SEC Filing

SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 ---------------------------------- FORM 10-Q Quarterly Report under Section 13 or 15(d) of The Securities Exchange Act of 1934 ---------------------------------- For Quarter Ended March 31, 2000 Commission file no. 0-10546 -------------- ------- LAWSON PRODUCTS, INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its 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) (Zip Code) Registrant's telephone no., including area code: (847) 827-9666 -------------- Not applicable - -------------------------------------------------------------------------------- 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. 10,001,922 Shares, $1 par value, as of April 17, 2000. 1

LAWSON PRODUCTS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Amounts in thousands, except share data) March 31, December 31, 2000 1999 --------- --------- (unaudited) ASSETS Current Assets: Cash and cash equivalents $ 13,527 $ 11,975 Marketable securities 12,244 12,282 Accounts receivable, less allowance for doubtful accounts 40,491 41,108 Inventories (Note B) 53,770 55,485 Miscellaneous receivables and prepaid expenses 8,487 8,029 Deferred income taxes 1,405 1,389 --------- --------- Total Current Assets 129,924 130,268 Marketable securities 4,887 4,695 Property, plant and equipment, less allowances for depreciation and amortization 41,437 41,989 Investments in real estate 4,288 4,108 Deferred income taxes 9,055 8,784 Other assets 27,589 26,147 --------- --------- Total Assets $ 217,180 $ 215,991 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable $ 7,616 $ 8,249 Accrued expenses and other liabilities 23,724 25,845 Income taxes 7,002 4,332 --------- --------- Total Current Liabilities 38,342 38,426 --------- --------- Accrued liability under security bonus plans 16,992 16,494 Other 11,390 11,031 --------- --------- 28,382 27,525 --------- --------- 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 - (2000- 10,016,922 shares; 1999 - 10,203,922 shares) 10,017 10,204 Capital in excess of par value 704 717 Retained earnings 140,940 140,201 Accumulated other comprehensive income (1,205) (1,082) --------- --------- Total Stockholders' Equity 150,456 150,040 --------- --------- Total Liabilities and Stockholders' Equity $ 217,180 $ 215,991 ========= ========= See notes to condensed consolidated financial statements. 2

LAWSON PRODUCTS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (Amounts in thousands, except per share data) For the Three Months Ended March 31, 2000 1999 ------- ------- Net sales $83,710 $74,148 Cost of goods sold (Note B) 29,914 25,837 ------- ------- Gross Profit 53,796 48,311 Selling, general and administrative expenses 43,454 39,925 ------- ------- Operating income 10,342 8,386 Investment and other income 566 606 ------- ------- Income before income taxes 10,908 8,992 Provision for income taxes 4,463 3,715 ------- ------- Net income $ 6,445 $ 5,277 ======= ======= Net income per share of common stock: Basic $ 0.64 $ 0.50 ======= ======= Diluted $ 0.64 $ 0.50 ======= ======= Cash dividends declared per share of common stock $ 0.15 $ 0.14 ======= ======= Weighted average shares outstanding: Basic 10,093 10,651 ======= ======= Diluted 10,098 10,651 ======= ======= See notes to condensed consolidated financial statements. 3

LAWSON PRODUCTS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (Amounts in thousands) For the Three Months Ended March 31, 2000 1999 -------- -------- Operating activities: Net income $ 6,445 $ 5,277 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,560 1,594 Changes in operating assets and liabilities (37) 26 Other 553 325 -------- -------- Net Cash Provided by Operating Activities 8,521 7,222 -------- -------- Investing activities: Additions to property, plant and equipment (871) (2,546) Purchases of marketable securities (14,460) (36,355) Proceeds from sale of marketable securities 14,298 36,617 Other -- 15 -------- -------- Net Cash Used in Investing Activities (1,033) (2,269) -------- -------- Financing activities: Purchases of treasury stock (4,404) (841) Dividends paid (1,532) (1,493) -------- -------- Net Cash Used in Financing Activities (5,936) (2,334) -------- -------- Increase in Cash and Cash Equivalents 1,552 2,619 Cash and Cash Equivalents at Beginning of Period 11,975 13,872 -------- -------- Cash and Cash Equivalents at End of Period $ 13,527 $ 16,491 ======== ======== See notes to condensed consolidated financial statements. 4

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 on Form 10-K for the year ended December 31, 1999. The Condensed Consolidated Balance Sheet as of March 31, 2000, the Condensed Consolidated Statements of Income for the three month periods ended March 31, 2000 and 1999 and the Condensed Consolidated Statements of Cash Flows for the three month periods ended March 31, 2000 and 1999 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 quarter ended March 31, 2000 are not necessarily indicative of the results that may be expected for the year ending December 31, 2000. B) Inventories (consisting of primarily finished goods) at March 31, 2000 and cost of goods sold for the three month periods ended March 31, 2000 and 1999 were determined through the use of estimated gross profit rates. The difference between actual and estimated gross profit is adjusted in the fourth quarter. In 1999, this adjustment increased net income by approximately $1,689,000. C) Total comprehensive income and its components, net of related tax, for the first quarter of 2000 and 1999 are as follows (in thousands): 2000 1999 ---- ---- Net income $ 6,445 $ 5,277 Unrealized losses on securities (4) (54) Foreign currency translation adjustments (119) 30 ------------------ Comprehensive income $ 6,322 $ 5,253 ================== The components of accumulated other comprehensive income, net of related tax, at March 31, 2000 and December 31, 1999 are as follows (in thousands): 2000 1999 ---- ---- Unrealized loss on securities $ (32) $ (28) Foreign currency translation adjustments (1,173) (1,054) ------------------ Accumulated other comprehensive income $(1,205) $(1,082) ================== 5

D) Earnings per Share The calculation of dilutive weighted average shares outstanding at March 31, 2000 and 1999 are as follows (in thousands): 2000 1999 ---- ---- Basic weighted average shares outstanding 10,093 10,651 Dilutive impact of options outstanding 5 --- ------------------- Dilutive weighted average shares outstanding 10,098 10,651 =================== E) On July 1, 1999, the Company purchased substantially all of the assets and liabilities of SunSource Inventory Management Company, Inc. (SunSource) and Hillman Industrial Division (Hillman), at a cost of approximately $10.5 million with certain contingent purchase price adjustment features based on future operating results. This all-cash transaction was accounted for as a purchase; accordingly, the accounts and transactions of the acquired company have been included in the consolidated financial statements since the date of acquisition. The purchase price exceeded tangible net assets acquired by approximately $3.7 million. This goodwill will be amortized over 15 years using the straight-line method. SunSource and Hillman are distributors of fasteners in the original equipment marketplace. The former business operations of SunSource and Hillman are being conducted through the Company's new subsidiary, ACS/SIMCO. 6

Independent Accountants' Review Report Board of Directors and Stockholders Lawson Products, Inc. We have reviewed the accompanying condensed consolidated balance sheet of Lawson Products, Inc. and subsidiaries as of March 31, 2000 and the related condensed consolidated statements of income and cash flows for the three month periods ended March 31, 2000 and 1999. 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 auditing standards generally accepted in the United States, 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 review, 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 accounting principles generally accepted in the United States. We have previously audited, in accordance with auditing standards generally accepted in the United States, the consolidated balance sheet of Lawson Products, Inc. as of December 31, 1999, 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 25, 2000, 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, 1999, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. /s/ ERNST & YOUNG LLP April 17, 2000 7

This Quarterly Report on Form 10-Q for the quarter ended March 31, 2000, contains certain forward-looking statements. These statements are subject to uncertainties and other factors which could cause actual events or results to vary materially from those anticipated. 8

ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL ------------------------------------------------- CONDITION AND RESULTS OF OPERATIONS ----------------------------------- Net sales for the three month period ended March 31, 2000 increased 12.9% to $83,710,000 relative to the similar period of 1999. The sales gain reflects increased contribution from substantially all Lawson operations and from our new subsidiary, ACS/SIMCO. See Note E to Notes to Condensed Consolidated Financial Statements. Net income advanced 22.1% to $6,445,000 ($.64 per diluted share) for the three months ended March 31, 2000 from $5,277,000 ($.50 per share) for the comparable period of 1999. This gain is attributable to higher gross margins, cost containment efforts and the increase in net sales noted above. Per share net income for 2000 and 1999 was positively impacted by the Company's share repurchase program. Cash flows provided by operations for the three months ended March 31, 2000 increased to $8,521,000 from $7,222,000 in the similar period of the prior year. This gain was due primarily to the advance in net income noted above. 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 $871,000 and $2,546,000, respectively, for the three months ended March 31, 2000 and 1999. Capital expenditures during 2000 primarily reflect purchases of computer related equipment, while in 1999 additions to property, plant and equipment primarily reflect costs incurred relative to the construction of a new Lawson outbound facility in Suwanee, Georgia and purchases of computer related equipment. This new facility was substantially completed in the third quarter of 1999 at a cost of approximately $7,000,000, and will be used in place of the Norcross, Georgia facility, which was disposed of in a tax-free exchange as a component of the purchase price of the new facility. In the third quarter of 1999, the Company purchased substantially all of the assets and liabilities of SunSource Inventory Management Company, Inc. (SunSource) and Hillman Industrial Division (Hillman), at a cost of approximately $10.5 million with certain contingent purchase price adjustment features based on future operating results. This all-cash transaction was accounted for as a purchase; accordingly, the accounts and transactions of the acquired company have been included in the consolidated financial statements since the date of acquisition. SunSource and Hillman are distributors of fasteners in the original equipment marketplace. The former business operations of SunSource and Hillman are being conducted through the Company's new subsidiary, ACS/SIMCO. During the first quarter of 2000, the Company purchased 187,000 shares of its own common stock for approximately $4,404,000. Of these purchases, 98,400 shares were acquired relative to the 1999 Board authorization of 500,000 shares and 88,600 shares represented the remaining shares relative to a 1998 stock 9

repurchase authorization of 500,000 shares. In the first quarter of 1999, the Company purchased 40,000 shares of its own common stock for approximately $841,000, relative to the Board's 1996 authorization to repurchase 1,000,000 shares. All shares purchased as of March 31, 2000 have been retired. Funds to purchase these shares were provided by investments and cash flows from operations. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There have been no material changes in market risk at March 31, 2000 from that reported in the Company's Annual Report on Form 10-K for the year ended December 31, 1999. 10

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 was not required to file a Current Report on Form 8-K for the most recently completed quarter. 11

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 April 17, 2000 /s/ Robert J. Washlow --------------- --------------------------------- Robert J. Washlow Chairman of the Board Dated April 17, 2000 /s/ Joseph L. Pawlick --------------- --------------------------------- Joseph L. Pawlick Chief Financial Officer 12

Exhibit 15 April 17, 2000 Board of Directors Lawson Products, Inc. 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 April 17, 2000 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 March 31, 2000. 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. /s/ ERNST & YOUNG LLP

5 1,000 3-MOS DEC-31-2000 MAR-31-2000 13,527 17,131 42,185 1,694 53,770 129,924 79,329 37,892 217,180 38,342 0 0 0 10,017 140,439 217,180 83,710 83,710 29,914 29,914 0 280 3 10,908 4,463 6,445 0 0 0 6,445 0.64 0.64