UNITED STATES
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 JUNE 30, 2002 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 Identification No.)
incorporation or organization)
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.
9,600,707 SHARES, $1 PAR VALUE, AS OF JULY 15, 2002.
----------------------------------------------------
PART I - FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
LAWSON PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA) JUNE 30, DECEMBER 31,
2002 2001
---------------- ----------
(UNAUDITED)
ASSETS
- ------
Current Assets:
Cash and cash equivalents $ 4,188 $ 6,987
Marketable securities 1,084 1,737
Accounts receivable, less allowance for doubtful accounts 48,284 44,314
Inventories (Note B) 60,074 65,543
Miscellaneous receivables and prepaid expenses 11,833 12,009
Deferred income taxes 2,486 2,471
-------------- --------------
Total Current Assets 127,949 133,061
Property, plant and equipment, less allowances for depreciation and
amortization 39,981 39,059
Investments in real estate 1,105 945
Deferred income taxes 10,767 10,679
Goodwill, less accumulated amortization 28,649 28,810
Other assets 15,892 20,226
-------------- --------------
Total Assets $ 224,343 $ 232,780
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current Liabilities:
Revolving line of credit $ 5,000 $ 4,000
Accounts payable 6,048 6,948
Accrued expenses and other liabilities 16,762 21,414
-------------- --------------
Total Current Liabilities 27,810 32,362
-------------- --------------
Accrued liability under security bonus plans 19,805 19,297
Revolving line of credit --- 10,000
Other 12,188 11,223
-------------- --------------
31,993 40,520
-------------- --------------
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 - 9,606,107 shares; 2001- 9,629,307 shares) 9,606 9,629
Capital in excess of par value 2,100 913
Retained earnings 154,807 151,554
Accumulated other comprehensive income (1,973) (2,198)
--------------- ---------------
Total Stockholders' Equity 164,540 159,898
-------------- --------------
Total Liabilities and Stockholders' Equity $ 224,343 $ 232,780
============== ==============
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 FOR THE
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------------- ---------------------
2002 2001 2002 2001
--------------- --------------- --------------- ----------
Net sales $ 99,890 $ 98,980 $ 195,636 $ 182,630
Cost of goods sold (Note B) 35,343 33,888 69,047 63,825
-------------- -------------- -------------- --------------
Gross profit 64,547 65,092 126,589 118,805
Selling, general and administrative expenses 56,995 58,214 113,037 106,845
-------------- -------------- -------------- --------------
Operating income 7,552 6,878 13,552 11,960
Investment and other income 535 303 1,018 1,046
Interest expense 31 254 104 254
-------------- -------------- -------------- --------------
Income before income taxes 8,056 6,927 14,466 12,752
Provision for income taxes 3,360 2,939 5,938 5,526
-------------- -------------- -------------- --------------
Net income $ 4,696 $ 3,988 $ 8,528 $ 7,226
============== ============== ============== ==============
Net income per share of common stock:
Basic $ 0.49 $ 0.41 $ 0.89 $ 0.74
============== ============== ============== ==============
Diluted $ 0.49 $ 0.41 $ 0.88 $ 0.74
============== ============== ============== ==============
Cash dividends declared per
share of common stock $ 0.16 $ 0.16 $ 0.32 $ 0.32
============== ============== ============== ==============
Weighted average shares outstanding:
Basic 9,611 9,711 9,619 9,710
============== ============== ============== ==============
Diluted 9,643 9,740 9,647 9,736
============== ============== ============== ==============
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
SIX MONTHS ENDED
JUNE 30,
2002 2001
--------------- ----------
Operating activities:
Net income $ 8,528 $ 7,226
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 3,454 3,864
Changes in operating assets and liabilities (1,139) (24,497)
Other 1,768 688
-------------- --------------
Net Cash Provided by (Used in) Operating Activities 12,611 (12,719)
-------------- ---------------
Investing activities:
Additions to property, plant and equipment (3,605) (3,755)
Purchases of marketable securities (4,679) (9,219)
Proceeds from sale of marketable securities 5,632 33,586
Acquisition of IPD and Kent Automotive --- (34,378)
Other 356 100
-------------- --------------
Net Cash Used in Investing Activities (2,296) (13,666)
--------------- ---------------
Financing activities:
Purchases of treasury stock (2,284) (46)
Proceeds from revolving line of credit 26,000 32,400
Payments on revolving line of credit (35,000) (9,000)
Dividends paid (3,079) (3,010)
Other 1,249 122
-------------- --------------
Net Cash Provided by (Used in) Financing Activities (13,114) 20,466
--------------- --------------
Decrease in Cash and Cash Equivalents (2,799) (5,919)
Cash and Cash Equivalents at Beginning of Period 6,987 7,912
-------------- --------------
Cash and Cash Equivalents at End of Period $ 4,188 $ 1,993
============== ==============
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 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 June 30, 2002, the Condensed
Consolidated Statements of Income for the three and six month periods ended June
30, 2002 and 2001 and the Condensed Consolidated Statements of Cash Flows for
the six month periods ended June 30, 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 three and six month periods
ended June 30, 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 June 30, 2002 and
cost of goods sold for the three and six month periods ended June 30, 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 three and six months of 2002 and 2001 are as follows (in thousands):
Three months ended June 30,
2002 2001
---- ----
Net income $4,696 $3,988
Foreign currency translation adjustments 342 378
------- --------
Comprehensive income $5,038 $4,366
====== ======
Six months ended June 30,
2002 2001
---- ----
Net income $8,528 $7,226
Foreign currency translation adjustments 225 (196)
------- ---------
Comprehensive income $8,753 $7,030
====== ======
The components of accumulated other comprehensive income, net of related tax, at
June 30, 2002 and December 31, 2001 consist only of foreign currency translation
adjustments.
D) Earnings per Share
The calculation of dilutive weighted average shares outstanding for the three
and six months ended June 30, 2002 and 2001 are as follows (in thousands):
Three months ended June 30,
2002 2001
---- ----
Basic weighted average shares outstanding 9,611 9,711
Dilutive impact of options outstanding 32 29
------- -------
Dilutive weighted average shares outstanding 9,643 9,740
===== =====
-5-
Six months ended June 30,
2002 2001
---- ----
Basic weighted average shares outstanding 9,619 9,710
Dilutive impact of options outstanding 28 26
------- -------
Dilutive weighted average shares outstanding 9,647 9,736
===== =====
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 June 30, 2002.
F) 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 $8.0 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,
telephone 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 completed its initial valuation of the
carrying value of the recorded goodwill as required under the statement and
determined the carrying value was appropriately recorded.
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 for the three
and six-month periods in 2001 by approximately $241,000 to $4,229,000 ($.43 per
diluted share) and $272,000 to $7,498,000, ($.77 per diluted share),
respectively.
Intangible assets subject to amortization, included within other assets, were as
follows (in thousands):
June 30, 2002
-------------
Net
Gross Accumulated Carrying
Balance Amortization Amount
Trademarks and tradenames $1,400 $229 $1,171
Customer lists 650 16 634
------- ----- --------
$2,050 $245 $1,805
------ ---- ------
-6-
December 31, 2001
-----------------
Net
Gross Accumulated Carrying
Balance Amortization Amount
Trademarks and tradenames $1,400 $137 $1,263
Customer lists 650 --- 650
------- ------- -------
$2,050 $137 $1,913
------ ---- ------
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
(MRO) distribution, 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 June 30,
------------------------------------
In thousands 2002 2001
- --------------------------------------------------------------------------------
Net sales
MRO distribution $ 78,878 $ 80,612
OEM distribution 14,576 12,570
International distribution 6,439 5,798
------------------------------------
Consolidated total $ 99,890 $ 98,980
------------------------------------
Operating income (loss)
MRO distribution $ 6,822 $ 6,011
OEM distribution 1,055 653
International distribution (325) 214
Consolidated total $ 7,552 $ 6,878
------------------------------------
The reconciliation of segment profit to consolidated income before income taxes
consisted of the following:
Three Months Ended June 30,
------------------------------------
In thousands 2002 2001
- --------------------------------------------------------------------------------
Total operating income from
Reportable segments $ 7,552 $ 6,878
Investment and other income 535 303
Interest expense (31) (254)
------------------------------------
Income before income taxes $ 8,056 $ 6,927
------------------------------------
Six Months Ended June 30,
------------------------------------
In thousands 2002 2001
- --------------------------------------------------------------------------------
Net sales
MRO distribution $ 154,659 $ 147,783
OEM distribution 29,060 25,866
International distribution 11,917 8,981
------------------------------------
Consolidated total $ 195,636 $ 182,630
------------------------------------
Operating income (loss)
MRO distribution $ 12,314 $ 10,953
OEM distribution 2,122 1,256
International distribution (884) (249)
------------------------------------
Consolidated total $ 13,552 $ 11,960
------------------------------------
The reconciliation of segment profit to consolidated income before income taxes
consisted of the following:
Six Months Ended June 30,
------------------------------------
In thousands 2002 2001
- --------------------------------------------------------------------------------
Total operating income from
Reportable segments $ 13,552 $ 11,960
Investment and other income 1,018 1,046
Interest expense (104) (254)
------------------------------------
Income before income taxes $ 14,466 $ 12,752
------------------------------------
-7-
Asset information related to the Company's reportable segments consisted of the
following:
In thousands June 30, 2002 December 31, 2001
- --------------------------------------------------------------------------------
Total assets
MRO distribution $ 156,541 $ 165,127
OEM distribution 33,794 34,183
International distribution 20,755 20,320
------------------------------------
Total for reportable segments 211,090 219,630
Corporate 13,253 13,150
------------------------------------
Consolidated total $ 224,343 $ 232,780
------------------------------------
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
---------
$28,810
---------
-8-
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 June 30, 2002 and the related condensed
consolidated statements of income for the three month and six month periods
ended June 30, 2002 and 2001 and the condensed consolidated statements of cash
flows for the six month periods ended June 30, 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 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 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
July 15, 2002
-9-
This Quarterly Report on Form 10-Q for the quarter ended June 30, 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.
-10-
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS
------------------------------------
Net sales for the three and six-month periods ended June 30, 2002 increased 0.9%
to $99,890,000 and 7.1% to $195,636,000, respectively, relative to the
comparable periods of 2001. Maintenance, Repair and Replacement (MRO)
distribution net sales decreased by $1.7 million in the second quarter due to
continuing difficult market conditions. The $6.9 million increase in net sales
year-to-date is attributable to the 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). International distribution sales for the six-month period were also
positively impacted by the sales of IPD and Kent in Canada, representing $2.2
million of the segment increase of $2.9 million. Original Equipment Manufacturer
(OEM) net sales increased $2.0 million and $3.2 million, respectively, for the
three and six-month periods ended June 30, 2002. These sales gains are
attributable to increased sales from new customer development.
Operating income for the three and six-month periods ended June 30, 2002 rose
9.8% and 13.3%, respectively, over the similar periods of 2001. The MRO and OEM
segments realized increases resulting primarily from the higher net sales noted
above and FASB Statement No. 142's non-amortization of goodwill requirement,
while prior year results were negatively impacted by expenses associated with
the IPD/Kent acquisition. During 2002, the Company invested in the expansion of
sales and distribution activities in the international distribution segment in
the anticipation of increased sales activity, resulting in higher operating
losses as compared to the similar periods of 2001.
Net income advanced 17.8% to $4,696,000 ($.49 per diluted share) and 18.0% to
$8,528,000 ($.88 per diluted share) for the three and six-month periods,
respectively, compared to the similar periods of 2001. The increases are
attributable to the gains in net sales, a lower effective income tax rate and
the non-amortization of goodwill. 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 six months ended June 30, 2002 were
$12.6 million. The Company used $12.7 million of cash in operations for the
comparable period of 2001. The 2002 improvement was due primarily to the advance
in net income noted above, as well as net decreases in inventories and other
assets. In 2001, cash flows from operations were negatively impacted by
increases in accounts receivable, inventories and other current assets largely
associated with the acquisition of IPD and Kent. Additions to property, plant
and equipment were $3.6 million and $3.8 million, respectively, for the six
months ended June 30, 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.
During the first six months of 2002, the Company purchased 76,150 shares of its
own common stock for approximately $2,284,000. Of these purchases, 73,315 shares
were acquired pursuant to the 2000 Board authorization to purchase up to 500,000
shares. The additional 2,835 shares purchased during the first six months of
2002 represented the remaining shares authorized for purchase under the 1999
Board authorization to purchase up to 500,000 shares. In the first six months of
2001, the Company purchased 1,647 shares of its own common stock for
approximately $46,000. These shares were acquired pursuant to the 1999 Board
authorization described above. All shares purchased as of June 30, 2002 have
been retired. Funds to purchase these shares were provided by investments and
cash flow from operations. Current investments, cash flow 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.
-11-
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in market risk at June 30, 2002 from that
reported in the Company's Annual Report on Form 10-K for the year ended December
31, 2001.
-12-
PART II
OTHER INFORMATION
Items 1, 2, 3 and 5 are inapplicable and have been omitted from this report.
Item 4. Submission of Matters to a Vote of Security Holders.
(a) The annual meeting of stockholders of Lawson Products, Inc. was
held on May 14, 2002.
(b) Set forth below is the tabulation of the votes on each nominee for
election as a director:
For Withheld
Authority
Ronald B. Port, M.D. 9,193,854 135,015
Robert G. Rettig 9,211,787 117,082
Robert M. Melzer 9,217,437 111,432
Messers. Brophey, Saranow and Shaffer continue to serve as directors of
the Company for terms ending in 2003 and Messers. Kalish, Port and Washlow
continue to serve as directors of the Company for terms ending in 2004.
Item 6. Exhibits and Reports on Form 8-K.
(a) 10 Lawson Products, Inc. 2002 Stock Equivalents Plan for
Non-Employee Directors
15 Letter from Ernst & Young LLP Regarding Unaudited
Interim Financial Information
99.1 Certification pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
(b) The registrant was not required to file a Current Report on
Form 8-K for the most recently completed quarter.
-13-
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 August 14, 2002 /s/ Robert J. Washlow
--------------- -----------------------------------
Robert J. Washlow
Chairman of the Board
Dated August 14, 2002 /s/ Joseph L. Pawlick
--------------- -----------------------------------
Joseph L. Pawlick
Chief Financial Officer
(Principal Financial Officer)
-14-