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 March 31, 2002 Commission file no. 0-10546
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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
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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
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. 9,618,107 Shares, $1 par value,
as of April 16, 2002.
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
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LAWSON PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share data) March 31, 2002 December 31, 2001
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(UNAUDITED)
ASSETS
Current Assets:
Cash and cash equivalents $ 3,917 $ 6,987
Marketable securities 498 1,737
Accounts receivable, less allowance for doubtful accounts 46,829 44,314
Inventories (Note B) 60,604 65,543
Miscellaneous receivables and prepaid expenses 10,461 12,009
Deferred income taxes 2,478 2,471
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Total Current Assets 124,787 133,061
Property, plant and equipment, less
allowances for depreciation and amortization 39,046 39,059
Investments in real estate 1,095 945
Deferred income taxes 10,908 10,679
Goodwill, less accumulated amortization 28,744 28,810
Other assets 16,996 20,226
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Total Assets $ 221,576 $ 232,780
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Revolving line of credit $ 5,000 $ 4,000
Accounts payable 5,628 6,948
Accrued expenses and other liabilities 16,301 21,414
Income taxes 1,715 ---
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Total Current Liabilities 28,644 32,362
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Accrued liability under security bonus plans 19,713 19,297
Revolving line of credit --- 10,000
Other 11,461 11,223
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31,174 40,520
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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-(2002-9,618,107 shares; 2001-9,629,307 shares) 9,618 9,629
Capital in excess of par value 921 913
Retained earnings 153,534 151,554
Accumulated other comprehensive income (2,315) (2,198)
0
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Total Stockholders' Equity 161,758 159,898
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Total Liabilities and Stockholders' Equity $ 221,576 $ 232,780
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See notes to condensed consolidated financial statements.
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,
2002 2001
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Net sales $ 95,746 $ 83,650
Cost of goods sold (Note B) 33,704 29,937
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Gross profit 62,042 53,713
Selling, general and administrative expenses 56,042 48,631
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Operating income 6,000 5,082
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Investment and other income 483 743
Interest expense 73 ---
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Income before income taxes 6,410 5,825
Provision for income taxes 2,578 2,587
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Net income $ 3,832 $ 3,238
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Net income per share of common stock:
Basic $ 0.40 $ 0.33
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Diluted $ 0.40 $ 0.33
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Cash dividends declared per
share of common stock $ 0.16 $ 0.16
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Weighted average shares outstanding:
Basic 9,627 9,710
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Diluted 9,657 9,730
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See notes to condensed consolidated financial statements.
LAWSON PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Amounts in thousands)
For the
Three Months Ended
March 31,
2002 2001
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Operating activities:
Net income $ 3,832 $ 3,238
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 1,695 1,764
Changes in operating assets and liabilities 1,628 (7,077)
Other 538 222
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Net Cash Provided by (Used in) Operating Activities 7,693 (1,853)
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Investing activities:
Additions to property, plant and equipment (1,322) (2,191)
Purchases of marketable securities (2,883) (7,257)
Proceeds from sale of marketable securities 4,122 28,735
Acquisition of IPD and Kent Automotive --- (28,369)
Other 176 ---
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Net Cash Provided by (Used in) Investing Activities 93 (9,082)
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Financing activities:
Proceeds from revolving line of credit 14,000 7,000
Payments on revolving line of credit (23,000) ---
Dividends paid (1,541) (1,456)
Other (315) 122
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Net Cash Provided by (Used in) Financing Activities (10,856) 5,666
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Decrease in Cash and Cash Equivalents (3,070) (5,269)
Cash and Cash Equivalents at Beginning of Period 6,987 7,912
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Cash and Cash Equivalents at End of Period $ 3,917 $ 2,643
================== =================
See notes to condensed consolidated financial statements.
Part I
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
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NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
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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 Lawson Products, Inc.'s (the
"Company") Annual Report on Form 10-K for the year ended December 31, 2001. The
Condensed Consolidated Balance Sheet as of March 31, 2002, the Condensed
Consolidated Statements of Income for the three month periods ended March 31,
2002 and 2001 and the Condensed Consolidated Statements of Cash Flows for the
three month periods ended March 31, 2002 and 2001 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, 2002
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2002.
B) Inventories (consisting of primarily finished goods) at March 31, 2002 and
cost of goods sold for the three month periods ended March 31, 2002 and 2001
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
2001, this adjustment increased net income by approximately $2,055,000.
C) Total comprehensive income and its components, net of related tax, for the
first quarter of 2002 and 2001 are as follows (in thousands):
2002 2001
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Net income $ 3,832 $ 3,238
Foreign currency translation adjustments (117) (574)
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Comprehensive income $ 3,715 $ 2,664
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The components of accumulated other comprehensive income, net of related tax, at
March 31, 2002 and December 31, 2001 are as follows (in thousands):
2002 2001
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Foreign currency translation adjustments $ (2,315) $ (2,198)
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Accumulated other comprehensive income $ (2,315) $ (2,198)
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D) Earnings per Share
The calculation of dilutive weighted average shares outstanding at March 31,
2002 and 2001 are as follows (in thousands):
2002 2001
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Basic weighted average shares outstanding 9,627 9,710
Dilutive impact of options outstanding 30 20
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Dilutive weighted average shares outstanding 9,657 9,730
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E) Revolving Line of Credit
In March 2001 the Company entered into a $50 million revolving line of credit.
The revolving line of credit matures five years from the closing date and
carries an interest rate of prime minus 150 basis points floating or
LIBOR plus 75 basis points, at the Company's option. Interest is payable
quarterly on prime borrowings and at the earlier of quarterly or maturity with
respect to the LIBOR contracts. The line of credit contains certain financial
covenants regarding interest coverage, minimum stockholders' equity and working
capital, all of which the Company was in compliance with at March 31, 2002. As
the Company has the ability and intent to repay the $5 million outstanding
balance with the next twelve months, the $5 million is recorded in current
liabilities.
F) Business Acquisition
On March 30, 2001, the Company purchased certain assets of Premier Farnell's
Cleveland based North American Industrial Products (IPD) and Kent Automotive
(Kent) Divisions for approximately $28.4 million plus approximately $7.2 million
for related inventories. This all-cash transaction was accounted for as a
purchase; accordingly, the accounts and transactions of the acquired business
have been included in the consolidated financial statements since the date of
acquisition. Under the agreement, the Company acquired the field sales, inside
sales and customer service professionals, the customer accounts, certain
administrative executives, and various intellectual properties, including
trademarks and trade names of the divisions in certain territories.
The assets acquired were recorded at fair values based on actual purchase cost
of inventories and valuations of various intellectual properties, including
trademarks and trade names of the IPD and Kent divisions. This acquisition did
not require a significant investment by the Company in facilities or equipment.
As the Company only acquired portions of the inventory and sales professionals
of the IPD and Kent businesses, the Company is unable to provide any meaningful
pro forma information of prior period results.
G) New Accounting Standards
In June 2001, the Financial Accounting Standards Board issued Statement No. 142,
"Goodwill and Intangible Assets." Statement No. 142 provides that amortization
of goodwill no longer be required but does require the testing of the goodwill
for impairment at least annually. Statement No. 142 was adopted by the Company
as of January 1, 2002. The Company has not yet completed its initial valuation
of the carrying value of the recorded goodwill as required under the statement.
If Statement 142 had been adopted at the beginning of the first quarter of 2001,
the non-amortization of goodwill would have increased net income by
approximately $31,000 to $3,269,000, which is $.34 a diluted share.
Intangible assets subject to amortization, included within other assets, were as
follows (in thousands):
December 31, 2001
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Net
Gross Accumulated Carrying
Balance Amortization Amount
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Trademarks and tradenames $ 1,400 $ 137 $ 1,263
Customer Lists 650 --- 650
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$ 2,050 $ 137 $ 1,913
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At December 31, 2001, trademarks and tradenames are being amortized over a
weighted average 15.2 years. Customer lists are being amortized over 20 years.
Amortization expense for intangible assets is expected to be $216,000, $216,000,
$116,000, $83,000 and $83,000 for 2002 and the next four years.
H) Segment Reporting
The Company has three reportable segments: Maintenance, Repair and Replacement
distribution (MRO), Original Equipment Manufacturer distribution and
manufacturing (OEM), and international distribution.
Financial information for the Company's reportable segments consisted of the
following:
Three Months Ended March 31,
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In thousands 2002 2001
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Net sales
MRO distribution $75,781 $67,171
OEM distribution 14,484 13,296
International distribution
5,481 3,183
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Consolidated total $95,746 $83,650
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Operating income (loss)
MRO distribution $ 5,491 $ 4,941
OEM distribution 1,068 604
International distribution (559 )
(463)
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Consolidated total $ 6,000 $ 5,082
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The reconciliation of segment profit to consolidated income before income taxes
consisted of the following:
Three Months Ended March 31,
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In thousands 2002 2001
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Total operating income from
reportable segments $ 6,000 $ 5,082
Investment and other income
483 743
Interest expense )
(73 ---
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Income before income taxes $ $ 5,825
6,410
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Asset information related to the Company's reportable segments consisted of the
following:
In thousands March 31, 2002 December 31, 2001
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Total assets
MRO distribution $ 156,004 $ 165,127
OEM distribution 33,392 34,183
International distribution
18,794 20,320
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Total for reportable segments
208,190 219,630
Corporate 13,386 13,150
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Consolidated total $ 221,576 $ 232,780
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At December 31, 2001, the carrying value of goodwill within each reportable
segment was as follows (in thousands):
MRO distribution $22,265
OEM distribution 2,251
International distribution 4,294
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$28,810
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, 2002 and the related condensed
consolidated statements of income and cash flows for the three-month periods
ended March 31, 2002 and 2001. 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, 2001, 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 28, 2002, 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, 2001, 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 16, 2002
This Quarterly Report on Form 10-Q for the quarter ended March 31, 2002,
contains certain forward-looking statements pertaining to the ability of the
Company to finance future growth, cash dividends and capital expenditures, the
ability to successfully integrate acquired businesses and certain other matters.
These statements are subject to uncertainties and other factors which could
cause actual events or results to vary materially from those anticipated. The
Company does not undertake any obligation to revise these forward-looking
statements to reflect future events or circumstances.
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS
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Net sales for the three-month period ended March 31, 2002 increased 14.5% to
$95,746,000 relative to the similar period of 2001. Maintenance, Repair and
Replacement (MRO) distribution net sales increased by $8.6 million, including
$11.7 million in sales generated by the addition of the field and inside sales
representatives from the IPD and Kent divisions of the North American business
of Premier Farnell, acquired March 30, 2001 (Please refer to Note F). These
sales gains more than offset reduced contributions by other MRO units.
International distribution sales were also positively impacted by the sales of
IPD and Kent in Canada, representing $2.1 million of the segment increase of
$2.3 million. Original Equipment Manufacturer (OEM) net sales increased $1.2
million.
Operating income for the three-month period ended March 31, 2002 advanced $.9
million, or 18.1% over the comparable period of 2001. This increase was
primarily due to the higher net sales of the MRO segment noted above and
slightly higher gross margins, which more than offset increases in selling,
general and administrative (S,G&A) expenses. The OEM segment also realized an
increase in operating income, resulting from higher net sales and lower selling
S,G&A expenses, partially offset by lower gross margins. Operating losses for
the international distribution segment were slightly higher as a result of
higher S,G&A expenses, which more than offset the contribution from higher net
sales. Both the MRO and OEM segments operating income benefited from FASB
Statement No. 142's non-amortization of goodwill requirement.
Net income increased 18.3% to $3,832,000 ($.40 per diluted share) for the three
months ended March 31, 2002 from $3,238,000 ($.33 per diluted share) for the
similar period of 2001. This increase is attributable to the gains in net sales
and slightly higher gross margins noted above as well as a lower effective
income tax rate, which more than offset higher S,G&A expenses, lower investment
income and higher interest expense.
The Company's acquisition of IPD and Kent was completed using the proceeds from
the sale of marketable securities and borrowings under the $50 million unsecured
line of credit which the Company entered into in March 2001. This resulted in
the decrease in investment and other income and an increase in interest expense
for the three months ended March 31, 2002. Per share net income for 2002 and
2001 was positively impacted by the Company's share repurchase program.
Cash flows provided by operations for the three months ended March 31, 2002 were
$7.7 million while the Company used $1.9 million of cash in operations for the
comparable period of 2001. This increase was due primarily to the advance in net
income noted above, as well as net decreases in operating assets, primarily
inventories and other assets, while in 2001, cash flows provided from operating
income were negatively impacted by decreases in accrued expenses and accounts
payable. Additions to property, plant and equipment were $1.3 million and $2.2
million, respectively, for the three months ended March 31, 2002 and 2001.
Consistent with prior years, capital expenditures were incurred primarily for
improvement of existing facilities and for the purchase of related equipment as
well as for the improvement of new leased facilities. Capital expenditures
during 2001 primarily reflect purchases of computer related equipment and
warehouse equipment and building improvements.
During the first quarter of 2002, the Company purchased 11,600 shares of its own
common stock for approximately $325,000. Of these purchases, 8,765 shares were
acquired pursuant to the 2000 Board authorization to purchase up to 500,000
shares and 2,835 shares represented the remaining shares authorized for purchase
under the 1999 Board authorization to purchase up to 500,000 shares. All shares
purchased as of March 31, 2002 have been retired. Funds to purchase these shares
were provided by investments and cash flows from operations. Current
investments, cash
flows from operations and the $50,000,000 unsecured line of credit are expected
to be sufficient to finance the Company's future growth, cash dividends and
capital expenditures.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in market risk at March 31, 2002 from that
reported in the Company's Annual Report on Form 10-K for the year ended December
31, 2001.
Part II
OTHER INFORMATION
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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
(b) The registrant was not required to file a Current
Report on Form 8-K for the most recently
completed quarter.
SIGNATURES
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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 16, 2002 /s/ Robert J. Washlow
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Robert J. Washlow
Chairman of the Board
(principal executive officer)
Dated April 16 , 2002 /s/ Joseph L. Pawlick
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Joseph L. Pawlick
Chief Financial Officer
(principal financial officer)
Exhibit 15
April 16, 2002
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 16, 2002 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, 2002.
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
