SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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FORM 10-Q
Quarterly Report under Section 13 or 15(d) of
The Securities Exchange Act of 1934
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For Quarter Ended September 30, 1998 Commission file no. 0-10546
LAWSON PRODUCTS, INC.
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(Exact name of registrant as specified in its charter)
Delaware 36-2229304
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1666 East Touhy Avenue, Des Plaines, Illinois 60018
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(Address of principal executive offices) (Zip Code)
Registrant's telephone no., including area code: (847) 827-9666
Not applicable
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Former name, former address and former fiscal year, if changed since last
report.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date. 10,808,322 Shares, $1 par
value, as of October 16, 1998.
LAWSON PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except per share data) Sept. 30, December 31,
1998 1997
----------- ------------
(UNAUDITED)
ASSETS
Current Assets:
Cash and cash equivalents ....................... $ 14,346 $ 10,248
Marketable securities ........................... 11,576 11,638
Accounts receivable, less allowance for
doubtful accounts ............................... 35,660 33,714
Inventories (Note B) ............................ 44,326 41,788
Miscellaneous receivables and prepaid
expenses ...................................... 8,975 5,760
Deferred income taxes ........................... 1,122 836
--------- ---------
Total Current Assets ................. 116,005 103,984
Marketable securities ................................ 13,207 21,713
Property, plant and equipment, less
allowances for depreciation and
amortization ....................................... 40,941 40,963
Investments in real estate ........................... 3,878 3,731
Deferred income taxes ................................ 5,122 4,447
Other assets ......................................... 14,871 14,136
--------- ---------
Total Assets ......................... $ 194,024 $ 188,974
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable ................................ $ 5,781 $ 4,928
Accrued expenses and other liabilities .......... 17,860 17,902
Income taxes .................................... 1,743 1,641
--------- ---------
Total Current Liabilities ............ 25,384 24,471
--------- ---------
Accrued liability under security bonus plans ......... 14,808 14,000
Other ................................................ 10,153 10,578
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24,961 24,578
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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 -
(1998 - 10,853,322 shares;
1997 - 11,135,233 shares) ................ 10,853 11,135
Capital in excess of par value .................. 763 770
Retained earnings ............................... 132,677 128,708
Accumulated other comprehensive income .......... (614) (688)
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Total Stockholders' Equity ........... 143,679 139,925
--------- ---------
Total Liabilities and Stockholders'
Equity ............................. $ 194,024 $ 188,974
========= =========
See notes to condensed consolidated financial statements.
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LAWSON PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(Amounts in thousands, except per share data)
For the Three For the Nine
Months Ended Months Ended
Sept. 30, Sept. 30,
1998 1997 1998 1997
--------------- -------------- ---------------- ---------
Net sales $75,530 $71,420 $218,427 $207,693
Investment and other income 592 408 1,870 1,188
------- ------- -------- --------
76,122 71,828 220,297 208,881
------- ------- -------- --------
Cost of goods sold (Note B) 25,941 24,331 75,645 71,167
Selling, general and
administrative expenses 41,043 37,453 119,520 110,258
------- ------- -------- --------
66,984 61,784 195,165 181,425
------- ------- -------- --------
Income before income taxes 9,138 10,044 25,132 27,456
Provision for income taxes 3,884 4,165 10,627 11,206
------- ------- -------- --------
Net income $ 5,254 $ 5,879 $ 14,505 $ 16,250
======= ======= ======== ========
Net income per share of common stock:
Basic $ 0.48 $ 0.53 $ 1.31 $ 1.46
======= ======= ======== ========
Diluted $ 0.48 $ 0.53 $ 1.30 $ 1.45
======= ======= ======== ========
Cash dividends declared per
share of common stock $ 0.14 $ 0.14 $ 0.42 $ 0.40
======= ======= ======== ========
Weighted average shares
outstanding:
Basic 11,054 11,125 11,103 11,158
======= ======= ======== ========
Diluted 11,057 11,157 11,125 11,174
======= ======= ======== ========
See notes to condensed consolidated financial statements.
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LAWSON PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Amounts in thousands)
For the
Nine Months Ended
Sept. 30,
1998 1997
---- ----
Operating activities:
Net income ...................................... $ 14,505 $ 16,250
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ............... 4,196 3,746
Changes in operating assets and liabilities . (8,970) (10,303)
Other ....................................... (118) 1,875
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Net Cash Provided by Operating Activities ....... 9,613 11,568
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Investing activities:
Additions to property, plant and equipment ...... (3,949) (3,886)
Purchases of marketable securities .............. (172,749) (118,637)
Proceeds from sale of marketable securities ..... 181,418 121,302
Other ........................................... 629 40
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Net Cash Provided by/(Used in) Investing
Activities ..................................... 5,349 (1,181)
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Financing activities:
Purchases of treasury stock ..................... (6,201) (4,062)
Dividends paid .................................. (4,677) (4,366)
Other ........................................... 14 17
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Net Cash Used in Financing Activities ........... (10,864) (8,411)
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Increase in Cash and Cash
Equivalents ............................... 4,098 1,976
Cash and Cash Equivalents at Beginning of
Period ........................................ 10,248 14,515
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Cash and Cash Equivalents at End of Period .. $ 14,346 $ 16,491
========= =========
See notes to condensed consolidated financial statements.
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Part I
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
A) As contemplated by the Securities and Exchange Commission, the accompanying
consolidated financial statements and footnotes have been condensed and
therefore, do not contain all disclosures required by generally accepted
accounting principles. Reference should be made to the Company's Annual Report
to Stockholders for the year ended December 31, 1997. The Condensed Consolidated
Balance Sheet as of September 30, 1998, the Condensed Consolidated Statements of
Income for the three and nine month periods ended September 30, 1998 and 1997
and the Condensed Consolidated Statements of Cash Flows for the nine month
periods ended September 30, 1998 and 1997 are unaudited. In the opinion of the
Company, all adjustments (consisting only of normal recurring accruals) have
been made, which are necessary to present fairly the results of operations for
the interim periods. Operating results for the three and nine month periods
ended September 30, 1998 are not necessarily indicative of the results that may
be expected for the year ending December 31, 1998.
B) Inventories (consisting of primarily finished goods) at September 30, 1998
and cost of goods sold for the three and nine month periods ended September 30,
1998 and 1997 were determined through the use of estimated gross profit rates.
C) As of January 1, 1998, the Company adopted FASB Statement 130, "Reporting
Comprehensive Income," (SFAS 130). SFAS 130 establishes new rules for reporting
and display of comprehensive income and its components; however, the adoption of
this Statement had no impact on the Company's net income or stockholders'
equity. SFAS 130 requires unrealized gains or losses on the Company's
available-for-sale marketable securities and foreign currency translation
adjustments to be included in other comprehensive income, which prior to
adoption were reported separately in stockholders' equity.
Total comprehensive income and its components, net of related tax, for the first
three and nine months of 1998 and 1997 are as follows:
Three months ended
September 30
1998 1997
---- ----
Net income $5,253,716 $5,879,218
Unrealized gains(losses) on
marketable securities (43,000) 63,000
Foreign currency translation
adjustments (279,928) (99,170)
----------- -----------
Comprehensive income $4,930,788 $5,843,048
=========== ==========
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Part I
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
C) - Continued -
Nine months ended
September 30
1998 1997
---- ----
Net income $14,505,218 $16,249,750
Unrealized gains(losses) on
marketable securities 123,000 (19,000)
Foreign currency translation
adjustments (49,977) (282,363)
------------ ------------
Comprehensive income $14,578,241 $15,948,387
============ ===========
The components of accumulated other comprehensive income, net of related tax, at
September 30, 1998 and December 31, 1997 are as follows:
1998 1997
Unrealized gain on marketable
securities $686,000 $563,000
Foreign currency translation
adjustments (1,300,672) (1,250,695)
------------ ------------
Accumulated other
comprehensive income $ (614,672) $ (687,695)
============ ============
In June 1997, the Financial Accounting Standards Board issued Statement of
Accounting Standards No. 131, Disclosure about Segments of an Enterprise and
Related Information (SFAS 131). SFAS 131 establishes standards for the way that
public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. SFAS 131 is effective for financial
statements for fiscal years beginning after December 15, 1997, and therefore the
Company will adopt the new requirements retroactively in 1998. Management has
not completed its review of SFAS 131, but does not anticipate that the adoption
of the statement will have a significant effect on the Company's reported
financial disclosures.
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Part I
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
D) Earnings per Share
The calculation of dilutive weighted average shares outstanding for the three
and nine months ended September 30, 1998 and 1997 are as follows:
Three months ended
September 30
1998 1997
Basic weighted average shares
outstanding 11,054,494 11,124,852
Dilutive impact of options
outstanding 2,657 32,430
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Dilutive weighted average
shares outstanding 11,057,151 11,157,282
=========== ===========
Nine months ended
September 30
1998 1997
Basic weighted average shares
outstanding 11,103,067 11,158,459
Dilutive impact of options
outstanding 22,067 15,154
---------- ----------
Dilutive weighted average
shares outstanding 11,125,134 11,173,613
========== ==========
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Part I
Independent Accountants' Review Report
Board of Directors
Lawson Products, Inc.
We have reviewed the accompanying condensed consolidated balance sheet of Lawson
Products, Inc. and subsidiaries as of September 30, 1998 and the related
condensed consolidated statements of income for the three month and nine month
periods ended September 30, 1998 and 1997 and the condensed consolidated
statements of cash flows for the nine month periods ended September 30, 1998 and
1997. These financial statements are the responsibility of the Company's
management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data, and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit in accordance with
generally accepted auditing standards, which will be performed for the full year
with the objective of expressing an opinion regarding the financial statements
taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the accompanying condensed consolidated financial statements referred
to above for them to be in conformity with generally accepted accounting
principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Lawson Products, Inc. as of
December 31, 1997, and the related consolidated statements of income, changes in
stockholders' equity and cash flows for the year then ended, not presented
herein, and in our report dated February 27, 1998, we expressed an unqualified
opinion on those consolidated financial statements. In our opinion, the
information set forth in the accompanying condensed consolidated balance sheet
as of December 31, 1997, is fairly stated, in all material respects, in relation
to the consolidated balance sheet from which it has been derived.
ERNST & YOUNG LLP
October 16, 1998
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Part I
This Quarterly Report on Form 10-Q for the quarter ended September 30,
1998, contains certain forward-looking statements pertaining to the Year 2000
Issue and other matters. These statements are subject to uncertainties and other
factors which could cause actual events or results to vary materially from
those anticipated.
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS
Net sales for the three and nine month periods ended September 30, 1998
increased 5.8% to $75,530,000 and 5.2% to $218,427,000 relative to the similar
periods of 1997. The sales advances reflect increased contribution from
substantially all Lawson operations.
Net income for the third quarter decreased 10.6% to $5,254,000 ($.48 per diluted
share) from $5,879,000 ($.53 per diluted share) for the comparable period of
1997. Net income for the nine months ended September 30, 1998 declined 10.7% to
$14,505,000 ($1.30 per diluted share) from $16,250,000 ($1.45 per diluted share)
for the similar period of 1997. These decreases are primarily attributable to
lower gross margins and higher selling costs due to a restructuring of the sales
force, which more than offset the gains in net sales noted above. Per share net
income was positively impacted by purchases in 1998 and 1997 under the Company's
share repurchase program.
Cash flows provided by operations for the nine months ended September 30, 1998
declined to $9,613,000 from $11,568,000 in the comparable period of the prior
year. This decrease was due primarily to the decline in net income from the
similar period of 1997. Current investments and cash flows from operations are
expected to be sufficient to finance the Company's future growth, cash dividends
and capital expenditures. Additions to property, plant and equipment were
$3,949,000 and $3,886,000, respectively, for the nine months ended September 30,
1998 and 1997. Capital expenditures during 1998 primarily reflect costs incurred
relative to the construction of a new Lawson outbound facility in Atlanta,
Georgia and purchases of computer related equipment. The new facility, expected
to be completed during 1999 at a cost of approximately $7,000,000, will be used
in place of the Norcross, Georgia facility, which will be closed. Capital
expenditures during 1997 primarily reflect costs incurred for the completion of
the facilities expansion at the Company's specialty chemical subsidiary,
Drummond American Corporation. This project was completed at a cost of
approximately $3,000,000.
During the third quarter of 1998, the Board of Directors authorized the purchase
of up to 500,000 shares of the Company's common stock. No shares were purchased
relative to the most recent authorization. In 1996, the Board of Directors
authorized the purchase of up to 1,000,000 shares of the Company's common stock.
During the first nine months of 1998, the Company purchased 282,500 shares at a
cost of $6,201,000, while during the first nine months of 1997, the Company
expended $4,062,000 to acquire 187,500 shares under the 1996 stock repurchase
program. As of September 30, 1998, 762,000 shares have been purchased relative
to the 1996 stock repurchase program. All treasury shares purchased as of
September 30, 1998 have been retired.
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Part I
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS - continued
The Company has developed a plan to modify its information technology to
recognize the Year 2000 Issue. The Year 2000 Issue involves computer programs
being written using two digits rather than four to define the applicable year.
Computer programs or hardware that have date-sensitive software or embedded
chips may recognize a date using "00" as the year 1900 rather than the year
2000, which could result in a system failure or miscalculations causing
disruptions in the processing of normal business transactions.
Based on the Company's assessment of the Year 2000 Issue, it has been determined
that it will be required to modify or replace portions of its software and
certain hardware to insure the proper recognition of dates beyond December 31,
1999. The Company presently believes that with modifications or replacements of
certain existing software and hardware, the Year 2000 Issue can be mitigated.
The Company's plan to resolve the Year 2000 Issue involves the following four
phases: assessment, remediation, testing, and implementation. The Company has
fully completed its assessment of all systems that could be significantly
impacted by the Year 2000 and is currently converting its critical data
processing systems.
Based on a review of its product line, the Company has determined that the
products it has sold and will continue to sell do not require remediation to be
Year 2000 compliant. Accordingly, the Company does not believe that the Year
2000 presents exposure as it relates to the Company's products.
The Company has contacted all of its suppliers and has gathered information
about their Year 2000 compliance status. To date, the Company is not aware of
any supplier with a Year 2000 issue that would have a material impact on the
operations of the Company. However, the Company does not have the means to
ensure that third parties will be Year 2000 ready. The inability of third
parties to complete their Year 2000 resolution process in a timely fashion could
materially impact the Company. The effect of non-compliance by third parties is
not determinable.
The Company will utilize both internal and external resources to reprogram, or
replace, test, and implement the software and operating equipment for Year 2000
modifications. This project remains on schedule, including testing and
implementation. The Company presently believes all phases of the conversion will
be completed by the second quarter of 1999 at a total cost of approximately
$400,000, of which $300,000 of expense has been incurred as of September 30,
1998. This project is not expected to have a significant effect on operations.
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Part I
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS - continued
Although the project is not yet complete, the management of the Company believes
it has an effective program in place to resolve the Year 2000 Issue in a timely
manner. The Company is committed to providing the necessary resources, including
additional funding and manpower, as required, until such time that all phases of
the Year 2000 project are completed.
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Part II
OTHER INFORMATION
Items 1, 2, 3, 4 and 5 are inapplicable and have been omitted from this report.
Item 6. Exhibits and Reports on Form 8-K.
(a) 15 Letter from Ernst & Young LLP Regarding
Unaudited Interim Financial Information
27 Financial Data Schedule
(b) The registrant filed a Current Report on Form 8-K August 14, 1998.
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SIGNATURES
Pursuant to the requirements 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.
(Registrant)
Dated October 16, 1998 /s/ Bernard Kalish
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Bernard Kalish
Chairman of the Board
Dated October 16, 1998 /s/ Joseph L. Pawlick
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Joseph L. Pawlick
Vice President and Controller
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Exhibit 15
Part I
Consent of Independent Auditors
We are aware of the incorporation by reference in the Registration Statement
(Form S-8 No. 33-17912 dated November 4, 1987) of Lawson Products, Inc. of our
report dated October 16, 1998 relating to the unaudited condensed consolidated
interim financial statements of Lawson Products, Inc. which are included in its
Form 10-Q for the quarter ended September 30, 1998.
Pursuant to Rule 436(c) of the Securities Act of 1933 our report is not part of
the registration statement prepared or certified by accountants within the
meaning of Section 7 or 11 of the Securities Act of 1933.
ERNST & YOUNG LLP
Chicago, Illinois
October 16, 1998
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5
1,000
9-MOS
DEC-31-1998
SEP-30-1998
14,346
24,783
37,753
2,093
44,326
116,005
72,683
31,742
194,024
25,384
0
0
0
10,853
132,826
194,024
218,427
220,297
75,645
75,645
0
826
20
25,132
10,627
14,505
0
0
0
14,505
1.31
1.30
