SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended December 31, 2003
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [No Fee Required]
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)
Registrant's telephone number, including area code: (847) 827-9666
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of Each Class on which registered
------------------- -------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $1.00 PAR VALUE
(Title of class)
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 X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss.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. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No ......
The aggregate market value of the Registrant's voting stock held by
non-affiliates (based upon the per share closing price of $27.41) on June 30,
2003 was approximately $133,966,000.
As of March 1, 2004, 9,488,369 shares of Common Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated into this Form 10-K by reference:
Portions of the Proxy Statement for Annual Meeting of Stockholders to be held on
May 11, 2004 filed with the SEC Part III
TABLE OF CONTENTS
PART I PAGE
----
Item 1. Business 2
Item 2. Properties 6
Item 3. Legal Proceedings 7
Item 4. Submission of Matters to a Vote of Security Holders 7
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 8
Item 6. Selected Financial Data 9
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 7a. Quantitative and Qualitative Disclosures About
Market Risk 14
Item 8. Financial Statements and Supplementary Data 15
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 33
Item 9A. Controls and Procedures 33
PART III
Item 10. Directors and Executive Officers of the Registrant 33
Item 11. Executive Compensation 34
Item 12. Security Ownership of Certain Beneficial Owners
and Management 34
Item 13. Certain Relationships and Related Transactions 34
Item 14. Principal Accountant Fees and Services 34
PART IV
Item 15. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K 34
EXHIBITS
SIGNATURE PAGE 37
"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 include, but are not limited to, those related to
general economic conditions and market conditions in the original equipment
manufacturers and maintenance, repair and replacement distribution industries in
North America and to a lesser extent, the United Kingdom, the Company's ability
to obtain new customers and manage growth, material or labor cost increases,
competition in the Company's business, operating margin risk due to competitive
pricing and operating efficiencies, successful integration of acquisitions, the
Company's dependence on key personnel and the length of economic downturns in
the Company's markets. In the event of continued economic downturn, the Company
could experience additional customer bankruptcies, reduced volume of business
from its existing customers and lost volume due to plant shutdowns or
consolidations by the Company's customers or other factors that may be referred
to or noted in the Company's reports filed with the Securities and Exchange
Commission from time to time. 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.
PART I
ITEM 1. BUSINESS.
Lawson Products, Inc. was incorporated in Illinois in 1952 and reincorporated in
Delaware in 1982. The Company has four reportable segments: (i) maintenance,
repair and replacement distribution in the U.S.; (ii) international maintenance,
repair and replacement distribution in Canada; (iii) original equipment
manufacturer ("OEM") distribution and manufacturing in the U.S. and (iv)
international original equipment manufacturer distribution in the United Kingdom
and Mexico. Please see Note O in the notes to the consolidated financial
statements for additional information regarding segment results.
PRODUCTS
The Company is a seller and distributor of systems, services and
products. The Company also manufactures and distributes production and
specialized component parts to the OEM marketplace. The Company offers to
customers over 900,000 expendable maintenance, repair and replacement products.
These products may be divided into three broad categories: Fasteners, Fittings
and Related Parts, such as screws, nuts, rivets and other fasteners; Industrial
Supplies, such as hoses and hose fittings, lubricants, cleansers, adhesives and
other chemicals, as well as files, drills, welding products and other shop
supplies; and Automotive and Equipment Maintenance Parts, such as primary
wiring, connectors and other electrical supplies, exhaust and other automotive
parts. The Company estimates that these categories of products accounted for the
indicated percentages of its total consolidated net sales for 2003, 2002 and
2001 respectively:
PERCENTAGE OF
CONSOLIDATED
NET SALES
-------------------------
2003 2002 2001
---- ---- ----
Fasteners, Fittings and Related Parts............... 43% 44% 45%
Industrial Supplies................................. 48 47 47
Automotive and Equipment Maintenance Parts.......... 9 9 8
---- -- --
100% 100% 100%
Substantially all of the Company's maintenance and repair products are
manufactured by others and must meet the Company's specifications. Approximately
90% of the Company's products are sold under the Company label. Substantially
all maintenance and repair items which the Company distributes are purchased by
the Company in bulk and subsequently repackaged in smaller quantities. The
Company regularly uses a large number of suppliers but has no long-term or fixed
price contracts with any of them. Most maintenance and repair items which the
Company distributes are purchased from several sources, and the Company believes
that the loss of any single supplier would not significantly affect its
operations. No single supplier accounted for more than 2.9% of the Company's
purchases in 2003.
Production components sold to the OEM marketplace may be manufactured
to customers' specification or purchased from other sources.
MARKETS
The Company's principal markets are as follows:
Heavy Duty Equipment Maintenance. Customers in this market include
operators of trucks, buses, agricultural implements, construction and road
building equipment, mining, logging and drilling equipment and other
off-the-road equipment. The Company estimates that approximately 25% of 2003
sales were made to customers in this market.
In-Plant and Building Maintenance. This market includes plants engaged
in a broad range of manufacturing and processing activities, as well as
institutions such as hospitals, universities, school districts and government
units. The Company estimates that approximately 42% of 2003 sales were made to
customers in this market.
Vehicle Maintenance and Transportation. Customers in this market
include automobile service center chains, independent garages, automobile
dealers, car rental agencies and other fleet operators. The Company estimates
that approximately 17% of 2003 sales were made to customers in this market.
Original Equipment Manufacturers. This market includes plants engaged
in a broad range of manufacturing and processing activities. The Company
estimates that approximately 16% of 2003 sales were made to customers in this
market.
At December 31, 2003, the Company had approximately 267,000 customers,
the largest of which accounted for approximately one percent of net sales during
2003. Sales were made through a force of approximately 1,800 sales
representatives at December 31, 2003. Included in this group were 260 district
and zone managers, each of whom, in addition to his or her own sales activities,
acted in an advisory capacity to other sales representatives in a designated
area and 47 regional managers who coordinate regional marketing efforts. Sales
representatives, including district and zone managers, are compensated on a
commission basis and are responsible for repayment of commissions on their
respective uncollectible accounts. In addition to the sales representatives and
district, zone and regional managers discussed above, the Company had
approximately 1,370 employees at December 31, 2003.
The Company's products are sold in all 50 states, Mexico, Puerto Rico,
the District of Columbia, Canada and the United Kingdom. The Company believes
that an important factor in its success is its ability to service customers
promptly. During the past five years, more than 99.2% of all stocked orders were
shipped to the customer within 24 hours after an order was received by the
Company. This rapid delivery is facilitated by computer controlled order entry
and inventory control systems in each general distribution center. In addition,
the receipt of customer orders at the distribution facilities has been
accelerated by portable facsimile transmission equipment, personal computer
systems and other electronic devices used by sales representatives. Customer
orders are delivered by common carriers.
INVENTORY
The Company is required to carry significant amounts of inventory in
order to meet its high standards of rapid processing of customer orders. The
Company has historically funded its working capital requirements internally.
Such internally generated funds, along with a $50 million unsecured revolving
line of credit, are expected to finance the Company's future growth and working
capital requirements.
DISTRIBUTION AND MANUFACTURING FACILITIES
Substantially all of the Company's maintenance products are stocked in
and distributed from each of its eight general distribution centers in: Addison,
Illinois; Reno, Nevada; Farmers Branch, Texas; Suwanee, Georgia; Fairfield, New
Jersey; Mississauga, Ontario, Canada; Bradley Stoke (Bristol) England and
Guadalajara, Mexico. Chemical products are distributed from a facility in Vernon
Hills, Illinois and welding products are distributed from a facility in
Charlotte, North Carolina. Production components are stocked in and distributed
from five centers located in Decatur, Alabama; Des Plaines, Illinois; Memphis,
Tennessee; Lenexa, Kansas and Cincinnati, Ohio. Production components are
manufactured in Decatur, Alabama. In the opinion of the Company, all existing
facilities are in good condition and are well maintained. All are being used
substantially to capacity on a single shift basis, except the manufacturing
facility in Decatur, Alabama which operates two shifts and the inbound facility
in Des Plaines, Illinois, which operates two shifts. Further expansion of
warehousing capacity may require new or expanded warehouses, some of which may
be located in new geographical areas.
INTERNATIONAL OPERATIONS
Approximately 8% of the Company's net sales came from international
sales, primarily in Canada, the United Kingdom and Mexico.
Canadian operations are conducted at the Company's 95,000 square foot
general distribution center in Mississauga, Ontario, a suburb of Toronto. These
operations constituted less than 5% of the Company's net sales during 2003.
Operations in the United Kingdom are conducted under the name of
Assembly Component Systems Limited from a 10,000 square foot general
distribution center in Bradley Stoke (Bristol) England. Prior to December 2003,
the operations were conducted under the name Lawson Products Limited. These
operations constituted less than 3% of the Company's net sales during 2003.
Operations in Mexico are conducted under the name of Lawson Products de
Mexico S.A. de C.V. from a 10,000 square foot facility in Guadalajara, Mexico.
These operations constituted less than 2% of the Company's net sales during
2003.
COMPETITION
The Company encounters intense competition from several national
distributors and manufacturers and a large number of regional and local
distributors. Due to the nature of its business and the absence of reliable
trade statistics, the Company cannot estimate its position in relation to its
competitors. However, the Company recognizes that some competitors may have
greater financial and personnel resources, handle more extensive lines of
merchandise, operate larger facilities and price some merchandise more
competitively than the Company. Although the Company believes that the prices of
its products are competitive, it endeavors to meet competition primarily through
the quality of its product line, its response time and its delivery systems.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers all of whose terms of office expire on May 11,
2004, are as follows:
YEAR FIRST
NAME AND PRESENT ELECTED TO OTHER OFFICES HELD
POSITION WITH COMPANY AGE PRESENT OFFICE DURING THE PAST FIVE YEARS
- --------------------- --- -------------- --------------------------
Robert J. Washlow 59 1999 Mr. Washlow has been Chairman of the Board and Chief
Chairman of the Board, Executive Officer since August 1999. Prior thereto,
Chief Executive Officer Mr. Washlow was Executive Vice President-Corporate
and Director Affairs beginning in 1998, Secretary beginning in
1985. Mr. Washlow was a member of the Office of the
President from 1999 to 2003.
Sidney L. Port 93 2003 Mr. Port has been Vice Chairman of the Board since
Vice Chairman of the Board of 2003. Prior thereto, Mr. Port was Chairman of the
Directors and Director Executive Committee for more than five years.
Jeffrey B. Belford 57 2004 Mr. Belford became Chief Operating Officer in 1999
President and Chief Operating Officer and President in 2004. Mr. Belford was a member of
the Office of the President from 1999 to 2003.
Prior to 1999, Mr. Belford was Executive Vice
President - Operations, Chief Operating Officer
since 1989.
Roger F. Cannon 55 2004 Mr. Cannon was elected Vice President, Field Sales
Executive Vice President, Field Sales Strategy and Development in 2004. He was a member
Strategy and Development of the Office of the President from 1999 to 2003.
Prior to 1999, Mr. Cannon was Executive Vice President,
Sales - Marketing from 1997-1999, and Vice President
Central Field Sales from 1991-1997.
Thomas J. Neri 52 2004 Mr. Neri was elected Executive Vice President,
Executive Vice President, Finance, Finance, Planning and Corporate Development; Chief
Planning and Corporate Development; Financial Officer and Treasurer in 2004. Prior
Chief Financial Officer; and Treasurer thereto, Mr. Neri was a business consultant from
2000 to 2003. From 1993 to 2000, Mr. Neri was
President and Publisher of Pioneer Newspapers, Inc.,
a subsidiary of Hollinger International, a publicly
held international publishing company.
John J. Murray 48 2004 Mr. Murray was elected Group President, MRO and New
Group President, MRO and New Channels Channels in 2004. From 2001 to 2003, Mr. Murray was
the Vice President - Corporate Affairs. From 1998 to
2001, Mr. Murray served as a consultant and outside
director for KMR Industries, Inc., an internet
company. From 1992 to 1997, Mr. Murray was President
and Chief Operating Officer for Park Ohio
Industries, a diversified public company.
Neil E. Jenkins 54 2004 Mr. Jenkins was elected Executive Vice President in
Executive Vice President; Secretary 2004. From 2000 to 2003 Mr. Jenkins has served as
and General Counsel Secretary and General Counsel of the Company. From
1996 to 2000, Mr. Jenkins operated a golf travel
business and was a business consultant.
YEAR FIRST
NAME AND PRESENT ELECTED TO OTHER OFFICES HELD
POSITION WITH COMPANY AGE PRESENT OFFICE DURING THE PAST FIVE YEARS
- --------------------- --- -------------- --------------------------
Jerome Shaffer 76 2004 Mr. Shaffer was elected Vice President and Special
Vice President and Special Advisor to Advisor to the Chief Executive Officer in 2004. For
the Chief Executive Officer and more than five years prior thereto, Mr. Shaffer was
Director Vice President and Treasurer of the Company. Mr.
Shaffer has been a director of the Company since 1987.
Joseph L. Pawlick 61 2003 Mr. Pawlick was elected Senior Vice President,
Senior Vice President, Accounting Accounting in 2003. From 1999 to 2003, Mr. Pawlick
was the Chief Financial Officer of the Company.
Prior to 1999, Mr. Pawlick was Vice President,
Controller and Assistant Secretary of the Company
since 1987.
Victor G. Galvez 47 1999 Mr. Galvez has been Vice President and Controller
Vice President, Controller since 1999. From 1999 to 1994, Mr. Galvez was
Assistant Controller of the Company.
AVAILABLE INFORMATION
The Company's Internet Address is: www.lawsonproducts.com. The Company makes
available free of charge through its website its annual report on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to
those reports filed pursuant to Section 13(a) or 15(d) of the Exchange Act and
Section 16 reports as soon as reasonably practicable after such documents are
electronically filed with the SEC. Our internet website and the information
contained therein or incorporated therein are not intended to be incorporated
into this Annual Report on Form 10-K.
ITEM 2. PROPERTIES.
The Company owns two facilities located in Des Plaines, Illinois,
(152,600 and 27,000 square feet, respectively). These buildings contain the
Company's main administrative activities and an inbound warehouse facility that
principally supports the Addison, Illinois facility and all Lawson distribution
facilities. The Company also leases a facility in Des Plaines, Illinois (114,000
square feet). This building contains administrative and warehouse activities.
Additional administrative, warehouse and distribution facilities owned by the
Company are located in Addison, Illinois (90,000 square feet); Fairfield, New
Jersey (61,000 square feet); Reno, Nevada (97,000 square feet); Suwanee, Georgia
(105,000 square feet); Farmers Branch, Texas (54,500 square feet); and
Mississauga, Ontario, Canada (95,000 square feet). The Company also leases
administrative office space (25,300 square feet) in Independence, Ohio. Chemical
products are distributed from a 105,400 square foot owned facility in Vernon
Hills, Illinois and welding products are distributed from a 40,000 square foot
owned facility located in Charlotte, North Carolina. Administrative, warehouse
and distribution facilities in Bradley Stoke (Bristol) England (10,000 square
feet) are leased by the Company. Administrative and distribution facilities in
Guadalajara, Mexico (10,000 square feet) are leased by the Company. Production
components are distributed from leased facilities in Des Plaines, Illinois
(21,400 sq. ft.) Memphis, Tennessee, (26,300 sq. ft.), Lenexa, Kansas (40,500
sq. ft.) and Cincinnati, Ohio (16,800 sq. ft.). The leased facilities in Des
Plaines, Illinois represent a portion of the 114,000 square foot facility noted
above. The Company owns a 61,000 square foot facility in Decatur, Alabama which
manufacturers and distributes production components. From time to time, the
Company leases additional warehouse space near its present facilities.
Management believes that the current facilities are adequate to meet its needs.
See Item 1, "Business - Distribution and Manufacturing Facilities" for further
information regarding the Company's properties.
ITEM 3. LEGAL PROCEEDINGS.
There is no material pending litigation to which the Company, or any of
its subsidiaries, is a party or to which any of their property is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this Report.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock is traded on the NASDAQ National Market
System under the symbol of "LAWS." The approximate number of stockholders of
record at December 31, 2003 was 871. The following table sets forth the high and
low closing sale prices as reported on the NASDAQ National Market System during
the last two years. The table also indicates the cash dividends for each
outstanding share of common stock paid by the Company during such periods.
2003 2002
----------------------------------- ------------------------------------
CASH DIVIDENDS CASH DIVIDENDS
HIGH LOW PAID PER SHARE HIGH LOW PAID PER SHARE
---- --- -------------- ---- --- --------------
First Quarter $30.81 $23.04 $.16 $29.00 $25.71 $.16
Second Quarter 28.48 24.40 .16 33.09 26.80 .16
Third Quarter 29.87 25.76 .16 30.31 25.68 .16
Fourth Quarter 34.74 27.47 .16 31.90 27.55 .16
ITEM 6. SELECTED FINANCIAL DATA.
The following selected financial data should be read in conjunction
with the Financial Statements of the Company and notes thereto included
elsewhere in this Annual Report. The income statement data and balance sheet
data is for, and as of the end of each of, the years in the five-year period
ended December 31, 2003, are derived from the audited Financial Statements of
the Company.
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
2003 2002 2001 2000 1999
------ ------ ------ ------ ------
Net Sales (1) $389,091 $387,456 $379,407 $348,967 $328,987
Income Before Income Taxes (2) 24,892 23,189 17,142 47,566 40,270
Net Income (3) 16,196 12,447 8,787 28,136 23,928
Total Assets 246,943 225,831 234,206 222,721 215,991
Return on Assets (percent) 6.6 5.5 3.8 12.6 11.1
Noncurrent Liabilities 36,714 31,765 40,520 28,946 27,525
Stockholders' Equity 173,351 162,343 159,898 159,912 150,040
Return on Average
Equity (percent) 9.6 7.7 5.4 18.6 16.5
Per Share of Common Stock (4):
Basic Net Income $1.71 $1.30 $0.91 $2.85 $2.29
Diluted Net Income 1.70 1.30 0.91 2.85 2.29
Stockholders' Equity 18.26 16.96 16.51 16.22 14.37
Cash Dividends Declared 0.66 0.64 0.64 0.60 0.57
Basic Weighted Average
Shares Outstanding 9,492 9,570 9,685 9,860 10,444
Diluted Weighted Average
Shares Outstanding 9,511 9,596 9,708 9,874 10,446
(1) Net sales for 2003, 2002 and 2001 were positively impacted by the
acquisition of the North American Industrial Products and Kent Automotive
Divisions in March 2001. In addition, net sales for the years 2000 and 1999
were also positively impacted by the acquisition of ACS/SIMCO in the third
quarter of 1999.
(2) During 2003, the Company recorded a $2,789 pre tax loss related to the sale
of Lawson Products Limited, the Company's former UK subsidiary.
(3) In 2003, the tax provision includes a $2,157 reduction to reflect the
partial utilization of a capital loss generated by the sale of the
Company's former UK subsidiary. In 2003, 2002 and 1999, the Company
recorded $1,477, $421 and $1760, respectively, after tax, of charges for
compensation arrangements related to management personnel reductions. The
Company adopted SFAS No. 142 as of January 1, 2002. Therefore, the Company
discontinued amortization of goodwill for 2002 and thereafter. Net income
for 2001 was reduced by $731 related to goodwill amortization. In 2001, the
Company recorded non-recurring charges for the write-off of capitalized
software and implementation costs related to an enterprise information
system project which the Company decided to discontinue as well as a
promotional program related to the acquisition of Premier operations. These
charges reduced net income by $5,138 and $2,021, respectively. During 2000,
the Company recorded a gain of $2,136 as a result of the sale of the
Company's interest in a real estate investment. In 1999, a gain of $554 was
recorded on the sale of marketable securities.
(4) These per share amounts were computed using basic weighted average shares
outstanding for all periods presented.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.
SUMMARY OF FINANCIAL PERFORMANCE
2003 2002 2001
- ----------------------------------------- ----------- ------------ ------------
(Dollars in thousands, except per share
data)
Net sales $389,091 $387,456 $379,407
Income before taxes 24,892 23,189 17,142
Net income 16,196 12,447 8,787
Total assets 246,943 225,831 234,206
Return on assets (%) 6.6 % 5.5 % 3.8 %
Stockholders' equity 173,351 162,343 159,898
Return on avg. equity (%) 9.6 % 7.7 % 5.4 %
Diluted earnings per share $1.70 $1.30 $ 0.91
- ----------------------------------------- ----------- ------------ ------------
Lawson Products, Inc. ("Lawson", the "Company") achieved net income growth of
30.1% in 2003 to $16,196. Diluted net income per share for the year 2003 was
$1.70 compared to $1.30 in 2002.
OVERVIEW
Lawson is an international distributor and marketer of systems, services and
products to the industrial, commercial and institutional maintenance, repair and
replacement ("MRO") marketplace. The Company also manufactures and markets
specialized component parts to the original equipment marketplace ("OEM"),
including automotive, appliance, aerospace, construction and transportation
industries.
Lawson markets its products through a network of approximately 1,800 independent
and inside sales representatives. Lawson delivers "the right product, at the
right place, at the right time" through its state-of-the-art distribution
systems.
YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002
As further described in the Notes to Consolidated Financial Statements, Note O -
Segment Reporting, the Company distributes Maintenance, Repair and Replacement
consumables, reporting this activity as the "MRO-US" segment in the United
States and as the "MRO-CAN" segment in Canada. The manufacture and distribution
of specialized component parts in the United States is reported as the "OEM-US"
segment. Distribution of specialized component parts in Mexico and the United
Kingdom is reported as the "OEM-INTL" segment.
The following table presents the Company's net sales results for its MRO and OEM
segments for the past three years:
2003 2002 2001
- ------------------------------- ----------- ----------- ----------
MRO $321.0 $323.4 $320.9
OEM 68.1 64.1 58.5
- ------------------------------- ----------- ----------- ----------
$389.1 $387.5 $379.4
=============================== =========== =========== ==========
The segment sales table above illustrates that OEM sales increased $4.0 million
(6.2%) in 2003 while MRO sales declined $2.4 million (0.7%). In the OEM segment,
the Company increased key account penetration and expanded its international
business. Overall, international sales growth in the OEM segment offset a slight
decline in U.S. OEM sales in 2003. The MRO segment continued to face difficult
market conditions in 2003, particularly in the United States. MRO sales gains in
Canada for 2003 were offset by sales declines in domestic MRO business in 2003.
Gross profit declined by $2.3 million, or 0.9%, to $248.0 million during 2003
from $250.3 million in 2002. Gross profit as a percent of total sales, declined
to 63.7% in 2003 from 64.6% in 2002. This decrease resulted partially from
product mix, as the Company sold a lower percentage of MRO products as a percent
of total sales in 2003 as compared to 2002. In 2003, MRO gross profit was 71.3%
of sales, compared to 72.4% in 2002. OEM gross profit increased in 2003 to 28.0%
of sales, compared to 25.3% in 2002.
Selling, general and administrative (S,G&A) expenses decreased by $5.4 million,
or 2.4%, to $221.2 million (56.8% of sales) in 2003 from $226.6 million (58.5%
of sales) in 2002. The decline in S,G&A was attributable to the Company's
continuing efforts to contain and reduce costs. Lower sales agent compensation
and benefit costs more than offset increases in other S,G&A expenses,
principally wages and a loss of approximately $2.8 million in connection with
the sale of the MRO operations of the Company's former UK subsidiary. The
decrease in sales agent compensation and benefits resulted principally from the
expiration of a special promotional program ending in the second quarter of
2002.
During 2003, the Company incurred $2.5 million in charges for the retirement and
severance of certain management personnel compared to $0.4 million in 2002.
Operating income increased by $0.9 million, or 4.3%, to $22.7 million in 2003
from $21.8 million in 2002. The increase resulted primarily from lower S,G&A
expenses noted above, partially offset by lower gross profit and higher other
charges.
The effective income tax rates were approximately 34.9% and 46.3%, respectively,
for 2003 and 2002. The decrease in the effective tax rate was primarily
attributable to a $2.2 million reduction of the income tax provision to reflect
the partial utilization of a capital loss carryback generated by the 2003 sale
of Lawson Products Limited, the Company's former subsidiary in the United
Kingdom.
Net income increased by $3.7 million, or 30.1%, to $16.2 million during 2003
from $12.5 million in 2002, while income per share increased 31.0% to $1.70 in
2003 from $1.30 in 2002. The principal factors affecting net income and earnings
per share were lower income taxes and higher operating income, as discussed
above. Per share net income for 2003 and 2002 was positively impacted by the
Company's share repurchase program.
YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001
In 2002, total sales increased by $8.1 million, or 2.1%, to $387.5 million from
$379.4 million in 2001, comprising an increase of $2.5 million, or 0.8% in the
MRO segments and $5.6 million, or 9.6% in the OEM segments. The MRO increase was
attributable to sales generated by the addition of field and inside sales
representatives from the IPD and Kent divisions of the North American business
of Premier Farnell, acquired March 30, 2001, partially offset by the effects of
difficult market conditions and a planned reduction in the number of
under-performing domestic sales agents from 2001 levels. The sales increase in
the OEM segments was attributable to increased penetration of existing accounts
as well as new customer development efforts, both domestically and
internationally in these business segments.
Gross profit increased by $2.0 million, or 0.8%, to $250.3 million during 2002
from $248.3 million in 2001. This increase resulted from the sales increase
noted above, partially offset by a decline in gross profit as a percent of total
sales, to 64.6% from 65.5%. This reduction in gross profit percentage is due to
relatively higher growth in the OEM segments, which traditionally carry a lower
gross profit rate than MRO but also have lower operating costs. In 2002, OEM
gross profit was 25.2% of sales, compared to 30.2% in 2001. In 2002, OEM gross
profit was negatively impacted by a $2.1 million inventory write-off,
principally resulting from a change in the inventory profile by our U.K.
business to better serve our then current customer base. Excluding this
write-off, OEM gross profit was 28.5% and total gross profit was 65.1%. The MRO
segments gross profit percentage was 72.4% of sales in 2002, compared to 71.9%
in 2001.
Selling, general and administrative (S,G&A) expenses increased by $4.8 million,
or 2.2%, to $226.6 million (58.5% of sales) in 2002 from $221.7 million (58.4%
of sales) in 2001. The increase in S,G&A was attributable to wage and operating
cost increases, and to continued investment in various selling and product
education initiatives, coupled with higher health costs. The increase was
partially offset by the cessation of amortization of goodwill pursuant to
adoption of FASB Statement No. 142 by the Company at the beginning of 2002,
expired MRO promotional program costs put in place during 2001 to support the
newly acquired Premier business and the absence of non-recurring costs
associated with the IPD/Kent acquisition. If FASB Statement No.142 had been
adopted at the beginning of 2001, the non-amortization of goodwill would have
resulted in decreased S,G&A expenses of approximately $1.2 million.
Operating income increased by $5.6 million, or 34.6%, to $21.8 million in 2002
from $16.2 million in 2001. The increase resulted primarily from higher net
sales, the absence of the $8.5 million write-off of an enterprise information
system included in 2001 results and the absence of goodwill amortization and
acquisition costs, partially offset by the higher wages and health costs and
continued investment in various selling and product education initiatives noted
above.
Interest expense was $0.2 million in 2002 compared to $0.7 million in 2001. The
decrease was attributable to the Company's repayment of all of its outstanding
debt from a revolving line of credit, coupled with lower interest rates in 2002.
The effective income tax rates were approximately 46.3% and 48.7%, respectively,
for 2002 and 2001.
Net income increased by $3.6 million, or 41.6%, to $12.4 million during 2002
from $8.8 million in 2001, while income per share increased 42.9% to $1.30 in
2002 from $0.91 in 2001. The principal factors affecting net income and earnings
per share are stated above. Per share net income for 2002 and 2001 was
positively impacted by the Company's share repurchase program.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows from operations and a $50 million unsecured line of credit entered
into in February 2001 have continued to be sufficient to fund operating
requirements, cash dividends and capital improvements. Cash flows from
operations and the line of credit are also expected to finance the Company's
future growth.
Cash flows provided by operations for 2003, 2002 and 2001 were $26.4 million,
$29.0 million and $6.4 million, respectively. The decline in 2003 was
principally attributable to increasing operating assets, primarily accounts
receivable and cash value of life insurance, more than offsetting the $3.7
million increase in net income. The improvement in 2002 over 2001 was due
primarily to decreasing operating assets, increasing operating liabilities, as
well as the gain in net income noted above. Working capital at December 31, 2003
and 2002 was approximately $107.9 million and $98.0 million, respectively. At
December 31, 2003 the current ratio was 3.9 to 1 as compared to 4.1 to 1 at
December 31, 2002.
Over the past three years, the Company has made the following purchases of its
common stock:
Year Purchased Shares Purchased Cost (In millions) Year Authorized by Board
- ---------------- ------------------ ------------------- ------------------------
2003 20,186 $0.6 2000
2002 196,250 5.6 1999/2000
2001 84,497 2.2 1999
- ---------------- ------------------ ------------------- ------------------------
In 1999, the Board authorized the purchase of up to 500,000 shares of the
Company's common stock. In 2000, the Board authorized 500,000 additional shares.
At December 31, 2003, 286,399 shares were available for purchase pursuant to the
2000 Board authorization. Funds to purchase these shares were provided by
investments and cash flows from operations.
Additions to property, plant and equipment were $4.2 million, $6.0 million and
$5.2 million, respectively, for 2003, 2002 and 2001. Consistent with prior
years, capital expenditures were incurred principally for improvement of
existing facilities and for the purchase of related equipment. Capital
expenditures during 2002 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 equipment and improvement of existing facilities
and purchases of related equipment.
Future contractual obligations consisted of the following at December 31, 2003:
(In thousands) 2009 and
2004 2005 2006 2007 2008 thereafter Total
- --------------------------------------- --------- --------- --------- --------- -------- ----------- ----------
Rents $3,056 $2,528 $2,209 $1,874 $1,081 $3,223 $13,971
Mortgage payable 1,462 1,573 - - - - 3,035
Deferred compensation 745 736 555 311 312 11,002 13,661
Security bonus plan (1) - - - - - 20,823 20,823
- --------------------------------------- --------- --------- --------- --------- -------- ----------- ----------
Total contractual cash $5,263 $4,837 $2,764 $2,185 $1,393 $35,048 $51,490
obligations
- --------------------------------------- --------- --------- --------- --------- -------- ----------- ----------
(1) Payments to beneficiaries of the security bonus plan are made on a lump sum basis at time of retirement.
No such obligations exist at December 31, 2003.
BUSINESS COMBINATIONS AND DISPOSALS
Sale of MRO Operations in United Kingdom: During the fourth quarter of 2003, the
Company completed the sale of its United Kingdom MRO subsidiary. As stated
above, in connection with the sale of this operation, the Company incurred a
loss of $2.8 million, including inventory write-offs of $1.8 million. The
Company's OEM customers in the United Kingdom will be serviced through a newly
formed entity, Assembly Component Systems Limited.
Purchase of Industrial Products and Kent Automotive: On March 30, 2001, the
Company purchased certain assets of Premier Farnell's Cleveland based North
American Industrial Products ("IPD") and Kent Automotive Divisions for
approximately $28.4 million plus approximately $7.2 million for related
inventories. The 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 use of various intellectual properties, including trademarks and
trade names of the Industrial Products and Kent Automotive divisions in certain
territories. Premier Farnell's Premier Fastener, Rotanium Products, Certainium
Alloys, CT Engineering, JI Holcomb and Kent Automotive business units in the
United States, Canada, Mexico, Central America and the Caribbean were combined
with the Company's existing operations.
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.
The acquisition generated approximately $41.2 million of incremental sales in
2001. The Company only acquired inventory and portions of the IPD and Kent
business, and is therefore unable to provide any meaningful pro forma
information of prior period results.
ADOPTION OF RECENTLY ISSUED ACCOUNTING STANDARDS
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest
Entities," which addresses the financial reporting by companies involved with
variable interest entities ("VIE"). A VIE is a corporation, partnership, trust
or any other legal structure used for business purposes that either (a) does not
have equity investors with voting rights or (b) has equity investors that do not
provide sufficient financial resources for the entity to support its activities.
FIN No. 46 requires a VIE to be consolidated by a company if that company is
subject to a majority of the risk of loss from the VIE's activities or entitled
to receive the majority of the entity's residual returns or both. Previously, a
company generally included an entity in its consolidated financial statements
only if it controlled the entity through voting interests. The consolidation
requirements of FIN No. 46 apply immediately to VIE's created after January 31,
2003. Existing VIE's must be consolidated in the first fiscal year or interim
period beginning after March 15, 2004.
The Company adopted FIN 46 as of July 1, 2003, which has resulted in the
consolidation of the Company's investment in a limited partnership, which owns
an office building in Chicago, Illinois. An officer and member of the Board of
Directors of the Company is the general partner of this VIE and holds a 1.5%
interest in the partnership. The operations of the partnership consist of rental
of the building under a long-term lease and the servicing of the non-recourse
mortgage. In conjunction with the consolidation of its investment, the Company
has recorded long-term debt, which represents a non-recourse mortgage payable
relative to the building, of approximately $3.0 million at December 31, 2003.
The building and land have a net carrying value of $4.4 million, which are
included in property, plant and equipment. The remaining assets, none of which
are significant, are recorded in other assets.
CRITICAL ACCOUNTING POLICIES
The Company has disclosed its accounting policies in Note B 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 - Methodology: The Company evaluates the
collectibility 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 (i.e., 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 - Slow Moving and Obsolescence: The Company carries significant
amounts of inventories, which is a part of the Company's strategy as a
competitive advantage in its ability to fulfill the vast majority of our
customers' orders the same day received. However, this strategy also increases
the chances that portions of the inventory have decreased in value below their
carrying cost. To reduce inventory to a lower of cost or market value, the
Company records a reserve for slow-moving and obsolete inventory. The Company
defines obsolete as those inventory parts on hand which the Company plans to
discontinue to offer to its customers. Slow-moving inventory is monitored by
examining reports of parts which have not been sold for extended periods. The
Company records the reserve needed based on its historical experience of how
much the selling prices must be reduced to move these obsolete and slow-moving
products. If experience or market conditions change, estimates of the reserves
needed could be revised by a material amount.
Impact of Inflation and Changing Prices: The Company has continued to pass on to
its customers most increases in product costs. Accordingly, gross margins have
not been materially impacted. The impact from inflation has been more
significant on the Company's fixed and semi-variable operating expenses,
primarily wages and benefits, although to a lesser degree in recent years due to
moderate inflation levels.
Although the Company expects that future costs of replacing warehouse and
distribution facilities will rise due to inflation, such higher costs are not
anticipated to have a material effect on future earnings.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company, through its foreign subsidiaries, distributes products in
Canada, the United Kingdom and Mexico. As a result, the Company is from time to
time exposed to market risk relating to the impact of foreign currency exchange
rates. A hypothetical 10% adverse movement in exchange rates would increase
income by $319,000 in 2003 to offset the loss by the foreign subsidiaries.
The Company had nothing outstanding as of December 31, 2003 under its
revolving line of credit.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The following information is presented in this report:
Report of Independent Auditors
Consolidated Balance Sheets as of December 31, 2003 and 2002.
Consolidated Statements of Income for the Years ended December
31, 2003, 2002 and 2001.
Consolidated Statements of Changes in Stockholders' Equity for
the Years ended December 31, 2003, 2002 and 2001.
Consolidated Statements of Cash Flows for the Years ended
December 31, 2003, 2002 and 2001.
Notes to Consolidated Financial Statements.
Schedule II
REPORT OF INDEPENDENT AUDITORS
To the Stockholders and Board of Directors
Lawson Products, Inc.
We have audited the accompanying consolidated balance sheets of Lawson Products,
Inc. and subsidiaries as of December 31, 2003 and 2002, and the related
consolidated statements of income, changes in stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 2003. 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 auditing standards generally accepted
in the 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. and subsidiaries at December 31, 2003 and 2002, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2003, in conformity with generally accepted
accounting principles in the United States. 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 B to the financial statements, in 2003 the Company changed
its method of accounting for its investment in a real estate partnership.
As discussed in Note G to the financial statements, in 2002 the Company changed
its method of accounting for goodwill and other intangible assets.
/s/Ernst & Young LLP
Chicago, Illinois
February 25, 2004
LAWSON PRODUCTS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands) DECEMBER 31,
---------------------------------------------
2003 2002
---- ----
Assets
Current assets:
Cash and cash equivalents $ 21,399 $ 7,591
Marketable securities 2,156 696
Accounts receivable, less allowance for doubtful accounts
(2003 -$2,121, 2002 - $1,830) 47,972 42,990
Inventories 59,817 63,851
Miscellaneous receivables 4,773 3,202
Prepaid expenses 6,666 7,968
Deferred income taxes 1,975 3,463
---------------------------------------------
Total Current Assets 144,758 129,761
---------------------------------------------
Property, plant and equipment, at cost, less allowances for
depreciation and amortization (2003 - $53,880;
2002 - $49,499) 42,946 39,519
---------------------------------------------
Other assets:
Cash value of life insurance 13,201 10,933
Investments in real estate -- 1,305
Deferred income taxes 13,201 11,987
Goodwill, less accumulated amortization 28,649 28,649
Other intangible assets, less accumulated amortization
(2003 - $1,219; 2002 - $701) 1,481 1,999
Other 2,707 1,678
---------------------------------------------
59,239 56,551
---------------------------------------------
$ 246,943 $ 225,831
=============================================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 8,240 $ 8,085
Accrued expenses and other liabilities 27,176 23,638
Current Portion of long term debt 1,462 --
---------------------------------------------
Total Current Liabilities 36,878 31,723
---------------------------------------------
Noncurrent liabilities and deferred credits:
Accrued liability under security bonus plans 20,823 20,614
Long term debt 1,573 --
Deferred compensation and other liabilities 14,318 11,151
---------------------------------------------
36,714 31,765
---------------------------------------------
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 - 2003- 9,493,511 shares; 2002 - 9,494,011 shares 9,494 9,494
Capital in excess of par value 2,667 2,387
Retained earnings 161,831 152,495
---------------------------------------------
173,992 164,376
Accumulated other comprehensive loss (641) (2,033)
---------------------------------------------
Stockholders' equity 173,351 162,343
---------------------------------------------
$ 246,943 $ 225,831
=============================================
See notes to consolidated financial statements
LAWSON PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31,
---------------------------------------------------------
2003 2002 2001
---------------- --------------- --------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Net sales $389,091 $387,456 $379,407
Cost of goods sold 141,124 137,129 131,065
--------------------------------------------------------
Gross profit 247,967 250,327 248,342
Selling, general and administrative expenses 221,189 226,571 221,743
Other charges 2,459 360 8,496
Provision for doubtful accounts 1,578 1,585 1,901
--------------------------------------------------------
Operating Income 22,741 21,811 16,202
--------------------------------------------------------
Interest and dividend income 194 53 654
Interest expense (131) (154) (706)
Other income - net 2,088 1,479 992
--------------------------------------------------------
2,151 1,378 940
--------------------------------------------------------
Income Before Income Taxes 24,892 23,189 17,142
Income tax expense 8,696 10,742 8,355
--------------------------------------------------------
Net Income $ 16,196 $ 12,447 $ 8,787
========================================================
Net Income Per Share of Common Stock:
Basic $ 1.71 $ 1.30 $0.91
========================================================
Diluted $ 1.70 $ 1.30 $0.91
========================================================
See notes to consolidated financial statements
LAWSON PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF
CHANGES IN STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS) ACCUMULATED
COMMON CAPITAL OTHER
STOCK, IN EXCESS OF RETAINED COMPREHENSIVE COMPREHENSIVE
$1 PAR VALUE PAR VALUE EARNINGS LOSS INCOME
------------ ------------- ---------------- ---------------- ---------------
Balance at January 1, 2001 $9,706 $762 $151,066 $(1,622) $ --
Net income 8,787 8,787
Other comprehensive loss, net of tax:
Adjustment for foreign currency (576) (576)
--------------
translation
Comprehensive income for the year $8,211
--------------
Cash dividends declared (6,191)
Stock issued under employee stock plans 7 159
Purchase and retirement of common stock (84) (8) (2,108)
- ------------------------------------------ ------------------- -------------- ----------------- ------------------ ----------------
Balance at December 31, 2001 9,629 913 151,554 (2,198)
- ------------------------------------------ ------------------- -------------- ----------------- ------------------ ----------------
Net income 12,447 $12,447
Other comprehensive income, net of tax:
Adjustment for foreign currency 165 165
--------------
translation
Comprehensive income for the year $12,612
--------------
Cash dividends declared (6,115)
Stock issued under employee stock plans 61 1,510
Purchase and retirement of common stock (196) (36) (5,391)
- ------------------------------------------ ------------------- -------------- ----------------- ------------------ ----------------
Balance at December 31, 2002 9,494 2,387 152,495 (2,033)
- ------------------------------------------ ------------------- -------------- ----------------- ------------------ ----------------
Net income 16,196 $ 16,196
Other comprehensive income, net of tax:
Adjustment for foreign currency 1,392 1,392
--------------
translation
Comprehensive income for the year $17,588
--------------
Cash dividends declared (6,265)
Stock issued under employee stock plans 20 285
Purchase and retirement of common stock (20) (5) (595)
- ------------------------------------------ ------------------- -------------- ----------------- ------------------ ----------------
Balance at December 31, 2003 $9,494 $2,667 $161,831 $(641)
- ------------------------------------------ ------------------- -------------- ----------------- ------------------ ----------------
See notes to consolidated financial statements
LAWSON PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS) YEAR ENDED DECEMBER 31,
---------------------------------------------------------
2003 2002 2001
---------------- --------------- -----------------
Operating activities
Net income $16,196 $ 12,447 $ 8,787
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 5,359 5,506 5,741
Amortization 1,744 1,321 2,405
Provision for allowance for doubtful accounts 1,578 1,585 1,901
Deferred income taxes (476) (2,177) (1,771)
Deferred compensation and security bonus plans 5,466 2,704 3,399
Payments under deferred compensation
and security bonus plans (2,099) (1,635) (2,395)
Losses (Gains) from sale of marketable securities -- (300) (13)
Income from investments in real estate (360) (600) (480)
Changes in operating assets and liabilities
(Exclusive of effect of acquisition):
Accounts receivable (5,888) 1,165 (5,392)
Inventories 4,902 1,692 (3,093)
Prepaid expenses and other assets (4,171) 4,867 3,259
Accounts payable and accrued expenses 3,176 1,958 (2,970)
Income taxes payable -- -- (2,615)
Other 991 429 (316)
-----------------------------------------------------
Net Cash Provided by Operating Activities 26,418 28,962 6,447
-----------------------------------------------------
Investing activities
Additions to property, plant and equipment (4,241) (5,965) (5,229)
Purchases of marketable securities (5,129) (8,340) (13,268)
Proceeds from sale of marketable securities 3,669 9,681 41,917
Acquisition of businesses, net of cash acquired -- -- (36,891)
Other 286 456 240
-----------------------------------------------------
Net Cash Used in Investing Activities (5,415) (4,168) (13,231)
-----------------------------------------------------
Financing Activities
Proceeds from revolving line of credit 4,000 36,500 71,800
Payments on revolving line of credit (4,000) (50,500) (57,800)
Payments on mortgage payable (805) -- --
Purchases of common stock (620) (5,623) (2,201)
Proceeds from exercise of stock options 305 1,571 166
Dividends paid (6,075) (6,138) (6,106)
-----------------------------------------------------
Net Cash Provided by (Used in) Financing Activities (7,195) (24,190) 5,859
-----------------------------------------------------
Increase (Decrease) in Cash and Cash Equivalents 13,808 604 (925)
Cash and Cash Equivalents at Beginning of Year 7,591 6,987 7,912
-----------------------------------------------------
Cash and Cash Equivalents at End of Year $ 21,399 $ 7,591 $ 6,987
=====================================================
See notes to consolidated financial statements
LAWSON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
NOTE A - DESCRIPTION OF BUSINESS
Lawson Products, Inc. is an international seller and distributor of
systems, services and products to the industrial, commercial and institutional
maintenance, repair and replacement marketplace. The Company also manufactures,
sells and distributes production and specialized component parts to the original
equipment marketplace.
NOTE B - SUMMARY OF MAJOR ACCOUNTING POLICIES
Principles of Consolidation: The accompanying consolidated financial
statements include the accounts and transactions of the Company and its wholly
owned and majority owned subsidiaries. All inter-company accounts and
transactions have been eliminated in consolidation.
Revenue Recognition: Sales and associated cost of goods sold are
recognized when products are shipped and title passes to customers.
Shipping and Handling Fees and Costs: Costs related to shipping and
handling fees are included on the Income Statement in the caption Selling,
general and administrative expenses and totaled $11,159, $11,898 and $11,460 in
2003, 2002 and 2001, respectively. Amounts billed to customers for shipping fees
are included in net sales.
Use of Estimates: The 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 financial statements and accompanying notes. Actual results could differ
from these estimates.
Investment in Real Estate Partnership: The Company's investment in real
estate, representing a limited partnership interest, was carried on the basis of
the equity method until June 30, 2003. (See New Accounting Standards)
Marketable Securities: Marketable equity and debt securities are
classified as available-for-sale and are carried at fair value, with the
unrealized gains and losses, net of tax, recorded in stockholders' equity.
Realized gains and losses, declines in value judged to be other-than-temporary,
and interest and dividends are included in investment income. The cost of
securities sold is based on the specific identification method.
Inventories: Inventories which consist of principally finished goods
are stated at the lower of cost (first-in, first-out method) or market.
Property, Plant and Equipment: Provisions for depreciation and
amortization are computed by the straight-line method for buildings using useful
lives of 20 to 30 years and by the double declining balance method for machinery
and equipment, furniture and fixtures and vehicles using useful lives of 3 to 10
years.
Investment Tax Credits: Investment tax credits on assets leased to
others (see Investment in Real Estate Partnership) are deferred and amortized
over the useful life of the related asset.
Cash Equivalents: The Company considers all highly liquid investments
with a maturity of three months or less when purchased to be cash equivalents.
Stock Options: Stock options are accounted for under Accounting
Principles Board (APB) Opinion No. 25, "Accounting For Stock Issued to
Employees." Under APB 25, the Company uses the intrinsic value method where no
compensation expense is recognized because the exercise price of the stock
options granted equals the market price of the underlying stock at the date of
grant.
The following table shows the effect on net income and earnings per
share if the Company had applied the fair value recognition provision of FASB
Statement No. 123, "Accounting for Stock-Based Compensation."
2003 2002 2001
- -------------------------------------------------------------------------------
Net income - as reported 16,196 $12,447 $8,787
Deduct: Total stock based
employee compensation
expense determined under
fair value method, net of tax (27) (38) (49)
- ------------------------------------------------------------------------------
Net income - pro forma 16,169 12,409 8,738
Basic earnings per share - as reported 1.71 1.30 .91
Diluted earnings per share - as reported 1.70 1.30 .91
Basic earnings per share - pro forma 1.70 1.30 .90
Diluted earnings per share - pro forma 1.70 1.29 .90
For purposes of pro forma disclosures, the estimated fair value of
options granted is amortized to expense over the option's vesting period. The
pro forma effect on net income is not representative of the pro forma effect on
net income in future years because grants made in 1996 and later years have an
increasing vesting period.
Goodwill and Other Intangibles: Goodwill represents the cost of
business acquisitions in excess of the fair value of identifiable net tangible
assets acquired. Goodwill was amortized over 20 years using the straight-line
method until the end of 2001.
In June 2001, the FASB issued Statement No. 141, "Business
Combinations" and Statement No. 142 "Goodwill and Other Intangibles," effective
for fiscal years beginning after December 15, 2001. Under the new rules,
goodwill and other intangible assets deemed to have indefinite lives will no
longer be amortized but subject to annual impairment tests. (See note G)
Foreign Currency Translation: The financial statements of foreign
entities have been translated in accordance with Statement of Financial
Accounting Standards No. 52 and, accordingly, unrealized foreign currency
translation adjustments are reflected as a component of stockholders' equity.
Realized foreign currency transaction gains and losses were not significant for
the years ended December 31, 2003, 2002 and 2001.
Income per share: Basic EPS is computed by dividing net income by the
weighted average number of common shares outstanding during the period. Diluted
EPS reflects the potential dilution from the exercise or conversion of
securities into common stock, such as stock options.
Reclassifications: Certain amounts have been reclassified in the 2002
and 2001 financial statements to conform with the 2003 presentation.
New Accounting Standards: In January 2003, the FASB issued FIN No. 46,
"Consolidation of Variable Interest Entities," which addresses the financial
reporting by companies involved with variable interest entities ("VIE"). A VIE
is a corporation, partnership, trust or any other legal structure used for
business purposes that either (a) does not have equity investors with voting
rights or (b) has equity investors that do not provide sufficient financial
resources for the entity to support its activities. FIN No. 46 requires a VIE to
be consolidated by a company if that company is subject to a majority of the
risk of loss from the VIE's activities or entitled to receive a majority of the
entity's residual returns or both. Previously, a company generally included an
entity in its consolidated financial statements only if it controlled the entity
through voting interests. The consolidation requirements of FIN No. 46 apply
immediately to VIE's created after January 31, 2003. Existing VIE's must be
consolidated in the first fiscal year or interim period beginning after March
15, 2004. the Company adopted FIN 46 as of July 1, 2003, which has resulting in
the consolidation of the Company's investment in a limited partnership, which
owns an office building in Chicago, Illinois. An officer and member of the Board
of Directors of the Company is the 1.5% general partner. (See Note I) The
operations of the partnership consist of rental of the building under a
long-term lease and the servicing of the non-recourse mortgage. The activities
are insignificant for separate disclosure.
NOTE C - BUSINESS COMBINATION
Sale of Lawson Products Limited, UK Subsidiary:
In the fourth quarter of 2003, the Company sold its UK subsidiary, Lawson
Products Limited, engaged primarily in the business of MRO sales, to a third
party for approximately $647. The purchase price is in the form of a note
payable to the Company over two years. Prior to the sale, the Company
transferred certain assets and liabilities related to the OEM portion of this
business to a newly formed subsidiary, Assembly Components Systems Limited. The
sale of Lawson Products Limited resulted in a pre-tax loss of approximately
$2,789, largely related to inventory write-offs and termination costs associated
with the sale. This loss is classified in selling, general and administrative
expenses in the statement of income. This business was part of the Company's
International OEM distribution segment.
The sale also generated approximately $22,441 in capital losses. The Company was
able to carryback $6,163 of the capital loss to offset capital gains in prior
years. The effect of the carryback resulted in $2,157 of tax benefit in 2003. A
valuation allowance has been provided for the remainder of the capital loss due
to the uncertainty of utilization.
Purchase of Industrial Products and Kent Automotive:
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 $28,369 plus approximately $7,267 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, customer accounts, certain administrative
executives, and various intellectual properties, including trademarks and trade
names of the divisions in certain territories. The identifiable intangibles
acquired in the acquisitions were recorded at an independent appraised value of
approximately $1,400. These intangibles are being amortized over a weighted
average estimated life of 15.14 years. The remaining excess of purchase price
over net assets acquired of approximately $27,100 represents goodwill. The
assets acquired were recorded at fair values as determined by the Company's
management. As the Company only acquired 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. Net sales attributed to the acquired
division represented approximately $41,252 for 2001.
NOTE D - OTHER CHARGES
In 2003, the Company recorded charges totaling $2,459 for severance of
several members of management. Approximately $422 was paid in 2003 and the
remaining benefits will be paid through 2006.
During 2002, the Company recorded a charge of $568 for severance for
several members of management and a $208 adjustment to the reserve resulting
from a severance settlement. Approximately $155 was paid in 2003 and the
remaining benefits will be paid in 2004.
In 2001, the Company wrote-off capitalized software and implementation
costs of a discontinued enterprise information system project. This write-off
represents a non-cash charge of $8,527 ($5,138 net of tax benefits).
The table below shows an analysis of the company's reserves for other
charges:
Severance
Description of Item and Related Asset
- --------------------------- Expenses Writedown Total
- ------------------------------------------------------------------------------
Balance January 1, 2001 $2,373 $ - $2,373
Charged to earnings 2001 - 8,527 8,527
Cash paid in 2001 (884) - (884)
Non-cash utilization - (8,527) (8,527)
Adjustment to reserves (31) - (31)
- ------------------------------------------------------------------------------
Balance December 31, 2001 1,458 - 1,458
Charged to earnings 2002 568 - 568
Cash paid in 2002 (942) - (942)
Adjustment to reserves (208) - (208)
- -------------------------------------------------------------------------------
Balance December 31, 2002 876 - 876
Charged to earnings 2003 2,459 - 2,459
Cash paid in 2003 (859) - (859)
- -------------------------------------------------------------------------------
Balance December 31, 2003 $2,476 $ - $2,476
===============================================================================
NOTE E - MARKETABLE SECURITIES
The following is a summary of the Company's investments at December 31
which are classified as available-for-sale. The contractual maturity of all
marketable securities at December 31, 2003 is less than one year.
Gross Gross Estimated
Unrealized Unrealized Fair
Cost Gain Losses Value
2003
- ------------------------------ ---------- ------------- ------------- ----------
Foreign government securities $ 2,156 $ - $ - $ 2,156
- ------------------------------ ---------- ------------- ------------- ----------
2002
- ------------------------------ ---------- ------------- ------------- ----------
Foreign government securities $ 696 $ - $ - $ 696
- ------------------------------ ---------- ------------- ------------- ----------
The gross realized gains on sales of marketable securities totaled: $0,
$300 and $13 in 2003, 2002 and 2001, respectively.
NOTE F - PROPERTY, PLANT AND EQUIPMENT
The cost of property, plant and equipment consists of:
2003 2002
- ---------------------------------------------------------------------------
Land $8,389 $ 6,608
Buildings and improvements 51,556 42,090
Machinery and equipment 30,143 32,702
Furniture and fixtures 5,749 5,965
Vehicles 432 406
Construction in Progress 557 1,247
- ---------------------------------------------------------------------------
$96,826 $89,018
===========================================================================
NOTE G- GOODWILL AND OTHER INTANGIBLES
As discussed in Note B - Summary of Major Accounting Policies, the
Company adopted FASB statement No. 142 "Goodwill and Other Intangibles" as of
January 1, 2002. The Company performed its annual impairment test in the fourth
quarter which determined the Company's goodwill was not impaired.
The Company's pro forma information for intangible assets that are no
longer being amortized effective January 1, 2002 consisted of the following:
2003 2002 2001
- --------------------------------------------------------------------------------
Net income - as reported $16,196 $12,447 $8,787
Goodwill amortization - - 731
- --------------------------------------------------------------------------------
Net income - pro forma 16,196 12,447 9,518
Diluted earnings per share - as reported 1.70 1.30 .91
Diluted earnings per share - pro forma 1.70 1.30 .98
Intangible assets subject to amortization were as follows:
December 31, 2003
Gross Accumulated Net Carrying
Balance Amortization Amount
- --------------------------------------------------------------------------------
Trademarks and tradenames $1,747 $851 $896
Customer lists 953 368 585
- --------------------------------------------------------------------------------
$2,700 $1,219 $1,481
================================================================================
December 31, 2002
Gross Accumulated Net Carrying
Balance Amortization Amount
- --------------------------------------------------------------------------------
Trademarks and tradenames $1,747 $668 $1,079
Customer lists 953 33 920
- --------------------------------------------------------------------------------
$2,700 $701 $1,999
================================================================================
Trademarks and tradenames are being amortized over a weighted average
15.14 years. Customer lists are being amortized over 13.96 years. Amortization
expense, all of which was included in the MRO distribution segment, for the
intangible assets was $518, $377 and $137 in 2003, 2002 and 2001, respectively.
Amortization expense for each of the next five years is estimated as follows:
2004 2005 2006 2007 2008
- --------------------- ----------- ---------- ---------- ------------ -----------
Amortization expense $116 $83 $83 $83 $83
===================== =========== ========== ========== ============ ===========
NOTE H - ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities consist of the following:
2003 2002
- ---------------------------------------------- ---------------- ----------------
Salaries, commissions and other compensation $ 6,802 $ 5,875
Accrued other charges 2,476 876
Accrued and withheld taxes, other than income
taxes 2,591 2,757
Accrued profit sharing contributions 3,448 3,269
Accrued self-insured health benefits 1,800 1,500
Cash dividends payable 1,709 1,519
Other 8,350 7,842
- ---------------------------------------------- ---------------- ----------------
$27,176 $23,638
============================================== ================ ================
NOTE I - LONG TERM DEBT
On July 1, 2003, the Company adopted FIN No. 46 which has resulted in the
Company's consolidated of an investment in a limited partnership which owns an
office building in Chicago, Illinois. In conjunction with the consolidation of
its investment, the Company has recorded long-term debt, which represents a
non-recourse mortgage payable relative to the building. The interest rate of the
non-recourse mortgage payable in 7.315%, with a maturity date of January 1,
2006. The building and the land have a net carrying value of $4,425, which are
included in property, plant and equipment. The remaining assets, none of which
are significant, are recorded in other assets.
The Company's mortgage obligations in effect at December 31, 2003 amounted to
approximately $3,035. Mortgage payments are payable as follows: 2004-$1,462;
2005-$1,573. Interest expense related to the mortgage totaled $124 for the year
ended December 31, 2003.
On February 21, 2001, the Company entered into a $50 million unsecured
multi-currency line of credit. The Company had nothing outstanding under the
line at December 31, 2003 and 2002. Amounts outstanding under the line carry
interest at 1.5% below the prime rate or .75% over the LIBOR rate as determined
by the Company. The line matures on February 21, 2006. Since the line's interest
rate floats on a variable basis with either prime or LIBOR, the carrying value
of the debt approximates fair value. The line requires the Company to meet
certain covenants, all of which were met on December 31, 2003. The Company paid
interest of $7, $220 and $605, respectively, in 2003, 2002 and 2001.
NOTE J - STOCK PLANS
The Incentive Stock Plan, As Amended (Plan), provides for the issuance of shares
of Common Stock to non-employee directors, officers and key employees pursuant
to stock options, Stock Performance Rights (SPRs), stock purchase agreements and
stock awards. 575,673 shares of Common Stock were available for issuance under
the Plan as of December 31, 2003.
In 2003, 2002 and 2001, the Company granted SPRs pursuant to an incentive plan
adopted in 2000. These SPRs have an exercise price ranging from $24.64 to $33.15
per share. These SPRs vest at 20% per year and entitle the recipient to receive
a cash payment equal to the excess of the market value of the Company's common
stock and the SPR price when the SPRs are surrendered. Compensation expense for
the SPRs in 2003, 2002 and 2001 was $410, $244 and $0, respectively.
Additional information with respect to SPRs is summarized as follows:
Average SPR
Exercise Price # of SPR's
Outstanding January 1, 2001 $ 26.50 71,250*
Granted 27.09 157,250**
- ---------------------------------------- ------------------ --------------------
Outstanding December 31, 2001 26.90 228,500
Granted 30.74 18,000***
- ---------------------------------------- ------------------ --------------------
Outstanding December 31, 2002 27.18 246,500
Granted 27.85 31,500
Exercised 26.77 (1,900)
- ---------------------------------------- ------------------ --------------------
Outstanding December 31, 2003 $ 27.26 276,100
======================================== ================== ====================
*Includes 42,750 SPRs vested at December 31, 2003 **Includes 62,900 SPRs
vested at December 31, 2003 ***Includes 3,600 SPRs vested at December 31, 2003
The Plan permits the grant of incentive stock options, subject to
certain limitations, with substantially the same terms as non-qualified stock
options. Non-employee directors are not eligible to receive incentive stock
options. Stock options are not exercisable within six months from date of grant
and may not be granted at prices less than the fair market value of the shares
at the dates of grant. Benefits may be granted under the Plan through December
16, 2006.
Additional information with respect to the Plan is summarized as
follows:
Average Price Option Shares
- ----------------------------------------- ------------------ ------------------
Outstanding January 1, 2001 $22.86 180,390
Granted -- --
Exercised 22.50 (7,400)
Canceled or expired -- --
- ----------------------------------------- ------------------ ------------------
Outstanding December 31, 2001 22.87 172,990
Granted -- --
Exercised 22.73 (50,954)
Canceled or expired -- --
- ----------------------------------------- ------------------ ------------------
Outstanding December 31, 2002 22.93 122,036
Granted -- --
Exercised 22.50 (19,686)
Canceled or expired -- --
- ----------------------------------------- ------------------ ------------------
Outstanding December 31, 2003 $23.01 102,350
========================================= ================== ==================
Exercisable options at
December 31, 2003 $22.99 99,600
December 31, 2002 $22.90 114,286
December 31, 2001 $22.79 157,990
As of December 31, 2003, the Company had the following outstanding options:
Exercise Price $22.44 - $23.56 $26.75 $27.00
- ------------------------------------------ ---------------- ---------- ---------
Options Outstanding 92,850 9,000 500
Weighted Average Exercise Price $22.62 $26.75 $27.00
Weighted Average Remaining Life 3.1 4.3 3.7
Options Exercisable 90,100 9,000 500
Weighted Average Exercise price $22.59 $26.75 $27.00
Disclosure of pro forma information regarding net income and net income
per share is required by FASB Statement No. 123, "Accounting for Stock-Based
Compensation," and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement. The fair
value of these options was estimated at the date of grant using the
Black-Scholes options pricing model.
No options were granted in 2003, 2002 or 2001. See Note B Stock Options
for impact of options granted prior to 2001 on pro forma earnings per share.
NOTE K - PROFIT SHARING AND SECURITY BONUS PLANS
The Company and certain subsidiaries have a profit sharing plan for
office and warehouse personnel. The amounts of the companies' annual
contributions are determined by the respective boards of directors subject to
limitations based upon current operating profits (as defined) or participants'
compensation (as defined).
The plan also has a 401(k) defined contribution saving feature. This
feature, available to all participants, was provided to give employees a pre-tax
investment vehicle to save for retirement. The Company does not match the
contributions made by plan participants.
The Company and its subsidiaries also have in effect security bonus
plans for the benefit of independent sales representatives and certain regional
managers, under the terms of which participants are credited with a percentage
of their yearly earnings (as defined). Of the aggregate amounts credited to
participants' accounts, 25% vests 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 profit sharing and security bonus plans aggregated
$5,301, $5,689 and $5,363 for the years ended December 31, 2003, 2002 and 2001,
respectively.
NOTE L - INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. In addition,
deferred income taxes include net operating loss carryforwards of foreign
subsidiaries which do not expire. The valuation allowance has been provided
since there is no assurance that the benefit of the net operating loss
carryforwards will be realized. Significant components of the Company's deferred
tax assets and liabilities as of December 31 are as follows:
Deferred Tax Assets: 2003 2002
- -------------------------------------------------- ---------------- ------------
Compensation and benefits $15,237 $13,128
Inventory 3,011 3,258
Net operating loss carryforwards of subsidiaries 2,619 6,587
Capital Loss 5,697 --
Accounts receivable 669 591
Other 345 1,095
- -------------------------------------------------- ---------------- ------------
Total Deferred Tax Assets 27,578 24,659
Valuation allowance for deferred tax assets (8,316) (6,587)
- -------------------------------------------------- ---------------- ------------
Net Deferred Tax Assets 19,262 18,072
- -------------------------------------------------- ---------------- ------------
Deferred Tax Liabilities:
- -------------------------------------------------- ---------------- ------------
Property, plant & equipment 2,381 2,236
Other 1,705 386
- -------------------------------------------------- ---------------- ------------
Total Deferred Tax Liabilities 4,086 2,622
- -------------------------------------------------- ---------------- ------------
Total Net Deferred Tax Assets $15,176 $15,450
================================================== ================ ============
Net Deferred Tax Assets: 2003 2002
- -------------------------------------------------- ---------------- ------------
Total Current Deferred Income Taxes $1,975 $3,463
Total Non Current Deferred Income Taxes 13,201 11,987
- -------------------------------------------------- ---------------- ------------
Total Net Deferred Tax Assets $15,176 $15,450
================================================== ================ ============
Net deferred tax assets include the tax impact of items in
comprehensive income of $345 and $1,095 at December 31, 2003 and 2002,
respectively.
Income (loss) before income taxes for the years ended December 31, consisted of
the following:
2003 2002 2001
- -------------------- ------------------- ----------------- ---------------------
United States $27,728 $27,906 $18,523
Foreign (2,836) (4,717) (1,381)
- -------------------- ------------------- ----------------- ---------------------
$24,892 $23,189 $17,142
==================== =================== ================= =====================
The provisions for income taxes for the years ended December 31, consisted of
the following:
2003 2002 2001
- --------------------- --------------------- ------------------- ---------------
Current:
Federal $7,422 $10,972 $8,348
State 1,750 1,947 1,778
- --------------------- --------------------- ------------------- ---------------
9,172 12,919 10,126
Deferred benefit (476) (2,177) (1,771)
- --------------------- --------------------- ------------------- ---------------
$8,696 $10,742 $ 8,355
===================== ===================== =================== ===============
The reconciliation between the effective income tax rate and the statutory
federal rate is as follows:
2003 2002 2001
- ------------------------------------- ------------- ------------- --------------
Statutory federal rate 35.0% 35.0% 35.0%
Increase (decrease) resulting from:
State income taxes, net of
federal income tax benefit 4.6 5.5 6.7
Foreign losses 6.7 9.3 5.1
Capital loss carryback (8.7) -- --
Other items, net (2.7) (3.5) 1.9
- ------------------------------------- ------------- ------------- --------------
Provision for income taxes 34.9 46.3% 48.7%
===================================== ============= ============= ==============
The decrease in the effective income tax rate in 2003 is due the sale
of the Company's UK MRO business that resulted in $22,441 capital loss. The
portion of the capital loss which the Company was able to carryback to a prior
year capital gain was realized in 2003. A valuation was provided for the
remainder of the capital loss. The capital loss expires in 2008.
Income taxes paid for the years ended December 31, 2003, 2002, and 2001
amounted to $10,523, $13,392 and $13,410, respectively.
NOTE M - COMMITMENTS
The Company's minimum rental commitments, principally for equipment,
under noncancelable leases in effect at December 31, 2003, amounted to
approximately $13,971. Such rentals are payable as follows:
2004 2005 2006 2007 2008 2009 and thereafter
- ----------- ----------- ----------- ----------- ------------ -------------------
$3,056 $2,528 $2,209 $1,874 $1,081 $3,223
=========== =========== =========== =========== ============ ===================
Total rental expense for the years ended December 31, 2003, 2002 and
2001 amounted to $3,977, $3,669, $3,090, respectively.
NOTE N - INCOME PER SHARE
The computation of basic and diluted earnings per share consisted of
the following:
Year ended December 31,
2003 2002 2001
- ------------------------------------------ ------------- ------------ ----------
Numerator:
Net income $16,196 $12,447 $8,787
========================================== ============= ============ ==========
Denominator:
Denominator for basic income per
share - weighted average shares 9,492 9,570 9,685
Effect of dilutive securities:
Stock option plans 19 26 23
- ------------------------------------------ ------------- ------------ ----------
Denominator for diluted
income per share -
adjusted weighted average shares 9,511 9,596 9,708
========================================== ============= ============ ==========
Basic income per share $1.71 $1.30 $0.91
========================================== ============= ============ ==========
Diluted income per share $1.70 $1.30 $0.91
========================================== ============= ============ ==========
NOTE O - SEGMENT REPORTING
The Company has four reportable segments: Maintenance, Repair and
Replacement distribution in the U.S. (MRO-US), International Maintenance, Repair
and Replacement distribution in Canada (MRO-CAN), Original Equipment
Manufacturer distribution and manufacturing in the U.S. (OEM-US), and
International Original Equipment Manufacturer distribution in the United Kingdom
and Mexico (OEM-INTL). The operations of the Company's MRO distribution segments
distribute a wide range of MRO parts to repair and maintenance organizations by
the Company's force of independent sales agents.
The operations of the Company's OEM segments manufacture and distribute
component parts to OEM manufacturers through a network of independent sales
agents as well as internal sales employees.
The Company's reportable segments are distinguished by the nature of
products distributed and sold, types of customers, manner of servicing them, and
geographical location.
The Company evaluates performance and allocates resources to reportable
segments primarily based on operating income. The accounting polices of the
reportable segments are the same as those described in the summary of
significant policies except that the Company records its federal and state
deferred tax assets and liabilities at corporate. Intersegment sales are not
significant.
Financial information for the Company's reportable segments consisted of the
following:
Year Ended December 31,
2003 2002 2001
- ------------------------------------- --------- --------- ---------
Net sales
MRO - US $ 302,047 $ 306,863 $ 306,917
MRO - CAN 18,976 16,505 13,999
OEM - US 54,147 55,547 52,350
OEM - INTL 13,921 8,541 6,141
- -------------------------------------- --------- --------- ---------
Consolidated total $ 389,091 $ 387,456 $ 379,407
- -------------------------------------- --------- --------- ---------
Operating Income (loss)
MRO - US $ 24,993 $ 23,828 $ 15,167
MRO - CAN 1,494 1,051 870
OEM - US 537 2,490 2,166
OEM - INTL (4,283) (5,558) (2,001)
- -------------------------------------- --------- --------- ---------
Consolidated total $ 22,741 $ 21,811 $ 16,202
- -------------------------------------- --------- --------- ---------
Capital expenditures
MRO - US $ 1,303 $ 3,941 $ 4,496
MRO - CAN 1,229 944 40
OEM - US 1,565 868 684
OEM - INTL 144 211 9
- -------------------------------------- --------- --------- ---------
Consolidated total $ 4,241 $ 5,965 $ 5,229
- -------------------------------------- --------- --------- ---------
Depreciation and amortization
MRO - US $ 5,592 $ 5,650 $ 6,553
MRO - CAN 175 121 278
OEM - US 804 799 1,060
OEM - INTL 532 257 254
- -------------------------------------- --------- --------- ---------
Consolidated total $ 7,103 $ 6,827 $ 8,146
- -------------------------------------- --------- --------- ---------
Total assets
MRO - US $ 168,783 $ 154,832 $ 165,603
MRO - CAN 17,137 13,989 15,023
OEM - US 36,076 33,181 34,932
OEM - INTL 9,771 8,379 5,498
- -------------------------------------- --------- --------- ---------
Segment total 231,767 210,381 221,056
- -------------------------------------- --------- --------- ---------
Corporate 15,176 15,450 13,150
- -------------------------------------- --------- --------- ---------
Consolidated total $ 246,943 $ 225,831 $ 234,206
- -------------------------------------- --------- --------- ---------
Goodwill
MRO - US $ 22,104 $ 22,104 $ 22,104
MRO - CAN 4,294 4,294 4,294
OEM - US 2,251 2,251 2,251
- -------------------------------------- --------- --------- ---------
Consolidated total $ 28,649 $ 28,649 $ 28,649
====================================== ========= ========= =========
The reconciliation of segment profit to consolidated income before income taxes
consisted of the following:
Year Ended December 31,
2003 2002 2001
- -------------------------------- ------------------ --------------- ------------
Total operating income for
reportable segments $22,741 $21,811 $16,202
Interest and dividend income 194 53 654
Interest expense (131) (154) (706
Other - net 2,088 1,479 992
- -------------------------------- ------------------ --------------- ------------
Income before income taxes $24,892 $23,189 $17,142
================================ ================== =============== ============
Financial information related to the Company's operations by geographic area
consisted of the following:
Year Ended December 31,
2003 2002 2001
- ------------------------------- ------------------ -------------- --------------
Net sales
United States $356,194 $362,410 $359,267
Canada 18,976 16,505 13,999
Other foreign countries 13,921 8,541 6,141
- ------------------------------- ------------------ -------------- --------------
Consolidated total $389,091 $387,456 $379,407
=============================== ================== ============== ==============
Year Ended December 31,
2003 2002 2001
- ---------------------------- ---------------- ------------------ ---------------
Long-lived assets
United States $63,115 $60,678 $61,173
Canada 8,193 7,129 6,300
Other foreign countries 287 361 396
- ---------------------------- ---------------- ------------------ ---------------
Consolidated total $71,595 $68,168 $67,869
============================ ================ ================== ===============
Net sales are attributed to countries based on the location of
customers. Long-lived assets consist of total property, plant and equipment and
goodwill.
NOTE P - SUMMARY OF UNAUDITED QUARTERLY RESULTS OF OPERATIONS
Unaudited quarterly results of operations for the years ended December 31, 2003
and 2002 are summarized as follows:
Quarter ended
2003 Mar. 31 Jun. 30 Sept. 30 Dec. 31
- --------------------------------------- --------------- -------------- ------------- ------------
(In thousands, except per share data)
Net sales $96,075 $97,109 $99,301 $96,606
Cost of goods sold 34,548 35,034 35,349 36,193
Income before income taxes1 6,621 6,705 7,488 4,078
Provision for income taxes2 2,863 2,564 3,124 145
Net income3 3,758 4,141 4,364 3,933
Net income per share of common stock
Basic and Diluted 0.40 0.44 0.46 0.41
Diluted weighted average shares
outstanding 9,511 9,506 9,511 9,519
Quarter ended
2002 Mar. 31 Jun. 30 Sept. 30 Dec. 31
- --------------------------------------- --------------- -------------- ------------- ------------
(In thousands, except per share data)
Net sales $95,746 $99,890 $98,474 $93,346
Cost of goods sold 33,704 35,343 35,211 32,871
Income before income taxes 6,410 8,056 6,628 2,095
Provision for income taxes 2,578 3,360 2,869 1,935
Net income4, 5 3,832 4,696 3,759 160
Net income per share of common stock
Basic and Diluted 0.40 0.49 0.39 0.02
Diluted weighted average shares
outstanding 9,657 9,643 9,576 9,526
1 The fourth quarter includes a $2,789 pre tax loss related to the sale
of Lawson Products Limited, the Company's former UK subsidiary.
2 The fourth quarter includes a $2,157 reduction of the tax provision to
reflect the partial utilization of a capital loss generated by the
sale of the Company's former UK subsidiary.
3 The second, third and fourth quarters, respectively, included $751,
$240 and $486 of charges for compensation arrangements related to
management personnel reductions.
4 Inventories and cost of goods sold during interim periods are
determined through the use of estimated gross profit rates. The
difference between actual and estimated gross profit rates used for
interim periods was adjusted in the fourth quarter. This adjustment
increased net income by approximately $1,955.
5 The fourth quarter included $421 of charges for compensation
arrangements related to management personnel reductions.
SCHEDULE II
LAWSON PRODUCTS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(In Thousands)
BALANCE AT CHARGED TO COSTS DEDUCTIONS - BALANCE AT END
DESCRIPTION BEGINNING OF PERIOD AND EXPENSES DESCRIBE (A) OF PERIOD
----------- ------------------- ------------ ------------ ---------
Allowance deducted from assets
to which it applies:
Allowance for doubtful
accounts:
Year ended December 31, 2003 $1,830 $1,578 $1,287 $2,121
Year ended December 31, 2002 1,803 1,585 1,558 1,830
Year ended December 31, 2001 1,659 1,901 1,757 1,803
Note A - Uncollected receivables written off, net of recoveries.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
The Company's chief executive officer and chief financial officer have
concluded, based on their evaluation as of the end of the period covered by this
report, that the Company's "disclosure controls and procedures" (as defined in
the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) are effective
to ensure that information required to be disclosed in the reports that the
Company files or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms. There have been no
significant changes in our internal controls over financial reporting or in
other factors that could significantly affect these controls subsequent to the
date of the previous mentioned evaluation.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
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 11,
2004, 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 in Item 1 - Business
under "Executive Officers of the Registrant."
c. Audit Committee Financial Expert
--------------------------------
The Company had determined that Mitchell Saranow, member of the Audit
Committee of the Board of Directors, qualifies as an "audit committee financial
expert" as defined in Item 401 (h) of Regulation S-K, and that Mr. Saranow is
"independent" as the term is used in Item 7 (d) (3) (iv) of Schedule 14A under
the Securities Exchange Act.
d. Code of Business Conduct
-------------------------
The Company has adopted a Code of Ethics applicable to all employees.
This code is applicable to Senior Financial Executives including the principle
executive officer, principle financial officer and principle accounting officer
of the Company. The Company's Code of Ethics is available on the Company's web
site at www.lawsonproducts.com. The Company intends to post on its web site any
amendments to, or waivers from its Code of Ethics applicable to Senior Financial
Executives. The Company will provide shareholders with a copy of its Code of
Ethics upon written request directed to the Company's Secretary at the Company's
address. .
The Audit, Compensation and Nominating and Corporate Governance
committees have each adopted a charter for their respective committees. These
charters may be viewed on the Corporation's website, www.lawsonproducts.com, and
copies may be obtained by request to the Secretary of the Corporation 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 11,
2004, under the caption "Remuneration of Executive Officers," which information
is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
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 11,
2004 under the captions "Securities Beneficially Owned by Principal Stockholders
and Management," and "Equity Compensation Plan Information", which information
is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
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 11,
2004 under the caption "Election of Directors" and "Certain Relationships and
Related Transactions" which information is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT 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 11, 2004
under the caption "Fees Paid to Independent Auditors" which information is
incorporated herein by reference.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) (1) Financial Statements
The following information is presented in this report:
Consolidated Balance Sheets as of December 31, 2003 and 2002.
Consolidated Statements of Income for the Years ended December
31, 2003, 2002 and 2001.
Consolidated Statements of Changes in Stockholders' Equity for
the Years ended December 31, 2003, 2002 and 2001.
Consolidated Statements of Cash Flows for the Years ended
December 31, 2003, 2002 and 2001.
Notes to Consolidated Financial Statements.
(2) Financial Statement Schedule
The following consolidated financial statement schedule of Lawson
Products, Inc. and subsidiaries is included in Item 15(d):
Schedule II - Valuation and Qualifying Accounts is submitted with this report.
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not submitted because
they are not applicable or are not required under Regulation S-X or because the
required information is included in the financial statements or notes thereto.
(3) Exhibits.
--------
3(a) 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(b) Amended and Restated By-laws of the Company.
*10(c)(1) Lawson Products, Inc. Incentive Stock Plan, incorporated
herein by reference to Appendix A to the Company's Proxy
Statement for the Annual Meeting of Stockholders held on May
11, 1999.
*10(c)(2) Salary Continuation Agreement between the Company and Mr.
Sidney L. Port dated January 7, 1980 incorporated herein by
reference from Exhibit 10(c)(2) to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31,
1991.
*10(c)(3) Employment Agreement between the Company and Mr. Jerome
Shaffer, incorporated herein by reference from Exhibit
10(c)(9) to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1985.
*10(c)(3.1) First Amendment to Employment Agreement between the Company
and Mr. Jerome Shaffer, dated as of August 1, 1996,
incorporated herein by reference from Exhibit 10(c)(6.1) to
the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1996.
*10(c)(4) Employment Agreement between the Company and Jeffrey B.
Belford dated March 10, 1983, incorporated herein by
reference from Exhibit 10(c)(5) to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31,
1999.
*10(c)(5) 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(c)(6) Employment Agreement dated July 21, 1994 between the Company
and Roger F. Cannon, incorporated herein by reference to
Exhibit 10(c)(8) to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1998.
*10(c)(7) Agreement between the Company and Bernard Kalish dated July
31, 1999, 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, 1999.
10(c)(8) 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(c)(9) Lawson Products, Inc. 2002 Stock Equivalents Plan for Non
Employee Directors, incorporated herein by reference from
Exhibit 10(c)(9) to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 2002.
14 Code of Ethics of the Company
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.
*Indicates management employment contracts or compensatory plans or
arrangements.
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.
(b) Reports on Form 8-K
-------------------
During the quarter ended December 31, 2003, the Company filed
a Current Report on Form 8-K dated October 22, 2003. This
Form 8-K contained, as an exhibit, a press release pertaining
to the financial results of the Company for the quarter ended
September 30, 2003.
During the quarter ended March 31, 2004, the Company filed a
Current Report on Form 8-K dated March 3, 2004. This Form 8-K
contained, as an exhibit, a press release pertaining to the
financial results of the Company for the year ended December
31, 2003.
(c) Exhibits
--------
See item 15(a)(3) above for a list of exhibits to this
report.
(d) Schedules
---------
See item 15(a)(2) above for a list of schedules filed with
this report.
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.
Date: March 12, 2004
By: /s/ Robert J. Washlow
----------------------------------
Robert J. Washlow, Chairman of the
Board and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below this day of March 12, 2004, by the following
persons on behalf of the registrant and in the capacities indicated.
Signature Title
--------- -----
Chairman of the Board,
Chief Executive Officer and
Director
/s/ Robert J. Washlow (principal executive officer)
- --------------------------------------
Robert J. Washlow
/s/ Thomas Neri Executive Vice President, Finance
- -------------------------------------- and Corporate Planning
Thomas Neri (principal financial officer)
/s/ Joseph L. Pawlick Senior Vice President-Accounting
- -------------------------------------- (principal accounting officer)
Joseph L. Pawlick
/s/ Jerome Shaffer Vice President, Treasurer and Director
- --------------------------------------
Jerome Shaffer
/s/ James T. Brophy Director
- --------------------------------------
James T. Brophy
/s/ Ronald B. Port, M.D. Director
- --------------------------------------
Ronald B. Port, M.D.
/s/ Sidney L. Port Director
- --------------------------------------
Sidney L. Port
/s/ Robert G. Rettig Director
- --------------------------------------
Robert G. Rettig
/s/ Mitchell H. Saranow Director
- --------------------------------------
Mitchell H. Saranow
/s/ Lee S. Hillman Director
- --------------------------------------
Lee S. Hillman
/s/ Wilma J. Smelcer Director
- --------------------------------------
Wilma J. Smelcer
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------ ----------------------
3(a) 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(b) Amended and Restated By-laws of the Company.
10(c)(1) Lawson Products, Inc. Incentive Stock Plan, incorporated herein
by reference to Appendix A to the Company's Proxy Statement for
the Annual Meeting of Stockholders held on May 11, 1999.
10(c)(2) Salary Continuation Agreement between the Company and Mr. Sidney
L. Port, dated January 7, 1980, incorporated herein by reference
from Exhibit 10(c)(2) to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1991.
10(c)(3) Employment Agreement between the Company and Mr. Jerome Shaffer,
incorporated herein by reference from Exhibit 10(c)(9) to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1985.
10(c)(3.1) First Amendment to Employment Agreement between the Company and
Mr. Jerome Shaffer, dated as of August 1, 1996, incorporated
herein by reference from Exhibit 10(c)(6.1) to the Company's
Annual Report on Form 10-K for the fiscal year ended December
31, 1996.
10(c)(4) Employment Agreement between the Company and Jeffrey B. Belford
dated March 10, 1983, incorporated herein by reference to
Exhibit 10(c)(5) to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1999.
10(c)(5) 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(c)(6) Employment Agreement dated July 21, 1994 between the Company and
Roger F. Cannon, incorporated herein by reference to Exhibit
10(c)(8) to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1998.
10(c)(7) Agreement between the Company and Bernard Kalish dated July 31,
1999, 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, 1999.
10(c)(8) 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(c)(9) Lawson Products, Inc. 2002 Stock Equivalents Plan for Non
Employee Directors, incorporated herein by reference from
Exhibit 10(c)(9) to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 2002.
14 Code of Ethics of the Company.
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