million in 2009 and decreased as a percent of MRO sales to 22.3% in 2010 from 24.3% in 2009.
The decrease, as a percent of sales, reflects the changes of the district sales managers
transitioning to full-time employees during 2010 and an increase in sales to customers with a lower
commission percentage.
20
Table of Contents
Excluding commission expenses, the remaining Selling, general and administrative expenses
increased $4.9 million or 4.8%. The increase was primarily driven by the transition of independent
district sales managers to full-time employees, ERP implementation expenses of $3.8 million since
the commencement of the project, and higher incentive compensation expense as a result of improved
performance and an increase in our stock price. These increases were partially offset by lower
legal fees, a full year of savings from the closure of the Dallas, Texas and Charlotte, North
Carolina distribution centers in 2009 and a continued effort to streamline our overall cost
structure.
Severance Expenses
Severance expenses were $3.6 million in 2010 compared to $6.2 million in 2009. A restructuring
of some of our managerial responsibilities focused on improved operating efficiencies in 2010
resulted in the elimination of certain positions within both the sales and corporate teams. In 2009
we reduced the size of our workforce across the organization in response to the economic recession.
Loss (Gain) on Sale of Assets
In 2010, we sold our previously discontinued Dallas, Texas distribution center for $2.0
million, resulting in a gain of $1.7 million.
Other Operating (Income) Expenses
In 2010, we recorded a $4.1 million benefit related to proceeds received from a settlement
agreement and legal remedies related to the actions of several former sales agents and the Share
Corporation (“Share”) alleging, among other things, breach of contract and interference with our
customer relationships. In exchange for the proceeds, we agreed to settle all related claims with
Share and the former sales agents.
In 2009, we recorded an impairment charge of $0.3 million to reduce the carrying value of
certain property, plant and equipment in our OEM segment to fair value. We also incurred $0.2
million of costs related to the DPA.
Interest Expense
Interest expense decreased $0.6 million to $0.4 million in 2010 from $1.0 million in 2009 as
strong cash flows from operations allowed us to reduce the average balance outstanding on our
revolving line of credit during the year.
Other Income
Other income was $0.2 million in 2010 compared to $1.0 million in 2009. Other income in 2009
included a non-recurring $0.6 million gain on the sale of an investment.
Income Tax Expense
The effective tax rates for continuing operations for 2010 and 2009 were 42.6% and (36.1)%,
respectively. The 2010 effective tax rate reflects the effect of capital losses not expected to be
utilized due to tax effects of the sales of ACS and Rutland and other deferred expenses. 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.
21
Table of Contents
RESULTS OF OPERATIONS FOR 2009 AS COMPARED TO 2008
Net 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 | |||||||||||||||
| (as adjusted) | (as adjusted) | |||||||||||||||
| 2009 | 2008 | Amount | % | |||||||||||||
|
|
||||||||||||||||
|
Net sales
|
||||||||||||||||
|
MRO
|
$ | 289,715 | $ | 357,092 | $ | (67,377 | ) | (18.9 | )% | |||||||
|
OEM
|
12,054 | 19,480 | (7,426 | ) | (38.1 | ) | ||||||||||
|
|
||||||||||||||||
|
Consolidated
|
$ | 301,769 | $ | 376,572 | $ | (74,803 | ) | (19.9 | ) | |||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Gross profit
|
||||||||||||||||
|
MRO
|
$ | 184,430 | $ | 233,525 | $ | (49,095 | ) | (21.0 | )% | |||||||
|
OEM
|
1,129 | 3,262 | (2,133 | ) | (65.4 | ) | ||||||||||
|
|
||||||||||||||||
|
Consolidated
|
$ | 185,559 | $ | 236,787 | $ | (51,228 | ) | (21.6 | ) | |||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Gross profit margin
|
||||||||||||||||
|
MRO
|
63.7 | % | 65.4 | % | ||||||||||||
|
OEM
|
9.4 | 16.7 | ||||||||||||||
|
Consolidated
|
61.5 | 62.9 | ||||||||||||||
Net sales for 2009 decreased 19.9% to $301.8 million from $376.6 million in 2008 as the global
economic recession and contraction in the credit markets continued to weaken customer demand
throughout our industry. The sales decline was reflected in both the MRO and the OEM segments. MRO
net sales decreased $67.4 million or 18.9% in 2009 to $289.7 million from $357.1 million in 2008.
OEM net sales decreased $7.4 million or 38.1% in 2009 to $12.1 million from $19.5 million in 2008.
Gross profit decreased $51.2 million in 2009 to $185.6 million from $236.8 million in 2008.
The gross profit margin declined to 61.5% in 2009 from 62.9% in 2008. MRO gross profit decreased
$49.1 million in 2009 to $184.4 million from $233.5 million in 2008. MRO gross profit as a percent
of net sales decreased to 63.7% in 2009 from 65.4% 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 in 2009 to $1.1 million from $3.3 million in 2008. Gross profit as
a percent of net sales decreased to 9.4% in 2009 from 16.7% in 2008. The decline in the gross
profit percentage is primarily due to a significantly lower sales base resulting in lower
production efficiency and a lower sales base to allocate fixed production costs.
Selling, General and Administrative Expenses
SG&A expenses were $177.4 million or 58.8% of net sales and $211.1 million or 56.1% of net
sales in 2009 and 2008, respectively. The $33.7 million reduction in 2009 includes a $21.0 million
reduction in sales agent compensation and $12.7 million due to cost containment initiatives. Agent
commissions as a percent of MRO sales decreased slightly to 24.3% for 2009 compared to 25.3% for
2008 due to a mix in the customer base. Other 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 2.7 percentage points in 2009 as
fixed costs were not reduced in proportion to the accelerated decrease in net sales.
22
Table of Contents
Severance Expense
s
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 $6.2 million, primarily related to the
work force reduction.
In 2008, we recorded $5.2 million of severance and other charges related to severance costs
associated with the departure of certain executives and employees and operational efficiency
improvement initiatives.
Other Operating (Income) Expenses
Other operating expenses for 2009 include settlement expenses of $0.2 million related to legal
and other fees from the DPA and an impairment charge of $0.3 million to reduce the carrying value
of certain property, plant and equipment in our OEM segment to fair value.
Other operating expenses for 2008 included unclaimed property liabilities of $4.0 million and
settlement costs of $31.7 million. Settlement costs consisted of $30.0 million related to the DPA
with the U.S. Attorney’s Office and $1.7 million of expense in connection with the investigation.
Interest Expense
Interest expense increased $0.2 million to $1.0 million in 2009 from $0.8 million in 2008.
This increase in interest expense was due to an increase in average borrowings in 2009.
Other Income
Other income was $1.0 million in 2009 compared to $0.6 million in 2008. Other income in 2009
included a non-recurring $0.6 million gain on the sale of an investment.
Income Tax Expense
We recorded a $0.5 million income tax benefit based on pre-tax income of $1.4 million in 2009
compared to a $8.3 million income tax expense based on a pre-tax loss of $15.4 million in 2008. The
2009 income tax benefit 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 our ability to realize a portion of
the capital loss against future capital gains prior to expiration in 2012. The 2008 income tax
expense 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.
23
Table of Contents
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities for 2010, 2009 and 2008 was $11.3 million, $10.6 million
and $7.5 million, respectively. Cash from operations was net of $10.0 million settlement payments
in 2010, 2009 and 2008, respectively. In 2010, cash was primarily generated from operating income
and proceeds received from the sale of ACS and Rutland. In 2009 and 2008, cash was primarily
generated through the streamlining of working capital by reducing excess inventories and increased
collection of accounts receivable. Working capital increased to $79.4 million on December 31, 2010
from $75.1 million on December 31, 2009.
Cash used to purchase property, plant and equipment was $10.0 million in 2010 compared to $2.7
million in 2009 and $2.9 million in 2008. Purchases during 2010 included $6.5 million for the new
ERP system. We received $2.0 million of proceeds from the sale of our Dallas, Texas property in
2010 and $2.2 million of proceeds from the sale of our Charlotte, North Carolina property in 2009.
Our financing activities included dividends paid to stockholders of our common stock of $2.2
million, $2.7 million and $6.8 million in 2010, 2009 and 2008, respectively and net payments on our
line of credit of $7.7 million and $3.3 million in 2009 and 2008, respectively.
We have a 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 applicable interest rate margins for borrowings are based on the Company’s debt to EBITDA ratio
and range from LIBOR plus 2.25 to 3.00 or Prime minus .25 to zero percent. The Credit Agreement is
secured by cash, accounts receivable and inventory. At December 31, 2010, we had no borrowings
outstanding on our revolving line of credit and $1.3 million of outstanding letters of credit,
leaving borrowing availability at $53.7 million.
The Credit Agreement limits our annual dividend distribution to $7.0 million and, in addition
to other customary representations, warranties and covenants, it requires us to comply with the
following financial covenants, as defined in the Credit Agreement. On December 31, 2010 we were in
compliance with all covenants as detailed below:
| Covenant | Requirement | Actual | ||
|
Minimum EBITDA, as defined in the amended Credit
Agreement
|
$10.0 million | $26.8 million | ||
|
Cash plus accounts receivable and inventory to debt ratio
|
2.00:1.00 | 91.84:1.00 | ||
|
Minimum tangible net worth
|
$55.0 million | $88.2 million | ||
|
Debt service ratio
|
1.2 | 34.5 |
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 and capital
improvements for the upcoming fiscal year.
24
Table of Contents
CONTRACTUAL OBLIGATIONS
Contractual obligations, including discontinued operations, on December 31, 2010 that require
cash payment over future periods are as follows:
| (Dollars in thousands) | ||||||||||||||||||||
| Payments due in years ended December 31, | ||||||||||||||||||||
| Total | 2011 | 2012 – 2013 | 2014 – 2015 | Thereafter | ||||||||||||||||
|
|
||||||||||||||||||||
|
Operating leases
|
$ | 1,461 | $ | 778 | $ | 610 | $ | 73 | $ | — | ||||||||||
|
Capital leases
|
1,152 | 768 | 312 | 72 | — | |||||||||||||||
|
Deferred compensation
|
13,220 | 2,422 | 2,687 | 1,419 | 6,692 | |||||||||||||||
|
Security bonus plan (1)
|
25,739 | 137 | — | — | 25,602 | |||||||||||||||
|
Severance obligation
|
3,327 | 2,490 | 837 | — | — | |||||||||||||||
|
Long term incentive plan (2)
|
1,751 | 1,492 | 259 | — | — | |||||||||||||||
|
Purchase commitments
|
4,281 | 4,281 | — | — | — | |||||||||||||||
|
|
||||||||||||||||||||
|
Total contractual cash
obligations
|
$ | 50,931 | $ | 12,368 | $ | 4,705 | $ | 1,564 | $ | 32,294 | ||||||||||
|
|
||||||||||||||||||||
| (1) |
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.
|
|
| (2) |
Amounts owed in 2011 relate
to the 2003-2008 LTIP plan. Amounts owed in 2012-2013 relate to the
2010-2012 LTIP plan and are subject to increase or decrease based on
future operating performance.
|
OFF-BALANCE SHEET ARRANGEMENTS
As of December 31, 2010, we had future minimum operating lease commitments of $1.5 million,
principally for facilities and equipment. We also had contractual commitments to purchase $4.3
million of product from our suppliers in 2011.
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 collectability of accounts receivable based
on a combination of factors. In circumstances where we are aware of a specific customer’s inability
to meet its financial obligations (e.g., bankruptcy filings, substantial down-grading of credit
ratings), a specific reserve for bad debts is recorded against amounts due to reduce the receivable
to the amount we believe will be collected. For all other customers, we recognize reserves for bad
debts based on our historical experience of bad debt write-offs as a percent of accounts receivable
outstanding. If circumstances change (e.g., higher than expected defaults or an unexpected material
adverse change in a major customer’s ability to meet its financial obligations), the estimates of
the recoverability of amounts due to us could be revised by a material amount. At December 31,
2010, our allowance reserve was 3.1% of our gross accounts receivables outstanding. A hypothetical
change of one percent to our reserve allowance would have affected our annual doubtful accounts
expense by approximately $0.3 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, 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.
25
Table of Contents
At December 31, 2010, our inventory reserve was $4.7 million, equal to approximately 9% of our
total inventory. A hypothetical change of one percent to our reserve allowance would have affected
our cost of goods sold by $0.5 million.
Income Taxes
— Deferred tax assets or liabilities reflect temporary differences between
amounts of assets and liabilities for financial and tax reporting. Such amounts are adjusted, as
appropriate, to reflect changes in enacted tax rates expected to be in effect when the temporary
differences reverse. 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, (3) the impact
of tax planning strategies and (4) the ability to carry back deferred tax assets to offset prior
taxable income. In assessing the need for a valuation allowance, we consider all available positive
and negative evidence, including past operating results, projections of future taxable income and
the feasibility of ongoing tax planning strategies. The projections of future taxable income
include a number of estimates and assumptions regarding our volume, pricing and costs.
Additionally, valuation allowances related to deferred tax assets can be impacted by changes to tax
laws. Significant judgment is required in determining income tax provisions as well as deferred tax
asset and liability balances, including the estimation of valuation allowances and the evaluation
of tax positions.
The Company recognizes the benefit of tax positions when a benefit is more likely than not
(i.e., greater than 50% likely) to be sustained on its technical merits. Recognized tax benefits
are measured at the largest amount that is more likely than not to be sustained, based on
cumulative probability, in final settlement of the position. The Company recognizes interest and
penalties related to unrecognized tax benefits as a component of income tax expense.
Goodwill Impairment
— Goodwill, all of which is included in our MRO segment, 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 MRO segment 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 our operating plan 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 MRO segment. 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 MRO segment exceeds its carrying value by over $57
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 MRO segment would decrease its estimated fair value by
approximately $16 million. A hypothetical 100 basis point increase in the discount rate would
decrease its estimated fair value by approximately $14 million.
26
Table of Contents
| 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 2010 net sales by $2.9 million and net
assets by $2.2 million.
Certain compensation awards have been granted to our directors, officers and key employees
that are payable in cash, based upon the market price of our common stock. These awards are
re-measured each reporting period and the effect of the change in the share price is reflected in
our operating results. A hypothetical 10% change in the price of our common stock on December 31,
2010 would have affected our 2010 operating income by $0.4 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. As of December 31, 2010,
we recorded a $13.2 million liability equal to the market value amount of the funds owed.
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 $15.7 million
market value of these investment instruments has been recorded as an asset on our financial
statements as of December 31, 2010. 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 2010 operating income by $0.2 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, 2010, 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.
27
Table of Contents
| ITEM 8. |
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
|
The following information is presented in this item:
| 29 | ||||
|
|
||||
| 30 | ||||
|
|
||||
| 31 | ||||
|
|
||||
| 32 | ||||
|
|
||||
| 33 | ||||
|
|
||||
| 34 | ||||
|
|
||||
| 54 |
28
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, 2010 and 2009, 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,
2010. 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, 2010 and
2009, and the consolidated results of its operations and its cash flows for each of the three years
in the period ended December 31, 2010, in conformity with U.S. generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
As discussed in Note 2 to the consolidated financial statements, the Company has elected to
change its method of accounting for the classification of costs in the Consolidated Statement of
Operations related to shipping and handling fees charged to customers effective December 31, 2010.
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, 2010, 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 17, 2011, expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Chicago, Illinois
February 17, 2011
February 17, 2011
29
Table of Contents
Lawson Products, Inc.
(Dollars in thousands)
| December 31, | ||||||||
| (as adjusted) | ||||||||
| 2010 | 2009 | |||||||
|
ASSETS
|
||||||||
|
|
||||||||
|
Current assets:
|
||||||||
|
Cash and cash equivalents
|
$ | 40,566 | $ | 8,787 | ||||
|
Accounts receivable, less allowance for doubtful accounts of $1,085 and
$882, respectively
|
33,398 | 29,397 | ||||||
|
Inventories
|
47,167 | 43,397 | ||||||
|
Miscellaneous receivables and prepaid expenses
|
8,905 | 10,142 | ||||||
|
Deferred income taxes
|
4,251 | 4,819 | ||||||
|
Property held for sale
|
— | 332 | ||||||
|
Discontinued operations
|
619 | 41,446 | ||||||
|
|
||||||||
|
Total current assets
|
134,906 | 138,320 | ||||||
|
|
||||||||
|
Property, plant and equipment, less accumulated depreciation and amortization
|
44,442 | 40,328 | ||||||
|
|
||||||||
|
Cash value of life insurance
|
15,660 | 17,021 | ||||||
|
Deferred income taxes
|
11,492 | 15,249 | ||||||
|
Goodwill
|
28,307 | 27,957 | ||||||
|
Other assets
|
1,577 | 2,461 | ||||||
|
Discontinued operations
|
— | 311 | ||||||
|
|
||||||||
|
|
||||||||
|
Total assets
|
$ | 236,384 | $ | 241,647 | ||||
|
|
||||||||
|
|
||||||||
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
||||||||
|
|
||||||||
|
Current liabilities:
|
||||||||
|
Accounts payable
|
$ | 18,195 | $ | 12,302 | ||||
|
Accrued expenses and other liabilities
|
35,348 | 33,086 | ||||||
|
Settlement payable
|
— | 10,000 | ||||||
|
Discontinued operations
|
2,008 | 7,852 | ||||||
|
|
||||||||
|
Total current liabilities
|
55,551 | 63,240 | ||||||
|
|
||||||||
|
|
||||||||
|
Noncurrent liabilities and deferred credits:
|
||||||||
|
Security bonus plan
|
25,602 | 25,931 | ||||||
|
Deferred compensation
|
10,792 | 10,374 | ||||||
|
Other
|
1,574 | 5,456 | ||||||
|
|
||||||||
|
|
37,968 | 41,761 | ||||||
|
|
||||||||
|
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 — 8,534,028 and 8,522,001 shares, respectively |
8,534 | 8,522 | ||||||
|
Capital in excess of par value
|
5,328 | 4,780 | ||||||
|
Retained earnings
|
126,098 | 121,888 | ||||||
|
Treasury stock — 2,703 and 0 shares held, respectively
|
(70 | ) | — | |||||
|
Accumulated other comprehensive income
|
2,975 | 1,456 | ||||||
|
|
||||||||
|
Total stockholders’ equity
|
142,865 | 136,646 | ||||||
|
|
||||||||
|
Total liabilities and stockholders’ equity
|
$ | 236,384 | $ | 241,647 | ||||
|
|
||||||||
See notes to Consolidated Financial Statements
30
Table of Contents
Lawson Products, Inc.
(Dollars in thousands, except per share data)
| Year Ended December 31, | ||||||||||||
| (as adjusted) | (as adjusted) | |||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
|
||||||||||||
|
Net sales
|
$ | 316,780 | $ | 301,769 | $ | 376,572 | ||||||
|
Cost of goods sold
|
121,954 | 116,210 | 139,785 | |||||||||
|
|
||||||||||||
|
Gross profit
|
194,826 | 185,559 | 236,787 | |||||||||
|
|
||||||||||||
|
Operating expenses:
|
||||||||||||
|
Selling, general and administrative expenses
|
180,021 | 177,421 | 211,100 | |||||||||
|
Severance expenses
|
3,629 | 6,228 | 5,238 | |||||||||
|
Loss (gain) on sale of assets
|
(1,701 | ) | 16 | 44 | ||||||||
|
Other operating (income) expenses
|
(4,050 | ) | 481 | 35,616 | ||||||||
|
|
||||||||||||
|
Operating expenses
|
177,899 | 184,146 | 251,998 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Operating income (loss)
|
16,927 | 1,413 | (15,211 | ) | ||||||||
|
|
||||||||||||
|
Interest expense
|
(391 | ) | (1,037 | ) | (789 | ) | ||||||
|
Other income, net
|
160 | 1,029 | 626 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Income (loss) from continuing operations
before income taxes
|
16,696 | 1,405 | (15,374 | ) | ||||||||
|
Income tax expense (benefit)
|
7,106 | (507 | ) | 8,305 | ||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Income (loss) from continuing operations
|
9,590 | 1,912 | (23,679 | ) | ||||||||
|
Discontinued operations, net
|
(2,653 | ) | (4,648 | ) | (3,952 | ) | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Net income (loss)
|
$ | 6,937 | $ | (2,736 | ) | $ | (27,631 | ) | ||||
|
|
||||||||||||
|
|
||||||||||||
|
Basic income (loss) per share of common stock:
|
||||||||||||
|
Continuing operations
|
$ | 1.13 | $ | 0.22 | $ | (2.78 | ) | |||||
|
Discontinued operations
|
(0.32 | ) | (0.54 | ) | (0.46 | ) | ||||||
|
|
||||||||||||
|
Net Income (loss)
|
$ | 0.81 | $ | (0.32 | ) | $ | (3.24 | ) | ||||
|
|
||||||||||||
|
|
||||||||||||
|
Diluted income (loss) per share of common
stock:
|
||||||||||||
|
Continuing operations
|
$ | 1.12 | $ | 0.22 | $ | (2.78 | ) | |||||
|
Discontinued operations
|
(0.31 | ) | (0.54 | ) | (0.46 | ) | ||||||
|
|
||||||||||||
|
Net Income (loss)
|
$ | 0.81 | $ | (0.32 | ) | $ | (3.24 | ) | ||||
|
|
||||||||||||
See notes to Consolidated Financial Statements
31
Table of Contents
Lawson Products, Inc.
Consolidated Statements of Changes in Stockholders’ Equity
(Dollars in thousands)
| Common | Capital in | Accumulated Other | ||||||||||||||||||||||
| Stock, | Excess of | Retained | Treasury | Comprehensive | Comprehensive | |||||||||||||||||||
| $1 par value | Par Value | Earnings | Stock | Income (loss) | Income (loss) | |||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Balance at January 1, 2008
|
$ | 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 | |||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Net income
|
— | — | 6,937 | — | — | $ | 6,937 | |||||||||||||||||
|
Other comprehensive income, net of tax:
|
||||||||||||||||||||||||
|
Adjustment for foreign currency translation
|
— | — | — | — | 1,519 | 1,519 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Comprehensive income for the year
|
— | — | — | — | — | $ | 8,456 | |||||||||||||||||
|
|
||||||||||||||||||||||||
|
Stock based compensation
|
12 | 548 | — | — | — | |||||||||||||||||||
|
Share repurchase
|
— | — | — | (70 | ) | — | ||||||||||||||||||
|
Cash dividends declared
|
— | — | (2,727 | ) | — | — | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Balance at December 31, 2010
|
$ | 8,534 | $ | 5,328 | $ | 126,098 | $ | (70 | ) | $ | 2,975 | |||||||||||||
|
|
||||||||||||||||||||||||
See notes to Consolidated Financial Statements
32
Table of Contents
Lawson Products, Inc.
(Dollars in thousands)
| Year Ended December 31, | ||||||||||||
| (as adjusted) | (as adjusted) | |||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
Operating activities
|
||||||||||||
|
Net income (loss)
|
$ | 6,937 | $ | (2,736 | ) | $ | (27,631 | ) | ||||
|
Loss from discontinued operations
|
2,653 | 4,648 | 3,952 | |||||||||
|
|
||||||||||||
|
Income (loss) from continuing operations
|
9,590 | 1,912 | (23,679 | ) | ||||||||
|
|
||||||||||||
|
Adjustments to reconcile net income (loss) from
continuing operations to net cash provided by
operating activities:
|
||||||||||||
|
Depreciation and amortization
|
6,306 | 6,507 | 7,431 | |||||||||
|
Deferred income taxes
|
5,220 | 2,941 | 666 | |||||||||
|
Stock based compensation expense (benefit)
|
1,915 | 12 | (843 | ) | ||||||||
|
Settlement payment
|
(10,000 | ) | (10,000 | ) | (10,000 | ) | ||||||
|
Provision for settlement
|
— | — | 30,000 | |||||||||
|
Loss (gain) on disposal of property and equipment
|
(1,701 | ) | 16 | 44 | ||||||||
|
Changes in operating assets and liabilities:
|
||||||||||||
|
Accounts receivable
|
(4,678 | ) | 6,595 | 5,146 | ||||||||
|
Inventories
|
(3,539 | ) | 6,278 | 3,304 | ||||||||
|
Prepaid expenses and other assets
|
2,118 | 3,403 | 1,402 | |||||||||
|
Accounts payable and accrued expenses
|
6,219 | (5,532 | ) | (771 | ) | |||||||
|
Other
|
(125 | ) | (1,570 | ) | (5,188 | ) | ||||||
|
|
||||||||||||
|
Net cash provided by operating activities
|
$ | 11,325 | $ | 10,562 | $ | 7,512 | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Investing activities
|
||||||||||||
|
Purchases of property, plant and equipment
|
$ | (10,048 | ) | $ | (2,721 | ) | $ | (2,886 | ) | |||
|
Proceeds from sale of property
|
2,027 | 2,179 | 36 | |||||||||
|
Proceeds from sale of businesses
|
27,264 | — | — | |||||||||
|
|
||||||||||||
|
Net cash provided by (used in) investing activities
|
$ | 19,243 | $ | (542 | ) | $ | (2,850 | ) | ||||
|
|
||||||||||||
|
|
||||||||||||
|
Financing activities
|
||||||||||||
|
Net payments on revolving line of credit
|
$ | — | $ | (7,700 | ) | $ | (3,300 | ) | ||||
|
Dividends paid
|
(2,216 | ) | (2,727 | ) | (6,817 | ) | ||||||
|
Other
|
(32 | ) | (420 | ) | — | |||||||
|
|
||||||||||||
|
Net cash used in financing activities
|
$ | (2,248 | ) | $ | (10,847 | ) | $ | (10,117 | ) | |||
|
|
||||||||||||
|
|
||||||||||||
|
Discontinued operations
|
||||||||||||
|
Operating cash flows
|
$ | 3,463 | $ | 5,361 | $ | 8,747 | ||||||
|
Investing cash flows
|
(4 | ) | (47 | ) | (663 | ) | ||||||
|
|
||||||||||||
|
Net cash provided by discontinued operations
|
$ | 3,459 | $ | 5,314 | $ | 8,084 | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Increase in cash and cash equivalents
|
31,779 | 4,487 | 2,629 | |||||||||
|
|
||||||||||||
|
Cash and cash equivalents at beginning of year
|
8,787 | 4,300 | 1,671 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Cash and cash equivalents at end of year
|
$ | 40,566 | $ | 8,787 | $ | 4,300 | ||||||
|
|
||||||||||||
See notes to Consolidated Financial Statements
33
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
— Net Sales 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 $13.0 million, $12.6 million and $15.5 million in 2010, 2009 and 2008, respectively, and
are included in the caption Net sales on the Consolidated Statements of Operations. Costs related
to shipping and handling fees are included in Cost of goods sold. Previously, shipping and handling
costs were included in Selling, general and administrative expenses (see
Change in Accounting
Principle
below).
Change in Accounting Principle
— In 2010, the Company changed how it presents costs related
to shipping and handling fees charged to customers. In previous periods, these shipping and
handling costs were included as a component of selling, general and administrative expenses. The
Company now includes these costs as a component of cost of goods sold. This is viewed as the
preferable method of accounting for these costs based upon: (1) the Financial Accounting Standards
Board (“FASB”) supports this accounting method, (2) this accounting method includes costs
associated with revenues in the calculation of gross profit, and (3) this accounting method
increases the Company’s comparability to industry competitors.
The following table provides the reconciliation from previously reported financial data to as
adjusted:
| (Dollars in thousands) | ||||||||||||||||
| Less: | Less: outbound | |||||||||||||||
| Previously | discontinued | shipping | ||||||||||||||
| reported | operations | reclass | As adjusted | |||||||||||||
|
|
||||||||||||||||
|
Year ended
December 31, 2009
|
||||||||||||||||
|
|
||||||||||||||||
|
Net sales
|
$ | 378,881 | $ | 77,112 | $ | — | $ | 301,769 | ||||||||
|
COGS
|
161,104 | 55,212 | (10,318 | ) | 116,210 | |||||||||||
|
|
||||||||||||||||
|
Gross profit
|
$ | 217,777 | $ | 21,900 | $ | 10,318 | $ | 185,559 | ||||||||
|
Gross profit %
|
57.5 | % | 61.5 | % | ||||||||||||
|
|
||||||||||||||||
|
Year ended
December 31, 2008
|
||||||||||||||||
|
|
||||||||||||||||
|
Net sales
|
$ | 485,207 | $ | 108,635 | $ | — | $ | 376,572 | ||||||||
|
COGS
|
206,209 | $ | 79,688 | (13,264 | ) | 139,785 | ||||||||||
|
|
||||||||||||||||
|
Gross profit
|
$ | 278,998 | $ | 28,947 | $ | 13,264 | $ | 236,787 | ||||||||
|
Gross profit %
|
57.5 | % | 62.9 | % | ||||||||||||
Selling, general, and administrative expense was reduced and cost of goods sold was increased
by $10.3 million and $13.3 million for 2009 and 2008, respectively. Gross profit and gross profit
percentage were reduced accordingly. The change had no effect on income from continuing operations,
net income, earnings per share, or retained earnings for any period.
34
Table of Contents
Lawson Products, Inc.
Notes to Consolidated Financial Statements
Notes to Consolidated Financial Statements
Cash Equivalents
— The Company considers all highly liquid investments with a maturity of
three months or less when purchased, such as money market funds, to be cash equivalents. The
Company has $5.0 million invested in money market funds that are valued based on unadjusted quoted
market prices.
Allowance for Doubtful Accounts Methodology
— The Company evaluates the collectability of
accounts receivable based on a combination of factors. In circumstances where the Company is aware
of a specific customer’s inability to meet its financial obligations (e.g., bankruptcy filings,
substantial down-grading of credit ratings), a specific reserve for bad debts is recorded against
amounts due to reduce the receivable to the amount the Company reasonably believes will be
collected. For all other customers, the Company recognizes reserves for bad debts based on the
Company’s historical experience of bad debt write-offs as a percent of accounts receivable
outstanding. If circumstances change (e.g., higher than expected defaults or an unexpected material
adverse change in a major customer’s ability to meet its financial obligations), the estimates of
the recoverability of amounts due the Company could be revised 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 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, 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 $3.7 million, $4.2 million and $4.7
million for 2010, 2009 and 2008, respectively. Capitalized software is amortized over estimated
useful lives of 3 to 5 years using the straight-line method. Amortization expense of capitalized
software was $2.6 million, $2.3 million and $2.7 million for 2010, 2009 and 2008, 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 may be
redeemable in cash. See Note 14 —
Stock Compensation Plans.
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.
35
Table of Contents
Lawson Products, Inc.
Notes to Consolidated Financial Statements
Notes to Consolidated Financial Statements
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 enacted tax rates expected to be in effect when the temporary
differences reverse. A valuation allowance is established to offset any deferred tax assets if,
based upon the available evidence, it is more likely than not that some or all of the deferred tax
assets will not be realized. The determination of the amount of a valuation allowance to be
provided on recorded deferred tax assets involves estimates regarding (1) the timing and amount of
the reversal of taxable temporary differences, (2) expected future taxable income, (3) the impact
of tax planning strategies and (4) the ability to carry back deferred tax assets to offset prior
taxable income. In assessing the need for a valuation allowance, 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.
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 records the impact of a tax
position, if that position is more likely than not to be sustained on audit, based on the technical
merits of the position. 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.
The Company recognizes the benefit of tax positions when a benefit is more likely than not
(i.e., greater than 50% likely) to be sustained on its technical merits. Recognized tax benefits
are measured at the largest amount that is more likely than not to be sustained, based on
cumulative probability, in final settlement of the position. The Company recognizes interest and
penalties related to unrecognized tax benefits as a component of income tax expense.
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 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.
Treasury Stock
— In 2010, the Company repurchased 2,703 shares of its common stock from
employees upon the vesting of restricted stock to offset the income taxes owed by the those
employees. The Company accounts for treasury stock using the cost method and includes treasury
stock as a component of stockholders’ equity.
36
Table of Contents
Lawson Products, Inc.
Notes to Consolidated Financial Statements
Notes to Consolidated Financial Statements
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 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. In February 2010, the FASB released Accounting
Standards Update (“ASU”) No. 2010-09, an update to ASC 855,
Subsequent Events,
which revised
various terms and definitions within the guidance and provided new guidance upon the date which
entities must evaluate subsequent events. This ASU states that the Company must evaluate
subsequent events through the date the financial statements are issued, rather than the date the
financial statements are available to be issued, and the disclosure of this date is no longer
required in the notes to the financial statements. The Company has evaluated subsequent events
through the issue date of this Form 10-K and has determined that there are no subsequent events to
recognize or disclose in the financial statements.
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, 2010. We
have conformed our consolidated financial statements and related Notes to the new codification.
Assembly Component Systems, Inc.
On August 31, 2010, the Company entered into a transaction to sell substantially all of the
assets of Assembly Component Systems, Inc. (“ACS”), a wholly owned subsidiary, to Supply
Technologies LLC (“Supply Technologies”), a wholly owned company of Park-Ohio Holdings Corp. Under
terms of the Asset Purchase Agreement (“the Agreement”), Supply Technologies purchased
substantially all of the assets of ACS for $19.0 million plus the assumption of certain
liabilities. Of the total consideration, $16.0 million was paid to Lawson in cash on September 1,
2010. The remaining balance due, adjusted based on the final value of the working capital of ACS on
August 31, 2010, will be paid in quarterly installments over the next three years, subject to the
terms of a subordinated promissory note between Supply Technologies and Lawson. A $3.5 million
pre-tax loss on the sale was recorded in 2010. As of December 31, 2010, $1.9 million of this note
was still outstanding. Of this amount, $1.0 million is classified as current under Miscellaneous
receivables and prepaid expenses and the remainder of this balance is classified as a noncurrent
asset under Other assets.
ACS was previously included in the Company’s Original Equipment Manufacturing (“OEM”) segment.
Losses per share of $0.29 and $0.51 related to the ACS operations in 2009 and 2008, respectively,
have been reclassified from continuing operations to discontinued operations.
Rutland Tool & Supply Company, Inc,
On December 10, 2010, the Company completed the sale of substantially all of the assets of
Rutland Tool & Supply Company, Inc. (“Rutland”) to Sid Tool Co. Inc., a wholly owned subsidiary of
MSC Industrial Direct Co., Inc., (“MSC”) for approximately $11.0 million in cash plus the
assumption of certain liabilities. The purchase price may be adjusted based on the final value of
the net working capital of Rutland. A $0.4 million pre-tax loss on the sale was recorded in 2010.
Rutland was a separate reporting unit previously included in the Company’s MRO segment for
financial reporting purposes. Loss per share of $0.25 and income per share of $0.10 related to the
Rutland operations in 2009 and 2008, respectively, have been reclassified from continuing
operations to discontinued operations.
37
Table of Contents
Lawson Products, Inc.
Notes to Consolidated Financial Statements
Notes to Consolidated Financial Statements
Mexico
The Company closed its operations in Mexico in 2007.
Results
The following table details the components of income (loss) from discontinued operations:
| (Dollars in thousands) | ||||||||||||
| Year Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
|
||||||||||||
|
Net sales
|
||||||||||||
|
ACS
|
$ | 34,786 | $ | 46,427 | $ | 62,143 | ||||||
|
Rutland
|
32,637 | 30,685 | 46,492 | |||||||||
|
|
||||||||||||
|
Total net sales
|
$ | 67,423 | $ | 77,112 | $ | 108,635 | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Pre-tax operating income (loss) from
discontinued operations
|
||||||||||||
|
ACS
|
$ | 736 | $ | (3,877 | ) | $ | (6,830 | ) | ||||
|
Rutland
|
88 | (3,265 | ) | 1,504 | ||||||||
|
Mexico
|
(264 | ) | (120 | ) | (571 | ) | ||||||
|
|
||||||||||||
|
Total pre-tax operating income (loss)
|
560 | (7,262 | ) | (5,897 | ) | |||||||
|
Income tax expense (benefit)
|
645 | (2,614 | ) | (1,945 | ) | |||||||
|
|
||||||||||||
|
Net operating loss from
discontinued operations
|
(85 | ) | (4,648 | ) | (3,952 | ) | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Sale of discontinued operations
|
||||||||||||
|
Pre-tax loss on sale of ACS
|
(3,508 | ) | — | — | ||||||||
|
Pre-tax loss on sale of Rutland
|
(442 | ) | — | — | ||||||||
|
|
||||||||||||
|
Total pre-tax loss on sale
|
(3,950 | ) | — | — | ||||||||
|
Income tax benefit
|
(1,382 | ) | — | — | ||||||||
|
|
||||||||||||
|
Net loss from sale of
discontinued operations
|
(2,568 | ) | — | — | ||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Loss from discontinued operations
|
$ | (2,653 | ) | $ | (4,648 | ) | $ | (3,952 | ) | |||
|
|
||||||||||||
Components of inventories were as follows:
| (Dollars in thousands) | ||||||||
| December 31, | ||||||||
| (as adjusted) | ||||||||
| 2010 | 2009 | |||||||
|
Finished goods
|
$ | 49,084 | $ | 45,159 | ||||
|
Work in progress
|
1,203 | 1,227 | ||||||
|
Raw materials
|
1,591 | 1,759 | ||||||
|
|
||||||||
|
Total
|
51,878 | 48,145 | ||||||
|
Reserve for obsolete and excess inventory
|
(4,711 | ) | (4,748 | ) | ||||
|
|
||||||||
|
|
$ | 47,167 | $ | 43,397 | ||||
|
|
||||||||
38
Table of Contents
Lawson Products, Inc.
Notes to Consolidated Financial Statements
Notes to Consolidated Financial Statements
Components of property, plant and equipment were as follows:
| (Dollars in thousands) | ||||||||
| December 31, | ||||||||
| (as adjusted) | ||||||||
| 2010 | 2009 | |||||||
|
Land
|
$ | 8,781 | $ | 8,712 | ||||
|
Buildings and improvements
|
49,857 | 50,730 | ||||||
|
Machinery and equipment
|
32,062 | 31,712 | ||||||
|
Capitalized software
|
9,279 | 10,090 | ||||||
|
Furniture and fixtures
|
5,538 | 5,274 | ||||||
|
Capital leases
|
3,210 | 3,439 | ||||||
|
Vehicles
|
247 | 211 | ||||||
|
Construction in progress
|
8,944 | 348 | ||||||
|
|
||||||||
|
|
117,918 | 110,516 | ||||||
|
Accumulated depreciation and amortization
|
(73,476 | ) | (70,188 | ) | ||||
|
|
||||||||
|
|
$ | 44,442 | $ | 40,328 | ||||
|
|
||||||||
Construction in progress includes $6.5 million related to ERP implementation on December 31,
2010.
In 2010, the Company sold its Dallas, Texas distribution center receiving cash proceeds of
$2.0 million resulting in a gain of $1.7 million. In 2009, the Company closed its Charlotte, North
Carolina and Dallas, Texas distribution centers. The Company sold its Charlotte, North Carolina
distribution center in 2009 receiving proceeds of $2.2 million in cash.
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 2010, the Company reviewed its $28.3 million goodwill balance, all of which relates to the
MRO segment, due to a 2001 acquisition. The Company estimated the fair value of the MRO segment
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 its operating
plan to determine a range of fair values. The Company then reconciled the estimated fair value of
the MRO segment 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 MRO segment exceeded its carrying value by over $57 million using the most
conservative estimate and, therefore, the goodwill was not considered impaired.
Goodwill activity in 2010 and 2009 was as follows:
| (Dollars in thousands) | ||||||||
| December 31, | ||||||||
| 2010 | 2009 | |||||||
|
Beginning balance
|
$ | 27,957 | $ | 25,748 | ||||
|
Translation adjustment
|
350 | 2,209 | ||||||
|
|
||||||||
|
Ending balance
|
$ | 28,307 | $ | 27,957 | ||||
|
|
||||||||
39
Table of Contents
Lawson Products, Inc.
Notes to Consolidated Financial Statements
Notes to Consolidated Financial Statements
Income (loss) from continuing operations before income taxes consisted of the following:
| (Dollars in thousands) | ||||||||||||
| Year Ended December 31, | ||||||||||||
| (as adjusted) | (as adjusted) | |||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
|
||||||||||||
|
United States
|
$ | 14,269 | $ | 2,115 | $ | (18,575 | ) | |||||
|
Canada
|
2,427 | (710 | ) | 3,201 | ||||||||
|
|
||||||||||||
|
|
$ | 16,696 | $ | 1,405 | $ | (15,374 | ) | |||||
|
|
||||||||||||
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, | ||||||||||||
| (as adjusted) | (as adjusted) | |||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
Current income tax expense (benefit):
|
||||||||||||
|
U.S. Federal
|
$ | 3,681 | $ | (2,491 | ) | $ | 2,755 | |||||
|
U.S. state
|
987 | 77 | 618 | |||||||||
|
Canada
|
366 | (102 | ) | 915 | ||||||||
|
|
||||||||||||
|
Total
|
$ | 5,034 | $ | (2,516 | ) | $ | 4,288 | |||||
|
|
||||||||||||
|
|
||||||||||||
|
Deferred income tax expense (benefit):
|
||||||||||||
|
U.S. Federal
|
$ | 1,648 | $ | 2,065 | $ | 3,885 | ||||||
|
U.S. state
|
217 | 55 | 168 | |||||||||
|
Canada
|
207 | (111 | ) | (36 | ) | |||||||
|
|
||||||||||||
|
Total
|
$ | 2,072 | $ | 2,009 | $ | 4,017 | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Total income tax expense (benefit):
|
||||||||||||
|
U.S. Federal
|
$ | 5,329 | $ | (426 | ) | $ | 6,640 | |||||
|
U.S. state
|
1,204 | 132 | 786 | |||||||||
|
Canada
|
573 | (213 | ) | 879 | ||||||||
|
|
||||||||||||
|
Total
|
$ | 7,106 | $ | (507 | ) | $ | 8,305 | |||||
|
|
||||||||||||
The reconciliation between the effective income tax rate and the statutory federal rate for
continuing operations was as follows:
| Year Ended December 31, | ||||||||||||
| (as adjusted) | (as adjusted) | |||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
|
||||||||||||
|
Statutory Federal rate
|
35.0 | % | 35.0 | % | 35.0 | % | ||||||
|
Increase (decrease) resulting from:
|
||||||||||||
|
State and local taxes, net
|
1.2 | 10.0 | (5.6 | ) | ||||||||
|
Executive life insurance
|
(1.8 | ) | (35.0 | ) | (13.8 | ) | ||||||
|
Fines and penalties
|
(0.2 | ) | 13.0 | (66.5 | ) | |||||||
|
Meals & Entertainment
|
0.8 | 7.8 | (1.4 | ) | ||||||||
|
Capital loss carryforward
|
3.7 | 73.6 | — | |||||||||
|
Deferred tax expense
|
1.2 | — | — | |||||||||
|
Change in valuation allowance
|
4.1 | 13.7 | — | |||||||||
|
Change in uncertain tax positions
|
(1.4 | ) | (154.0 | ) | (5.8 | ) | ||||||
|
Provision to return differences
|
1.4 | (1.9 | ) | 4.3 | ||||||||
|
Other items, net
|
(1.4 | ) | 1.7 | (0.2 | ) | |||||||
|
|
||||||||||||
|
Provision for income taxes
|
42.6 | % | (36.1 | )% | (54.0 | )% | ||||||
|
|
||||||||||||
40
Table of Contents
Lawson Products, Inc.
Notes to Consolidated Financial Statements
Notes to Consolidated Financial Statements
Income taxes paid for the years ended December 31, 2010, 2009, and 2008 amounted to $5.3
million, $2.8 million and $7.0 million, respectively. In 2010, the Company received $5.8 million in
income tax refunds primarily related to income tax overpayments from prior years.
At December 31, 2010, the Company had $2.8 million of tax assets for net operating losses and
tax credit carryforwards. The U.S. Federal carryforwards consist of $4.9 million of net operating
losses which are subject to expiration in 2030 and $0.5 million of foreign tax credit carryforwards
which are subject to expiration in 2020. In addition, the Company had $0.7 million of state net
operating loss carryforwards which expire at varying dates through 2030.
In connection with the ACS and Rutland sales, the Company wrote off a $2.2 million deferred
tax asset and an associated $1.6 million valuation allowance related to a capital loss from certain
Mexico operations closed in 2007.
As of December 31, 2010 and 2009, the Company had valuation allowances of $0.9 million and
$1.7 million, respectively. The net decrease in the valuation allowance in 2010 was primarily due
to changes in the anticipated realization of the capital loss related to certain Mexico operation
closed in 2007. The valuation allowance remaining at December 31, 2010 relates to certain state
net operating losses and foreign tax credit carryforwards, the realization of which the Company
believe is less than more likely than not.
Earnings from the Company’s foreign subsidiaries are considered to be indefinitely reinvested
and, accordingly, no provision for U.S. Federal and state income taxes or foreign withholding tax
has been made in our Consolidated Financial Statements. A distribution of these non-U.S. earnings
in the form of dividends or otherwise would subject the Company to both U.S. Federal and state
income taxes, as adjusted for tax credits and foreign withholding taxes. A determination of the
amount of any unrecognized deferred income tax liability on the undistributed earnings is not
practicable.
Deferred income tax assets and liabilities contain the following temporary differences:
| (Dollars in thousands) | ||||||||
| December 31, | ||||||||
| (as adjusted) | ||||||||
| 2010 | 2009 | |||||||
|
Deferred tax assets:
|
||||||||
|
Compensation and benefits
|
$ | 17,689 | $ | 19,293 | ||||
|
Inventory reserve
|
2,432 | 4,055 | ||||||
|
Capital loss
|
— | 2,166 | ||||||
|
Accounts receivable reserve
|
399 | 455 | ||||||
|
Property, plant and equipment
|
— | 184 | ||||||
|
Net operating loss carryforward
|
2,380 | 193 | ||||||
|
Other
|
1,165 | 1,423 | ||||||
|
|
||||||||
|
Total deferred tax assets
|
24,065 | 27,769 | ||||||
|
Valuation allowance for deferred tax assets
|
(875 | ) | (1,744 | ) | ||||
|
|
||||||||
|
Net deferred tax assets
|
23,190 | 26,025 | ||||||
|
|
||||||||
|
|
||||||||
|
Deferred tax liabilities:
|
||||||||
|
Goodwill
|
5,984 | 4,756 | ||||||
|
Property, plant and equipment
|
572 | — | ||||||
|
Other
|
891 | 1,201 | ||||||
|
|
||||||||
|
Total deferred liabilities
|
7,447 | 5,957 | ||||||
|
|
||||||||
|
|
||||||||
|
Total net deferred assets
|
$ | 15,743 | $ | 20,068 | ||||
|
|
||||||||
|
|
||||||||
|
Net deferred tax assets:
|
||||||||
|
Net current deferred income taxes
|
$ | 4,251 | $ | 4,819 | ||||
|
Net noncurrent deferred income taxes
|
11,492 | 15,249 | ||||||
|
|
||||||||
|
|
$ | 15,743 | $ | 20,068 | ||||
|
|
||||||||
41
Table of Contents
Lawson Products, Inc.
Notes to Consolidated Financial Statements
Notes to Consolidated Financial Statements
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as
follows:
| (Dollars in thousands) | ||||||||
| December 31, | ||||||||
| (as adjusted) | ||||||||
| 2010 | 2009 | |||||||
|
|
||||||||
|
Balance at beginning of year
|
$ | 1,230 | $ | 3,197 | ||||
|
Additions for tax positions of current year
|
— | 627 | ||||||
|
Additions for tax positions of prior years
|
— | (1,440 | ) | |||||
|
Settlements
|
(1,230 | ) | (1,154 | ) | ||||
|
|
||||||||
|
Balance at end of year
|
$ | — | $ | 1,230 | ||||
|
|
||||||||
The Company and its subsidiaries are subject to U.S. Federal income tax as well as income tax
of multiple state and foreign jurisdictions. As of December 31, 2010, the Company was subject to
income tax examinations in various jurisdictions for the tax years 2005 through 2009. During 2010,
the Company completed U.S. Federal income tax examinations through tax year 2008.
Accrued expenses and other liabilities consisted of the following:
| (Dollars in thousands) | ||||||||
| December 31, | ||||||||
| (as adjusted) | ||||||||
| 2010 | 2009 | |||||||
|
|
||||||||
|
Accrued compensation
|
$ | 13,912 | $ | 13,160 | ||||
|
Accrued and withheld taxes, other than income taxes
|
2,584 | 2,145 | ||||||
|
Accrued profit sharing
|
2,356 | 2,066 | ||||||
|
Accrued severance
|
2,229 | 3,065 | ||||||
|
Accrued stock based compensation
|
2,566 | 1,210 | ||||||
|
Accrued health benefits
|
1,145 | 928 | ||||||
|
Cash dividends payable
|
1,023 | 511 | ||||||
|
Other
|
9,533 | 10,001 | ||||||
|
|
||||||||
|
|
$ | 35,348 | $ | 33,086 | ||||
|
|
||||||||
The Company has a credit agreement as amended (“Credit Agreement”) with The PrivateBank and
Trust Company as agent and lender. The Credit Agreement provides for 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, 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, thus increasing the maximum
borrowing capacity to $75.0 million. The applicable interest rate margins for borrowings are based
on the Company’s debt to EBITDA ratio and range from Libor plus 2.25 to 3.00 or Prime minus .25 to
zero percent. The Credit Agreement is secured by cash, accounts receivable and inventory.
42
Table of Contents
Lawson Products, Inc.
Notes to Consolidated Financial Statements
Notes to Consolidated Financial Statements
The Credit Agreement limits the annual dividend distribution to $7.0 million and, in addition
to other customary representations, warranties and covenants, it requires the Company to comply
with the following financial covenants, as defined in the Credit Agreement. On December 31, 2010 we
were in compliance with all covenants as detailed below:
| Covenant | Requirement | Actual | ||
|
Minimum EBITDA, as defined in the amended Credit
Agreement
|
$10.0 million | $26.8 million | ||
|
Cash plus accounts receivable and inventory to debt ratio
|
2.00:1.00 | 91.84:1.00 | ||
|
Minimum tangible net worth
|
$55.0 million | $88.2 million | ||
|
Debt service ratio
|
1.2 | 34.5 |
At December 31, 2010, the Company had no outstanding balance under the revolving line and $1.3
million of outstanding letters of credit, leaving borrowing availability of $53.7 million. The
Company paid interest of $0.2 million, $0.3 million and $0.5 million in 2010, 2009 and 2008,
respectively. The weighted average interest rate charged on outstanding loans was 3.03% for the
year ended December 31, 2010.
Severance charges, primarily related to management realignment and reorganization of $3.6
million, $6.2 million and $5.2 million were recorded in 2010, 2009 and 2008, 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, | ||||||||||||
| (as adjusted) | (as adjusted) | |||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
|
||||||||||||
|
Beginning balance
|
$ | 4,086 | $ | 6,012 | $ | 6,620 | ||||||
|
Charged to earnings current year
|
3,696 | 6,579 | 5,238 | |||||||||
|
Cash paid
|
(4,667 | ) | (8,280 | ) | (5,826 | ) | ||||||
|
Adjustment to prior year reserves
|
(67 | ) | (351 | ) | — | |||||||
|
Exchange rate variance
|
14 | 126 | (20 | ) | ||||||||
|
|
||||||||||||
|
Ending balance
|
$ | 3,062 | $ | 4,086 | $ | 6,012 | ||||||
|
|
||||||||||||
Accrued severance charges were included in the line items of the Consolidated Balance Sheets
at December 31, 2010 and 2009 as follows:
| (Dollars in thousands) | ||||||||
| December 31, | ||||||||
| (as adjusted) | ||||||||
| 2010 | 2009 | |||||||
|
Accrued severance included in:
|
||||||||
|
Accrued expenses and other liabilities
|
$ | 2,229 | $ | 3,065 | ||||
|
Noncurrent other
|
833 | 1,021 | ||||||
|
|
||||||||
|
Total accrued severance
|
$ | 3,062 | $ | 4,086 | ||||
|
|
||||||||
The Company anticipates the remaining benefits outstanding as of December 31, 2010 will be
substantially paid out by the end of 2012.
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 $2.4 million, $2.0 million and
$2.2 million for the years ended December 31, 2010, 2009 and 2008, respectively.
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 $1.9 million, $2.1 million and $2.6 million for the years ended
December 31, 2010, 2009 and 2008, respectively.
43
Table of Contents
Lawson Products, Inc.
Notes to Consolidated Financial Statements
Notes to Consolidated Financial Statements
Lease Commitments
Total rental expense for the years ended December 31, 2010, 2009 and 2008 amounted to $1.4
million, $1.3 million and $1.6 million, respectively. The Company’s future minimum lease
commitments, principally for facilities and equipment, as of December 31, 2010, were as follows:
| (Dollars in thousands) | ||||||||
| Year ended December 31, | Operating Leases | Capital Leases | ||||||
|
|
||||||||
|
2011
|
$ | 778 | $ | 768 | ||||
|
2012
|
370 | 223 | ||||||
|
2013
|
240 | 89 | ||||||
|
2014
|
73 | 72 | ||||||
|
2015
|
— | — | ||||||
|
|
||||||||
|
Total
|
$ | 1,461 | 1,152 | |||||
|
|
||||||||
|
Less: Interest portion
|
(204 | ) | ||||||
|
|
||||||||
|
Liability
|
$ | 948 | ||||||
|
|
||||||||
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 2010, 2009,
and 2008 in accordance with this agreement. The Company continues to comply with the terms of the
DPA which expires in August of 2011.
During 2009, the Company identified that it had shipped a limited number of products in
violation of certain state environmental regulations. The Company reported its findings to
appropriate regulatory agencies. The Company also recalled 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, 2010, 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
The Company is under an employment tax examination for the years 2007 and 2008 of the
long-standing treatment by a Company subsidiary, Drummond American LLC, of its sales agents as
independent contractors. It is not possible at this time to predict the final outcome of this
examination or to establish a reasonable estimate of possible additional taxes owed, if any.
In 2009, 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 also 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 the
identified states. At December 31, 2010, the Company had finalized the majority of the agreements,
and does not believe any additional interest and penalties related to this issue will be material.
44
Table of Contents
Lawson Products, Inc.
Notes to Consolidated Financial Statements
Notes to Consolidated Financial Statements
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 has notified the
Internal Revenue Service Employment Tax Division and has established procedures to improve proper
information reporting practices. At this time, the Company cannot determine if further actions may
result from this review.
The Company’s 2009 Equity Compensation Plan (“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 were 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 of the Board of Directors, 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 a Stock Performance Rights Plan (“SPR Plan”) that provides for the issuance of
Stock Performance Rights 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.
Service based awards
Service based awards require the participants to provide service to the Company over a fixed
period of time. The Company has three award types that are based solely on a service condition:
Stock Performance Rights (“SPRs”), Restricted Stock Awards (“RSAs”) and Restricted Stock Units
(“RSUs”).
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, 2010, the SPRs outstanding were re-measured 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, 2010 was $9.68 per SPR using the Black-Scholes valuation model with
the following assumptions:
|
Expected volatility
|
46.9% to 79.4% | |
|
Risk-free rate of return
|
0.1% to 1.7% | |
|
Expected term (in years)
|
0.1 to 4.3 | |
|
Expected annual dividend
|
$0.48 |
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 expense of $0.8 million related to the SPRs was included in Selling, general and
administrative expense for the year ended December 31, 2010. No expense or benefit was incurred in
2009 as the decrease in the SPRs value was offset by the amortization expense and $0.4 million of
income was recognized in 2008 as the overall decline in the fair value of the SPRs exceeded the
amortization expense related to the unvested SPRs. Cash paid out due to the exercise of SPRs was
immaterial for the years ended December 31, 2010, 2009 and 2008.
45
Table of Contents
Lawson Products, Inc.
Notes to Consolidated Financial Statements
Notes to Consolidated Financial Statements
Activity related to the Company’s SPRs during the year ended 2010 was as follows:
| Weighted | ||||||||
| Number | Average | |||||||
| of SPRs | Exercise Price | |||||||
|
|
||||||||
|
Outstanding on December 31, 2009
|
388,300 | $ | 28.31 | |||||
|
Granted
|
2,600 | 14.04 | ||||||
|
Cancelled
|
(88,650 | ) | 30.51 | |||||
|
|
||||||||
|
Outstanding on December 31, 2010
|
302,250 | 27.54 | ||||||
|
|
||||||||
|
|
||||||||
|
Exercisable on December 31, 2010
|
215,550 | $ | 30.40 | |||||
|
|
||||||||
The SPRs outstanding had an intrinsic value of $0.6 million as of December 31, 2010.
Unrecognized compensation cost related to non-vested SPRs was $0.5 million at December 31, 2010,
which will be recognized over a weighted average period of 1.4 years. During the year ended
December 31, 2010, 60,468 SPRs with a fair value of $0.7 million vested. At December 31, 2010, the
weighted average remaining contractual term was 5.7 years for all outstanding SPRs and 5.4 years
for the SPRs that are exercisable.
Restricted Stock Awards
Restricted stock awards vest ratably over a one to 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 final vesting
date. 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.
Activity related to the Company’s RSAs during the year ended 2010 was as follows:
| Restricted Stock | ||||
| Awards | ||||
|
|
||||
|
Outstanding on December 31, 2009
|
40,400 | |||
|
Granted
|
35,692 | |||
|
Exchanged for common shares
|
(12,027 | ) | ||
|
Cancelled
|
(4,300 | ) | ||
|
|
||||
|
Outstanding on December 31, 2010
|
59,765 | |||
|
|
||||
The awards granted in 2010 had a grant date fair value of $14.04 per share. An expense of $0.5
million was recorded in Selling, general and administrative expenses in 2010. As of December 31,
2010, there was $0.6 million of total unrecognized compensation cost related to RSAs that will be
recognized over a weighted average period of 1.2 years.
Restricted Stock Units
RSUs can be exchanged for either the Company’s common stock or the equivalent value in cash on
the vesting date. On April 10, 2010 the Company issued 30,944 RSUs with a vesting period of one
year. On December 31, 2010, the RSUs outstanding were re-measured to equal the closing price of the
Company’s outstanding common shares. An expense of $0.5 million was recorded in Selling, general
and administrative expenses in 2010. As of December 31, 2010, there was $0.2 million of total
unrecognized compensation cost related to RSUs that will be recognized in 2011.
46
Table of Contents
Lawson Products, Inc.
Notes to Consolidated Financial Statements
Notes to Consolidated Financial Statements
Performance based awards
The Company has established two Long-Term Incentive Plans (“LTIP”): one for the Senior
Executive Officers (“SEO LTIP”) and one for the Company’s Vice Presidents (“VP LTIP”). Awards under
both plans are contingent on the level of financial performance of the Company over the three year
period ending December 31, 2012.
SEO LTIP
Participants in the SEO LTIP can earn one-third of the total target award if the financial
performance of the Company exceeds the established threshold levels for each year. At the end of
the three-year performance period, the average actual results for the three years will be
determined and the achievement calculated as a percent of the average annual goals for the entire
performance period. The award for each fiscal year will then be adjusted based on the average
annual results achieved. If a certain minimum performance level is not attained for the three year
period, no award will be earned for any of the three years. Compensation expense of $0.3 million
related to the SEO LTIP was included in Selling, general and administrative expense for the year
ended December 31, 2010.
Under the terms of the SEO LTIP, at the end of the three year period, one half of the amount
earned is payable in cash and one half is payable in the Company’s common stock. The maximum amount
of stock that could be issued, assuming the December 31, 2012 closing price of the stock remained
at the December 31, 2010 closing price of $24.89 would be 56,930 shares.
VP LTIP
Participants in the VP LTIP can earn one-third of the total target award if the financial
performance of the Company exceeds the established threshold levels for each year. The VP LTIP is
payable one half in restricted stock and one half in non-qualified stock options. As of December
31, 2010, there were 22,071 shares of restricted stock and 46,607 non-qualified stock options with
a weighted average exercise price of $14.05 outstanding that represents the maximum amount that can
be earned by the participants over the three year period. These amounts may be reduced based on the
Company’s financial performance over the next two years.
A portion of the total VP LTIP can be earned each year; 30% in 2010, 30% in 2011 and 40% in
2012. The awards are earned each year and vest at the end of the three year period. If certain
minimum performance levels are not attained in any given year, no award will be earned that year.
Compensation expense of $0.1 million related to the VP LTIP was included in Selling, general and
administrative expense for the year ended December 31, 2010.
In 2010, the Company recorded a $4.1 million benefit related to proceeds received from a
settlement agreement and legal remedies related to the actions of several former sales agents and
the Share Corporation (“Share”) alleging, among other things, breach of contract and interference
with customer relationships. In exchange for the proceeds, the Company agreed to settle all related
claims with Share and the former sales agents.
Other operating expense of $0.2 million in 2009 and $31.7 million in 2008 include the costs
related 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 the Company’s customer loyalty programs. In August
2008, in connection with the investigation, the Company entered into the DPA with the U.S.
Attorney’s Office and agreed to pay a $30.0 million penalty. Additionally, in 2009, an impairment
charge of $0.3 million was incurred to reduce the carrying value of certain property, plant and
equipment to fair value. Other expenses in 2008 also included $3.9 million related to unclaimed
property liabilities.
47
Table of Contents
Lawson Products, Inc.
Notes to Consolidated Financial Statements
Notes to Consolidated Financial Statements
The computation of basic and diluted earnings (loss) per share consisted of the following:
| (Dollars in thousands, except per share data) | ||||||||||||
| Year Ended December 31, | ||||||||||||
| (as adjusted) | (as adjusted) | |||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
Weighted average shares:
|
||||||||||||
|
Basic weighted average shares outstanding
|
8,522 | 8,522 | 8,522 | |||||||||
|
Effect of dilutive securities outstanding
|
15 | — | — | |||||||||
|
|
||||||||||||
|
Diluted weighted average shares outstanding
|
8,537 | 8,522 | 8,522 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Earnings (loss):
|
||||||||||||
|
Continuing operations
|
$ | 9,590 | $ | 1,912 | $ | (23,679 | ) | |||||
|
Discontinued operations
|
(2,653 | ) | (4,648 | ) | (3,952 | ) | ||||||
|
|
||||||||||||
|
Net income (loss)
|
$ | 6,937 | $ | (2,736 | ) | $ | (27,631 | ) | ||||
|
|
||||||||||||
|
|
||||||||||||
|
Basic earnings (loss) per share of common stock:
|
||||||||||||
|
Continuing operations
|
$ | 1.13 | $ | 0.22 | $ | (2.78 | ) | |||||
|
Discontinued operations
|
(0.32 | ) | (0.54 | ) | (0.46 | ) | ||||||
|
|
||||||||||||
|
Net income (loss)
|
$ | 0.81 | $ | (0.32 | ) | $ | (3.24 | ) | ||||
|
|
||||||||||||
|
|
||||||||||||
|
Diluted earnings (loss) per share of common
stock:
|
||||||||||||
|
Continuing operations
|
$ | 1.12 | $ | 0.22 | $ | (2.78 | ) | |||||
|
Discontinued operations
|
(0.31 | ) | (0.54 | ) | (0.46 | ) | ||||||
|
|
||||||||||||
|
Net income (loss)
|
$ | 0.81 | $ | (0.32 | ) | $ | (3.24 | ) | ||||
|
|
||||||||||||
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.
The Company’s Chairman of the Board, Dr. Port, is a partner in two partnerships that have an
interest in Lawson’s common stock. During 2010, litigation was initiated against Dr. Port,
requesting that the partnerships be changed to allow the partners to have more control over their
respective shares. The suit names Dr. Port as a defendant based on his role in the partnerships and
as a director of the Company. The Company is not a party to the lawsuit. Through December 31, 2010,
the Company incurred $0.7 million for legal services provided to Dr. Port in relation to this
litigation.
48
Table of Contents
Lawson Products, Inc.
Notes to Consolidated Financial Statements
Notes to Consolidated Financial Statements
The Company has two operating 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, | ||||||||||||
| (as adjusted) | (as adjusted) | |||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
Net sales
|
||||||||||||
|
MRO
|
$ | 303,138 | $ | 289,715 | $ | 357,092 | ||||||
|
OEM
|
13,642 | 12,054 | 19,480 | |||||||||
|
|
||||||||||||
|
Consolidated total
|
$ | 316,780 | $ | 301,769 | $ | 376,572 | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Operating income (loss)
|
||||||||||||
|
MRO
|
$ | 14,522 | $ | 9,256 | $ | 24,584 | ||||||
|
OEM
|
283 | (1,118 | ) | 1,103 | ||||||||
|
Severance expenses
|
(3,629 | ) | (6,228 | ) | (5,238 | ) | ||||||
|
Gain (loss) on sale of assets
|
1,701 | (16 | ) | (44 | ) | |||||||
|
Other operating income (expense)
|
4,050 | (481 | ) | (35,616 | ) | |||||||
|
|
||||||||||||
|
Consolidated total
|
16,927 | 1,413 | (15,211 | ) | ||||||||
|
|
||||||||||||
|
Interest expense
|
(391 | ) | (1,037 | ) | (789 | ) | ||||||
|
Other income, net
|
160 | 1,029 | 626 | |||||||||
|
|
||||||||||||
|
Income (loss) from
continuing operations
before income taxes
|
$ | 16,696 | $ | 1,405 | $ | (15,374 | ) | |||||
|
|
||||||||||||
|
|
||||||||||||
|
Capital expenditures
|
||||||||||||
|
MRO
|
$ | 10,038 | $ | 2,008 | $ | 2,337 | ||||||
|
OEM
|
10 | 713 | 549 | |||||||||
|
|
||||||||||||
|
Consolidated total
|
$ | 10,048 | $ | 2,721 | $ | 2,886 | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Depreciation and amortization
|
||||||||||||
|
MRO
|
$ | 5,900 | $ | 6,031 | $ | 6,981 | ||||||
|
OEM
|
406 | 476 | 450 | |||||||||
|
|
||||||||||||
|
Consolidated total
|
$ | 6,306 | $ | 6,507 | $ | 7,431 | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Total assets
|
||||||||||||
|
MRO
|
$ | 204,727 | $ | 167,394 | $ | 180,506 | ||||||
|
OEM
|
15,295 | 12,428 | 14,059 | |||||||||
|
|
||||||||||||
|
Segment total
|
220,022 | 179,822 | 194,565 | |||||||||
|
Corporate
|
15,743 | 20,068 | 24,286 | |||||||||
|
Discontinued operations
|
619 | 41,757 | 52,372 | |||||||||
|
|
||||||||||||
|
Consolidated total
|
$ | 236,384 | $ | 241,647 | $ | 271,223 | ||||||
|
|
||||||||||||
49
Table of Contents
Lawson Products, Inc.
Notes to Consolidated Financial Statements
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, | ||||||||||||
| (as adjusted) | (as adjusted) | |||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
Net sales
|
||||||||||||
|
United States
|
$ | 288,054 | $ | 276,116 | $ | 346,393 | ||||||
|
Canada
|
28,726 | 25,653 | 30,179 | |||||||||
|
|
||||||||||||
|
Consolidated total
|
$ | 316,780 | $ | 301,769 | $ | 376,572 | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Long-lived assets
|
||||||||||||
|
United States
|
$ | 41,006 | $ | 36,911 | $ | 43,178 | ||||||
|
Canada
|
3,436 | 3,417 | 3,148 | |||||||||
|
|
||||||||||||
|
Consolidated total
|
$ | 44,442 | $ | 40,328 | $ | 46,326 | ||||||
|
|
||||||||||||
Net sales are attributed to countries based on the location of customers. Long-lived assets
consist of property, plant and equipment.
50
Table of Contents
Lawson Products, Inc.
Notes to Consolidated Financial Statements
Notes to Consolidated Financial Statements
Unaudited quarterly results of operations for the years ended December 31, 2010 and 2009 are
summarized as follows:
| (Dollars in thousands, except per share data) | ||||||||||||||||
| 2010 Quarter Ended | ||||||||||||||||
| (as adjusted) | (as adjusted) | (as adjusted) | ||||||||||||||
| Dec. 31 | Sep. 30 | June 30 | Mar. 31 | |||||||||||||
|
|
||||||||||||||||
|
Net sales
|
$ | 80,012 | $ | 81,553 | $ | 80,305 | $ | 74,910 | ||||||||
|
Gross profit
|
49,764 | 49,948 | 48,789 | 46,325 | ||||||||||||
|
|
||||||||||||||||
|
Income from continuing operations (1)
|
$ | 112 | $ | 5,766 | $ | 1,480 | $ | 2,232 | ||||||||
|
Income (loss) from discontinued operations
|
(623 | ) | (2,337 | ) | 207 | 100 | ||||||||||
|
|
||||||||||||||||
|
Net income (loss)
|
$ | (511 | ) | $ | 3,429 | $ | 1,687 | $ | 2,332 | |||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Basic and diluted income (loss) per share
of common stock:
|
||||||||||||||||
|
Continuing operations (2)
|
$ | 0.01 | $ | 0.68 | $ | 0.17 | $ | 0.26 | ||||||||
|
Discontinued operations (2)
|
(0.07 | ) | (0.28 | ) | 0.03 | 0.01 | ||||||||||
|
|
||||||||||||||||
|
Net income (loss) (2)
|
$ | (0.06 | ) | $ | 0.40 | $ | 0.20 | $ | 0.27 | |||||||
|
|
||||||||||||||||
| 2009 Quarter Ended | ||||||||||||||||
| (as adjusted) | (as adjusted) | (as adjusted) | (as adjusted) | |||||||||||||
| Dec. 31 | Sep. 30 | June 30 | Mar. 31 | |||||||||||||
|
|
||||||||||||||||
|
Net sales
|
$ | 70,767 | $ | 76,821 | $ | 76,031 | $ | 78,150 | ||||||||
|
Gross profit
|
42,910 | 48,508 | 48,343 | 45,798 | ||||||||||||
|
|
||||||||||||||||
|
Income (loss) from continuing operations
|
$ | (75 | ) | $ | 3,151 | $ | 3,536 | $ | (4,700 | ) | ||||||
|
Income (loss) from discontinued operations
|
(63 | ) | (1,648 | ) | (1,689 | ) | (1,248 | ) | ||||||||
|
|
||||||||||||||||
|
Net Income (loss)
|
$ | (138 | ) | $ | 1,503 | $ | 1,847 | $ | (5,948 | ) | ||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Basic and diluted income (loss) per share
of common stock:
|
||||||||||||||||
|
Continuing operations
|
$ | (0.01 | ) | $ | 0.37 | $ | 0.41 | $ | (0.55 | ) | ||||||
|
Discontinued operations
|
(0.01 | ) | (0.19 | ) | (0.19 | ) | (0.15 | ) | ||||||||
|
|
||||||||||||||||
|
Net Income (loss)
|
$ | (0.02 | ) | $ | 0.18 | $ | 0.22 | $ | (0.70 | ) | ||||||
|
|
||||||||||||||||
| (1) |
Income from continuing operations for the three months ended September 31, 2010 and June 30,
2010, respectively, includes a net benefit of $2.1 million and $0.3 million related to the
Share litigation. Income from continuing operations for the three months ended March 30, 2010
includes a net gain of $1.0 million from the sale of the Dallas, Texas distribution center.
|
|
| (2) |
The sum of the quarterly earnings per share amounts do not equal the total annual earnings
per share due to rounding and the uneven timing of earnings throughout the year compared to
the weighted average shares outstanding.
|
51
Table of Contents
Lawson Products, Inc.
Notes to Consolidated Financial Statements
Notes to Consolidated Financial Statements
Previously reported quarterly results of operations have been reclassified to reflect the
effect of discontinuing Rutland and for the change in accounting policy to classify costs related
to shipping and handling fees from SG&A to Cost of goods sold. The quarters ended June 30, 2010,
March 31, 2010, December 31, 2009, June 30, 2009 and March 31, 2009, have also been adjusted to
reflect the effect of the discontinuance of ACS that had not been previously disclosed.
| (Dollars in thousands, except per share data) | ||||||||||||||||
| Less: outbound | ||||||||||||||||
| Less: discontinued | shipping | |||||||||||||||
| Previously reported | operations | re-class | As adjusted | |||||||||||||
|
Quarter ended September 30, 2010
|
||||||||||||||||
|
Net sales
|
$ | 89,264 | $ | 7,711 | $ | — | $ | 81,553 | ||||||||
|
Gross profit
|
56,054 | 3,448 | 2,658 | 49,948 | ||||||||||||
|
|
||||||||||||||||
|
Income from continuing operations
|
5,800 | 34 | — | 5,766 | ||||||||||||
|
Loss from discontinued operations
|
(2,371 | ) | (34 | ) | — | (2,337 | ) | |||||||||
|
|
||||||||||||||||
|
Net income
|
$ | 3,429 | $ | — | $ | — | $ | 3,429 | ||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Basic and diluted income (loss) per share
of common stock:
|
||||||||||||||||
|
Continuing operations
|
$ | 0.68 | $ | — | $ | — | $ | 0.68 | ||||||||
|
Discontinued operations
|
(0.28 | ) | — | — | (0.28 | ) | ||||||||||
|
|
||||||||||||||||
|
Net income
|
$ | 0.40 | $ | — | $ | — | $ | 0.40 | ||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Quarter ended June 30, 2010
|
||||||||||||||||
|
Net sales
|
$ | 101,623 | $ | 21,318 | $ | — | $ | 80,305 | ||||||||
|
Gross profit
|
58,630 | 7,032 | 2,809 | 48,789 | ||||||||||||
|
|
||||||||||||||||
|
Income from continuing operations
|
1,774 | 294 | — | 1,480 | ||||||||||||
|
Income (loss) from discontinued operations
|
(87 | ) | (294 | ) | — | 207 | ||||||||||
|
|
||||||||||||||||
|
Net income
|
$ | 1,687 | $ | — | $ | — | $ | 1,687 | ||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Basic and diluted income (loss) per share
of common stock:
|
||||||||||||||||
|
Continuing operations
|
$ | 0.21 | $ | 0.04 | $ | — | $ | 0.17 | ||||||||
|
Discontinued operations
|
(0.01 | ) | (0.04 | ) | — | 0.03 | ||||||||||
|
|
||||||||||||||||
|
Net income
|
$ | 0.20 | $ | — | $ | — | $ | 0.20 | ||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Quarter ended March 31, 2010
|
||||||||||||||||
|
Net sales
|
$ | 95,073 | $ | 20,163 | $ | — | $ | 74,910 | ||||||||
|
Gross profit
|
55,482 | 6,362 | 2,795 | 46,325 | ||||||||||||
|
|
||||||||||||||||
|
Income from continuing operations
|
2,342 | 110 | — | 2,232 | ||||||||||||
|
Income (loss) from discontinued operations
|
(10 | ) | (110 | ) | — | 100 | ||||||||||
|
|
||||||||||||||||
|
Net income
|
$ | 2,332 | $ | — | $ | — | $ | 2,332 | ||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Basic and diluted income (loss) per share
of common stock:
|
||||||||||||||||
|
Continuing operations
|
$ | 0.27 | $ | 0.01 | $ | — | $ | 0.26 | ||||||||
|
Discontinued operations
|
— | (0.01 | ) | — | 0.01 | |||||||||||
|
|
||||||||||||||||
|
Net income
|
$ | 0.27 | $ | — | $ | — | $ | 0.27 | ||||||||
|
|
||||||||||||||||
52
Table of Contents
Lawson Products, Inc.
Notes to Consolidated Financial Statements
Notes to Consolidated Financial Statements
| Less: | Less: outbound | |||||||||||||||
| Previously | discontinued | shipping | ||||||||||||||
| reported | operations | re-class | As adjusted | |||||||||||||
|
|
||||||||||||||||
|
Quarter ended December 31, 2009
|
||||||||||||||||
|
|
||||||||||||||||
|
Net sales
|
$ | 89,342 | $ | 18,575 | $ | — | $ | 70,767 | ||||||||
|
Gross profit
|
51,344 | 5,888 | 2,546 | 42,910 | ||||||||||||
|
|
||||||||||||||||
|
Loss from continuing operations
|
(114 | ) | (39 | ) | — | (75 | ) | |||||||||
|
Income (loss) from discontinued operations
|
(24 | ) | 39 | — | (63 | ) | ||||||||||
|
|
||||||||||||||||
|
Net Loss
|
$ | (138 | ) | $ | — | $ | — | $ | (138 | ) | ||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Basic and diluted loss per
share of common stock:
|
||||||||||||||||
|
Continuing operations
|
$ | (0.01 | ) | $ | — | $ | — | $ | (0.01 | ) | ||||||
|
Discontinued operations
|
(0.01 | ) | — | — | (0.01 | ) | ||||||||||
|
|
||||||||||||||||
|
Net loss
|
$ | (0.02 | ) | $ | — | $ | — | $ | (0.02 | ) | ||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Quarter ended September 30, 2009
|
||||||||||||||||
|
|
||||||||||||||||
|
Net sales
|
$ | 84,054 | $ | 7,233 | $ | — | $ | 76,821 | ||||||||
|
Gross profit
|
54,045 | 3,074 | 2,463 | 48,508 | ||||||||||||
|
|
||||||||||||||||
|
Income (loss) from continuing operations
|
2,773 | (378 | ) | — | 3,151 | |||||||||||
|
Income (loss) from discontinued operations
|
(1,270 | ) | 378 | — | (1,648 | ) | ||||||||||
|
|
||||||||||||||||
|
Net income
|
$ | 1,503 | $ | — | $ | — | $ | 1,503 | ||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Basic and diluted income (loss)
per share of common stock:
|
||||||||||||||||
|
Continuing operations
|
$ | 0.33 | $ | (0.04 | ) | $ | — | $ | 0.37 | |||||||
|
Discontinued operations
|
(0.15 | ) | 0.04 | — | (0.19 | ) | ||||||||||
|
|
||||||||||||||||
|
Net income
|
$ | 0.18 | $ | — | $ | — | $ | 0.18 | ||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Quarter ended June 30, 2009
|
||||||||||||||||
|
|
||||||||||||||||
|
Net sales
|
$ | 95,033 | $ | 19,002 | $ | — | $ | 76,031 | ||||||||
|
Gross profit
|
55,869 | 4,842 | 2,684 | 48,343 | ||||||||||||
|
|
||||||||||||||||
|
Income (loss) from continuing operations
|
1,896 | (1,640 | ) | — | 3,536 | |||||||||||
|
Income (loss) from discontinued operations
|
(49 | ) | 1,640 | — | (1,689 | ) | ||||||||||
|
|
||||||||||||||||
|
Net income
|
$ | 1,847 | $ | — | $ | — | $ | 1,847 | ||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Basic and diluted income (loss)
per share of common stock:
|
||||||||||||||||
|
Continuing operations
|
$ | 0.22 | $ | (0.19 | ) | $ | — | $ | 0.41 | |||||||
|
Discontinued operations
|
— | 0.19 | — | (0.19 | ) | |||||||||||
|
|
||||||||||||||||
|
Net income
|
$ | 0.22 | $ | — | $ | — | $ | 0.22 | ||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Quarter ended March 31, 2009
|
||||||||||||||||
|
|
||||||||||||||||
|
Net sales
|
$ | 99,381 | $ | 21,231 | $ | — | $ | 78,150 | ||||||||
|
Gross profit
|
54,167 | 5,744 | 2,625 | 45,798 | ||||||||||||
|
|
||||||||||||||||
|
Loss from continuing operations
|
(5,919 | ) | (1,219 | ) | — | (4,700 | ) | |||||||||
|
Income (loss) from discontinued operations
|
(29 | ) | 1,219 | — | (1,248 | ) | ||||||||||
|
|
||||||||||||||||
|
Net loss
|
$ | (5,948 | ) | $ | — | $ | — | $ | (5,948 | ) | ||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Basic and diluted income
(loss) per share of common stock:
|
||||||||||||||||
|
Continuing operations
|
$ | (0.69 | ) | $ | (0.14 | ) | $ | — | $ | (0.55 | ) | |||||
|
Discontinued operations
|
(0.01 | ) | 0.14 | — | (0.15 | ) | ||||||||||
|
|
||||||||||||||||
|
Net income
|
$ | (0.70 | ) | $ | — | $ | — | $ | (0.70 | ) | ||||||
|
|
||||||||||||||||
53
Table of Contents
Lawson Products, Inc.
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,
2010
|
$ | 882 | $ | 883 | $ | (680 | )(1) | $ | 1,085 | |||||||
|
Year ended
December 31,
2009 (5)
|
871 | 1,222 | (1,211 | )(1) | 882 | |||||||||||
|
Year ended
December 31,
2008 (5)
|
933 | 860 | (922 | )(1) | 871 | |||||||||||
|
|
||||||||||||||||
|
Allowance for
excess and
obsolete inventory:
|
||||||||||||||||
|
Year ended
December 31,
2010
|
$ | 4,748 | $ | 110 | $ | (147 | )(2) | $ | 4,711 | |||||||
|
Year ended
December 31,
2009 (5)
|
4,778 | 319 | (349 | )(2) | 4,748 | |||||||||||
|
Year ended
December 31,
2008 (5)
|
7,489 | (2,015 | )(3) | (696 | )(2) | 4,778 | ||||||||||
|
|
||||||||||||||||
|
Valuation allowance
for deferred tax
assets:
|
||||||||||||||||
|
Year ended
December 31,
2010
|
$ | 1,744 | $ | — | $ | (869 | )(4) | $ | 875 | |||||||
|
Year ended
December 31,
2009
|
2,854 | (536 | ) | (574 | )(4) | 1,744 | ||||||||||
|
Year ended
December 31,
2008
|
3,337 | (483 | ) | — | 2,854 | |||||||||||
| (1) |
Uncollected receivables written off, net of recoveries and translation adjustment.
|
|
| (2) |
Disposal of excess and obsolete inventory and translation adjustment.
|
|
| (3) |
An inventory reduction plan was implemented that focused on selling slow moving and obsolete
inventory which had been previously reserved. Overall inventory reserves decreased based on
the mix of remaining inventory on hand.
|
|
| (4) |
Capital loss carryforward written off.
|
|
| (5) |
As adjusted for discontinued operations.
|
54
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, 2010. 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, 2010. 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.
55
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, 2010 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, 2010, 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, 2010 and 2009 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,
2010 and our report dated February 17, 2011 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Chicago, Illinois
February 17, 2011
February 17, 2011
56
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 10, 2011, under the caption “Election of
Directors” and “Section 16(a) Beneficial Ownership Reporting Compliance,” which information is
incorporated herein by reference.
b.
Executive Officers
The information required by this Item is set forth under the caption Item 1 —
Business
under
“Executive Officers of the Registrant.”
c.
Audit Committee
Information on the Company’s Audit Committee is contained under the caption “Board of
Directors Meetings and Committees” in the Company’s Proxy Statement for the Annual Meeting of
Stockholders to be held on May 10, 2011, 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 10, 2011, under the caption “Remuneration of
Executive Officers,” which information is incorporated herein by reference.
57
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 10, 2011 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, 2010 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
|
185,373 | (1) | $ | 14.05 | (2) | 311,924 | ||||||
|
|
||||||||||||
|
Equity compensation
plans not approved
by security holders
|
— | — | — | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Total
|
185,373 | (1) | $ | 14.05 | (2) | 311,924 | ||||||
|
|
||||||||||||
| (1) |
Includes common stock to
cover conversion of 138,776 restricted stock awards and 46,607 stock options.
|
|
| (2) |
Weighted-average exercise
price of 46,607 stock options outstanding on December 31, 2010.
|
| 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 10, 2011 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 10, 2011 under the caption “Fees Paid to
Independent Auditors” which information is incorporated herein by reference.
| ITEM 15. |
EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
|
| (a) |
(1) See Index to Financial Statements in Item 8 on page 28.
|
| (2) |
See Schedule II in Item 8 on page 54.
|
||
| (3) |
See the Exhibit Index immediately following the signature page of this Annual Report on Form 10-K.
|
58
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 17, 2011 |
||||
| By: | /s/ Ronald J. Knutson | |||
| Ronald J. Knutson | ||||
|
Senior Vice President, Chief Financial Officer
(principal financial and accounting officer) Date: February 17, 2011 |
||||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below this 17th day of February, 2011, 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 | |
|
|
(principal executive officer) | |
|
|
||
|
/s/ Ronald B. Port
|
Chairman of the Board | |
|
|
||
|
|
||
|
/s/ Andrew B. Albert
|
Director | |
|
|
||
|
|
||
|
/s/ I. Steven Edelson
|
Director | |
|
|
||
|
|
||
|
/s/ James S. Errant
|
Director | |
|
|
||
|
|
||
|
/s/ Lee S. Hillman
|
Director | |
|
|
||
|
|
||
|
/s/ Thomas S. Postek
|
Director | |
|
|
||
|
|
||
|
/s/ Robert G. Rettig
|
Director | |
|
|
||
|
|
||
|
/s/ Wilma J. Smelcer
|
Director | |
|
|
59
Table of Contents
EXHIBIT INDEX
| Exhibit | ||||
| Number | Description of Exhibit | |||
| 2.1 |
Asset Purchase Agreement By and Among Assembly Component Systems,
Inc., Lawson Products, Inc., Supply Technologies LLC and Park-Ohio
Industries, Inc. dated as of August 31, 2010, incorporated herein
by reference to Exhibit 2.1 to the Company’s Current Report on
Form 8-K dated August 31, 2010.
|
|||
|
|
||||
| 2.2 |
Asset Purchase Agreement By and Among Rutland Tool & Supply Co.,
Lawson Products, Inc., Sid Tool Co., Inc. and MSC Industrial
Direct Co., Inc. dated as of November 9, 2010, incorporated herein
by reference to Exhibit 2.1 to the Company’s Current Report on
Form 8-K dated November 9, 2010.
|
|||
|
|
||||
| 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
October 20, 2009.
|
|||
|
|
||||
| 10.1 | * |
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.
|
||
|
|
||||
| 10.2 | * |
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.
|
||
|
|
||||
| 10.3 | * |
Lawson Products, Inc. Long-Term Capital Accumulation Plan,
incorporated herein by reference to Exhibit 10(c)(10) to the
Company’s Current Report on Form 8-K dated October 21, 2004.
|
||
|
|
||||
| 10.4 | * |
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.
|
||
|
|
||||
| 10.5 | * |
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.
|
||
|
|
||||
| 10.6 | * |
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.
|
||
|
|
||||
| 10.7 | * |
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.
|
||
|
|
||||
| 10.8 | * |
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.
|
||
|
|
||||
| 10.9 |
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.
|
|||
60
Table of Contents
| Exhibit | ||||
| Number | Description of Exhibit | |||
| 10.10 | * |
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
|
||
|
|
||||
| 10.11 |
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.
|
|||
|
|
||||
| 10.12 | * |
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.
|
||
|
|
||||
| 10.13 | * |
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.
|
||
|
|
||||
| 10.14 | * |
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.
|
||
|
|
||||
| 10.15 | * |
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.
|
||
|
|
||||
| 10.16 | * |
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.
|
||
|
|
||||
| 10.17 | * |
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.
|
||
|
|
||||
| 10.18 |
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.
|
|||
|
|
||||
| 10.19 |
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.
|
|||
|
|
||||
| 10.20 | * |
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.
|
||
|
|
||||
| 10.21 | * |
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.
|
||
|
|
||||
| 10.22 |
Consent, Waiver and Third Amendment to the Credit Agreement dated
September 1, 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 August 31, 2010.
|
|||
|
|
||||
| 10.23 |
Consent, Waiver and Fourth Amendment to the Credit Agreement dated
December 10, 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 December 10, 2010.
|
|||
61
Table of Contents
| Exhibit | ||||
| Number | Description of Exhibit | |||
| 18 |
Preference letter regarding change in accounting principle.
|
|||
|
|
||||
| 21 |
Subsidiaries of the Company.
|
|||
|
|
||||
| 23 |
Consent of Ernst & Young LLP.
|
|||
|
|
||||
| 31.1 |
Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350 as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|||
|
|
||||
| 31.2 |
Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350 as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|||
|
|
||||
| 32 |
Certification of Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
|
|||
| * |
Indicates management employment contracts or compensatory plans or arrangements.
|
62
TABLE OF CONTENTS
Part IItem 1. BusinessItem 1A. Risk FactorsItem 1B. Unresolved Staff CommentsItem 2. PropertiesItem 3. Legal ProceedingsPart 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 Discontinued OperationsNote 4 InventoriesNote 5 Property, Plant and EquipmentNote 6 Sale Of Distribution CentersNote 7 GoodwillNote 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 Other Operating (income) ExpensesNote 16 Earnings (loss) Per ShareNote 17 Related Party TransactionNote 18 Segment ReportingNote 19 Summary Of Unaudited Quarterly Results Of OperationsItem 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, Financial Statement Schedules