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Distribution Solutions Group, Inc. - Quarter Report: 2019 June (Form 10-Q)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
 
 
 
FORM 10-Q
 
 
 
 
(Mark One)
 
ý
Quarterly Report under Section 13 OR 15(d) of the Securities Exchange Act of 1934
For quarterly period ended June 30, 2019
or
 
¨
Transition Report under Section 13 OR 15(d) of the Securities Exchange Act of 1934
For the transition period from              to             

Commission file Number: 0-10546 
 
 
 
LAWSON PRODUCTS, INC.
(Exact name of registrant as specified in its charter)
 
 
 
Delaware
 
36-2229304
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
8770 W. Bryn Mawr Avenue, Suite 900, Chicago, Illinois
 
60631
(Address of principal executive offices)
 
(Zip Code)
(773) 304-5050
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading Symbol
 
Name of each exchange on which registered
Common stock, $1.00 par value
 
LAWS
 
NASDAQ Global Select Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
¨
Accelerated filer
ý
Non-accelerated filer
¨ (Do not check if a smaller reporting company)
Smaller reporting company
ý
 
 
Emerging growth company
¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ¨  
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
The number of shares outstanding of the registrant’s common stock, $1 par value, as of July 15, 2019 was 8,989,343.


TABLE OF CONTENTS
 
 
 
Page #
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 3.
Quantitative and Qualitative Disclosure About Market Risk
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2

Table of Contents

“Safe Harbor” Statement under the Securities Litigation Reform Act of 1995:

This Quarterly Report on Form 10-Q 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 or that might otherwise impact the business include:

•
the effect of general economic and market conditions;
•
the ability to generate sufficient cash to fund our operating requirements;
•
the ability to meet the covenant requirements of our lines of credit;
•
the market price of our common stock may decline;
•
inventory obsolescence;
•
work stoppages and other disruptions at transportation centers or shipping ports;
•
changing customer demand and product mixes;
•
increases in energy costs, tariffs and the cost of raw materials, including commodity prices;
•
decreases in demand from oil and gas customers due to lower oil prices;
•
disruptions of our information and communication systems;
•
cyber attacks or other information security breaches;
•
failure to recruit, integrate and retain a talented workforce including productive sales representatives;
•
the inability to successfully make or integrate acquisitions into the organization;
•
foreign currency fluctuations
•
failure to manage change within the organization;
•
highly competitive market;
•
changes that affect governmental and other tax-supported entities;
•
violations of environmental protection or other governmental regulations;
•
negative changes related to tax matters;
•
Luther King Capital's significant influence over the Company given its ownership percentage; and
•
all other factors discussed in the Company’s “Risk Factors” set forth in its Annual Report on Form 10-K for the year ended December 31, 2018.

The Company undertakes no obligation to update any such factors 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.



3

Table of Contents

PART I - FINANCIAL INFORMATION

ITEM 1 - FINANCIAL STATEMENTS
Lawson Products, Inc.
Condensed Consolidated Balance Sheets
(Dollars in thousands, except share data)
 
June 30,
 
December 31,
 
2019
 
2018
ASSETS
(Unaudited)
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
6,915

 
$
11,883

Restricted cash
800

 
800

Accounts receivable, less allowance for doubtful accounts of $596 and $549, respectively
45,570

 
37,682

Inventories, net
55,360

 
52,887

Miscellaneous receivables and prepaid expenses
4,742

 
3,653

Total current assets
113,387

 
106,905

 
 
 
 
Property, plant and equipment, net
17,630

 
23,548

Deferred income taxes
19,021

 
20,592

Goodwill
20,794

 
20,079

Cash value of life insurance
13,167

 
12,599

Intangible assets, net
12,895

 
13,112

Lease assets
11,840

 
—

Other assets
298

 
307

Total assets
$
209,032

 
$
197,142

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Revolving lines of credit
$
8,823

 
$
10,823

Accounts payable
16,550

 
15,207

Lease obligation
3,708

 
—

Accrued expenses and other liabilities
34,904

 
40,179

Total current liabilities
63,985

 
66,209

 
 
 
 
Security bonus plan
12,353

 
12,413

Lease obligation
10,500

 
5,213

Deferred compensation
5,670

 
5,304

Deferred tax liability
2,900

 
2,761

Other liabilities
4,292

 
6,069

Total liabilities
99,700

 
97,969

 
 
 
 
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 - 9,032,948 and 9,005,716 shares, respectively
Outstanding - 8,983,162 and 8,955,930 shares, respectively
9,033

 
9,006

Capital in excess of par value
16,973

 
15,623

Retained earnings
84,728

 
77,338

Treasury stock – 49,786 shares
(1,234
)
 
(1,234
)
Accumulated other comprehensive loss
(168
)
 
(1,560
)
Total stockholders’ equity
109,332

 
99,173

Total liabilities and stockholders’ equity
$
209,032

 
$
197,142


See notes to condensed consolidated financial statements.

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Table of Contents

Lawson Products, Inc.
Condensed Consolidated Statements of Income and Comprehensive Income
(Dollars in thousands, except per share data)
(Unaudited)
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
 
 
 
 
 
 
 
 
Product revenue
$
85,996

 
$
80,397

 
$
167,911

 
$
155,367

Service revenue
10,101

 
9,985

 
19,529

 
19,474

Total revenue
96,097

 
90,382

 
187,440

 
174,841

 
 
 
 
 
 
 
 
Product cost of goods sold
40,580

 
37,856

 
78,587

 
72,688

Service costs
4,474

 
3,395

 
8,887

 
6,804

Gross profit
51,043

 
49,131

 
99,966

 
95,349

 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
Selling expenses
21,867

 
22,004

 
43,609

 
43,944

General and administrative expenses
27,553

 
21,573

 
49,190

 
44,014

Operating expenses
49,420

 
43,577

 
92,799

 
87,958

 
 
 
 
 
 
 
 
Operating income
1,623

 
5,554

 
7,167

 
7,391

 
 
 
 
 
 
 
 
Interest expense
(146
)
 
(264
)
 
(343
)
 
(504
)
Other income (expense), net
339

 
(777
)
 
811

 
(490
)
 
 
 
 
 
 
 
 
Income before income taxes
1,816

 
4,513

 
7,635

 
6,397

Income tax expense
509

 
1,319

 
2,182

 
1,967

 
 
 
 
 
 
 
 
Net income
$
1,307

 
$
3,194

 
$
5,453

 
$
4,430

 
 
 
 
 
 
 
 
Basic income per share of common stock
$
0.15

 
$
0.36

 
$
0.61

 
$
0.50

 
 
 
 
 
 
 
 
Diluted income per share of common stock
$
0.14

 
$
0.35

 
$
0.58

 
$
0.48

 
 
 
 
 
 
 
 
Weighted average shares outstanding:
 
 
 
 
 
 
 
Basic weighted average shares outstanding
8,976

 
8,903

 
8,969

 
8,896

Effect of dilutive securities outstanding
405

 
314

 
379

 
304

Diluted weighted average shares outstanding
9,381

 
9,217

 
9,348

 
9,200

 
 
 
 
 
 
 
 
Comprehensive income:
 
 
 
 
 
 
 
Net income
$
1,307

 
$
3,194

 
$
5,453

 
$
4,430

Other comprehensive income (loss), net of tax
 
 
 
 
 
 
 
Adjustment for foreign currency translation
717

 
22

 
1,392

 
(1,461
)
Net comprehensive (loss) income
$
2,024

 
$
3,216

 
$
6,845

 
$
2,969







See notes to condensed consolidated financial statements.

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Table of Contents

Lawson Products, Inc.
Condensed Consolidated Statements of Changes in Stockholders’ Equity - 2019
(Dollars in thousands)
(Unaudited)
 
Common Stock
 
Capital in Excess of Par Value
 
 
 
 
 
Accumulated Other Comprehensive Income (Loss)
 
Total Stockholders' Equity
 
Outstanding Shares
 
$1 Par Value
 
 
Retained Earnings
 
Treasury Stock
 
 
Balance at January 1, 2019
8,955,930

 
$
9,006

 
$
15,623

 
$
77,338

 
$
(1,234
)
 
$
(1,560
)
 
$
99,173

Change in accounting principle (1)
—

 
—

 
—

 
1,937

 
—

 
—

 
1,937

Net income
—

 
—

 
—

 
4,146

 
—

 
—

 
4,146

Adjustment for foreign currency translation
—

 
—

 
—

 
—

 
—

 
675

 
675

Stock-based compensation
—

 
—

 
666

 
—

 
—

 
—

 
666

Shares issued
6,520

 
6

 
(6
)
 
—

 
—

 
—

 
—

Balance at March 31, 2019
8,962,450

 
9,012

 
16,283

 
83,421

 
(1,234
)
 
(885
)
 
106,597

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
—

 
—

 
—

 
1,307

 
—

 
—

 
1,307

Adjustment for foreign currency translation
—

 
—

 
—

 
—

 
—

 
717

 
717

Stock-based compensation
—

 
—

 
711

 
—

 
—

 
—

 
711

Shares issued
20,712

 
21

 
(21
)
 
—

 
—

 
—

 
—

Balance at June 30, 2019
8,983,162

 
$
9,033

 
$
16,973

 
$
84,728

 
$
(1,234
)
 
$
(168
)
 
$
109,332


(1)
The Company adopted the ASC No.842, Leases (ASC 842) on January 1, 2019 using the modified retrospective approach. See Note 2 - Leases for further details.




























See notes to condensed consolidated financial statements.

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Table of Contents

Lawson Products, Inc.
Condensed Consolidated Statements of Changes in Stockholders’ Equity - 2018
(Dollars in thousands)
(Unaudited)
 
Common Stock
 
Capital in Excess of Par Value
 
 
 
 
 
Accumulated Other Comprehensive Income (Loss)
 
Total Stockholders' Equity
 
Outstanding Shares
 
$1 Par Value
 
 
Retained Earnings
 
Treasury Stock
 
 
Balance at January 1, 2018
8,888,028

 
$
8,921

 
$
13,005

 
$
71,453

 
$
(711
)
 
$
822

 
$
93,490

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Change in accounting principle (2)
—

 
—

 
—

 
(329
)
 
—

 
—

 
(329
)
Net income
—

 
—

 
—

 
1,236

 
—

 
—

 
1,236

Adjustment for foreign currency translation
—

 
—

 
—

 
—

 
—

 
(1,483
)
 
(1,483
)
Stock-based compensation
—

 
—

 
651

 
—

 
—

 
—

 
651

Shares issued
307

 
1

 
(1
)
 
—

 
—

 
—

 
—

Balance at March 31, 2018
8,888,335

 
8,922

 
13,655

 
72,360

 
(711
)
 
(661
)
 
93,565

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
—

 
—

 
—

 
3,194

 
—

 
—

 
3,194

Adjustment for foreign currency translation
—

 
—

 
—

 
—

 
—

 
22

 
22

Stock-based compensation
—

 
—

 
673

 
—

 
—

 
—

 
673

Shares issued
30,304

 
30

 
(30
)
 
—

 
—

 
—

 
—

Balance at June 30, 2018
8,918,639

 
$
8,952

 
$
14,298

 
$
75,554

 
$
(711
)
 
$
(639
)
 
$
97,454


(2)
The Company adopted the ASC 606, Revenue from Contracts with Customers (ASC 606) on January 1, 2018 using the modified retrospective approach.



























See notes to condensed consolidated financial statements.

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Table of Contents

Lawson Products, Inc.
Condensed Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)

 
Six Months Ended June 30,
 
2019
 
2018
 
 
 
 
Operating activities:
 
 
 
Net income
$
5,453

 
$
4,430

 
 
 
 
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
 
 
 
Depreciation and amortization
2,933

 
3,365

Stock-based compensation
5,247

 
1,057

Deferred income taxes
1,591

 
1,380

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(7,974
)
 
(4,632
)
Inventories
(1,882
)
 
(682
)
Prepaid expenses and other assets
(1,629
)
 
(1,563
)
Accounts payable and other liabilities
(6,406
)
 
(1,745
)
Other
434

 
238

Net cash (used in) provided by operating activities
$
(2,233
)
 
$
1,848

 
 
 
 
Investing activities:
 
 
 
Purchases of property, plant and equipment
$
(944
)
 
$
(1,428
)
Business acquisition
—

 
(157
)
Net cash used in investing activities
$
(944
)
 
$
(1,585
)
 
 
 
 
Financing activities:
 
 
 
Net (payments on) proceeds from revolving lines of credit
$
(2,000
)
 
$
1,528

Payment of financing lease principal
(123
)
 
—

Proceeds from stock option exercises
16

 
—

Net cash (used in) provided by financing activities
$
(2,107
)
 
$
1,528

 
 
 
 
Effect of exchange rate changes on cash and cash equivalents
$
316

 
$
(215
)
 
 
 
 
Increase (decrease) in cash, cash equivalents and restricted cash
(4,968
)
 
1,576

 
 
 
 
Cash, cash equivalents and restricted cash at beginning of period
12,683

 
5,216

 
 
 
 
Cash, cash equivalents and restricted cash at end of period
$
7,715

 
$
6,792

 
 
 
 
Cash and cash equivalents
$
6,915

 
$
5,992

Restricted cash
800

 
800

Cash, cash equivalents and restricted cash
$
7,715

 
$
6,792

 
 
 
 
 
 
 
 
Supplemental disclosure of cash flow information
 
 
 
Net cash paid for income taxes
$
259

 
$
1,101


See notes to condensed consolidated financial statements.

8

Table of Contents

Notes to Condensed Consolidated Financial Statements

Note 1 — Basis of Presentation and Summary of Significant Accounting Policies

The accompanying unaudited condensed consolidated financial statements of Lawson Products, Inc. (the “Company”) have been prepared in accordance with generally accepted accounting principles for interim financial information, the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not contain all disclosures required by generally accepted accounting principles. Reference should be made to the Company’s Annual Report on Form 10-K for the year ended December 31, 2018. In the opinion of the Company, all normal recurring adjustments have been made that are necessary to present fairly the results of operations for the interim periods. Operating results for the three and six month periods ended June 30, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019.

The Company has two operating segments. The first segment, the Lawson operating segment, distributes maintenance, repair and operations ("MRO") products to customers primarily through a network of sales representatives offering vendor managed inventory ("VMI") service to customers throughout the United States and Canada. The second segment, The Bolt Supply House Ltd. ("Bolt Supply") operating segment, distributes MRO products primarily through its branches located in Western Canada. Bolt Supply had 14 branches in operation at the end of the second quarter 2019.

Note 2 - Leases

In February 2016 the FASB established Topic ASC 842, Leases, by issuing Accounting Standards Update 2016-02. Lawson adopted ASC 842 as of January 1, 2019. The Company leases property used for distribution centers, office space, and Bolt branch locations throughout the US and Canada, along with various equipment located in distribution centers and corporate headquarters. The Company is also a lessor of its Decatur, Alabama property previously used in conjunction with a discontinued operation, and is a sublessor of a portion of its corporate headquarters.

Lawson Operating Leases

Lawson MRO primarily has two types of leases: leases for real estate and leases for equipment. Operating real estate leases that have a material impact on the operations of the Company are related to the Company's distribution network and headquarters. The Company possesses several additional property leases that are month to month basis and are not material in nature. Lawson MRO does not possess any leases that have residual value guarantees. Several property leases include renewal clauses which vary in length and may not include specific rent renewal amounts. The Company will revise the value of the right of use assets and associated lease liabilities when the Company is reasonably certain it will renew a lease.

The key change commencing on January 1, 2019 for the Company is the recognition of assets and liabilities of operating leases with lease terms longer than twelve months that were not previously capitalized on the balance sheet. The value of the Right Of Use ("ROU") assets and associated lease liabilities is calculated using the total cash payments over the course of the lease, discounted to the present value using the appropriate incremental borrowing rate. The right of use asset will be amortized over its useful life. Similar to deferred rent under ASC 840, the lease liability is reduced in conjunction with the lease payments made, with adjustments made to the lease liability in order to account for non-straight line cash payments through the life of the lease.

Bolt primarily leases the real estate for its branch locations as well as its distribution center in Calgary, Alberta. Bolt possesses additional property leases that are month to month and not material in nature. Bolt property leases include renewal clauses which vary in length and may not include specific rent renewal amounts. The Company will revise the value of the right of use asset and associated lease liability when the Company is reasonably certain it will renew a lease.

Lease of McCook Distribution Facility

Upon adoption of ASC 842, the previously capitalized financing asset and lease liability for the McCook distribution facility was removed from the balance sheet and re-established as a ROU asset and a lease liability as an operating lease. The Company did not include the lease renewal periods in its assessment of the McCook lease as it did not meet the reasonably certain threshold required under ASC 842. Changes in the value of the assets and liabilities associated with the property due to adoption of ASC 842 have been accounted for as an adjustment to beginning retained earnings of $1.9 million.






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Accounting Policy Elections

As part of the transition to ASC 842, the Company elected the following practical expedients:

The transitional package of practical expedients as prescribed by ASC 842. Per the practical expedient for the transition to ASC 842, the Company did not reassess expired leases, existing lease classifications or initial indirect costs for existing leases in the calculation of the right to use asset and lease liability.

The Company elected the modified retrospective method of transition, which resulted in no restatement of prior period results with the adoption impact being recorded to opening retained earnings.

The Company did not capitalize short term leases, for all asset classes defined as leases with a term of shorter than twelve months, on the balance sheet. These leases have not been transitioned to ASC 842.

As a practical expedient, the Company did not reassess the accounting for initial direct costs of current leases.

The Company elected not to use the hindsight practical expedient in determining the lease term.

The Company recognizes certain lease components and non-lease components together and not as separate parts of a lease for real estate leases. The Company will exercise this practical expedient in the future by asset class.

Significant Assumptions

The Company is required to determine a discount rate for the present value of lease payments. If the rate is not included in the lease or cannot be readily determined, the Company must estimate the incremental borrowing rate to be used for the discount rate. The Company determined that Lawson MRO and Bolt have different discount rates for leases, as both reporting units have separate borrowing agreements. The Lawson MRO segment will discount the present value of the total payments for the operating and financing leases using the incremental borrowing rate of 5.5%, given the similarity of the lease terms amongst asset classes. The Bolt segment will discount the present value of the total payments of each operating and financing lease at its incremental borrowing rate of 4.2%. The discount rate of Lawson MRO and Bolt will be reviewed on a periodic basis and updated as needed.

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The expenses and income generated by the leasing activity of Lawson as lessee for the three and six months ending June 30, 2019 are as follows (Dollars in thousands):
Lease Type
 
Classification
 
Three Months Ending June 30, 2019
 
Six Months Ending June 30, 2019
 
 
 
 
 
 
 
Consolidated Operating Lease Expense (1)
 
Operating expenses
 
$
1,227

 
$
2,502

 
 
 
 
 
 
 
Consolidated Financing Lease Amortization
 
Operating expenses
 
51

 
99

Consolidated Financing Lease Interest
 
Interest expense
 
7

 
13

Consolidated Financing Lease Expense
 
 
 
58

 
112

 
 
 
 
 
 
 
Sublease Income (2)
 
Operating expenses
 
(80
)
 
(160
)
Net Lease Cost
 
 
 
$
1,205

 
$
2,454


(1) Includes short term lease expense, which is immaterial
(2) Sublease income from sublease of a portion of the Company headquarters. The sublease was terminated in June 2019 and the Company has no other subleases.

The Company recorded $1.1 million of operating lease expense in the second quarter of 2018 and $2.2 million of operating lease expense in the first two quarters of 2018.

The value of the net assets and liabilities generated by the leasing activity of Lawson as lessee as of June 30, 2019 are as follows (Dollars in thousands):
Lease Type
 
Amount
 
 
 
Total ROU operating lease assets (1)
 
$
11,142

Total ROU financing lease assets (2)
 
698

Total lease assets
 
$
11,840

 
 
 
Total current operating lease obligation
 
$
3,434

Total current financing lease obligation
 
274

Total current lease obligations
 
$
3,708

 
 
 
Total long term operating lease obligation
 
$
10,089

Total long term financing lease obligation
 
411

Total long term lease obligation
 
$
10,500



(1) Operating lease assets are recorded net of accumulated amortization of $1.4 million as of June 30, 2019
(2) Financing lease assets are recorded net of accumulated amortization of $0.1 million as of June 30, 2019


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Table of Contents


The value of the lease liabilities generated by the leasing activities of Lawson as lessee as of June 30, 2019 were as follows (Dollars in thousands):
Maturity Date of Lease Liabilities
 
Operating Leases
 
Financing Leases
 
Total
 
 
 
 
 
 
 
Year one
 
$
4,032

 
$
267

 
$
4,299

Year two
 
4,044

 
240

 
4,284

Year three
 
3,981

 
126

 
4,107

Year four
 
1,880

 
79

 
1,959

Year five
 
845

 
25

 
870

Subsequent years
 
55

 
—

 
55

Total lease payments
 
14,837

 
737

 
15,574

Less: Interest
 
1,314

 
52

 
1,366

Present value of lease liabilities
 
$
13,523

 
$
685

 
$
14,208



The Company’s future minimum lease commitments as of December 31, 2018, were as follows (Dollars in thousands):
Maturity Date of Lease Liabilities
Operating Leases (2)(3)
Financing Lease (3)(4)
Capital Leases (4)
Year one
 
$
2,574
 
 
$
1,395

 
$
201

Year two
 
2,369
 
 
1,444

 
155

Year three
 
2,349
 
 
1,493

 
91

Year four
 
2,008
 
 
760

 
11

Year five
 
1,130
 
 
—

 
—

Subsequent years
 
374
 
 
—

 
—

Total lease payments (1)
 
$
10,804
 
 
$
5,092

 
$
458


(1)
Minimum lease payments exclude payments to landlord for real estate taxes and common area maintenance

(2)
On January 1, 2019, the Company elected the modified retrospective method of transition to adopt the new lease standard ASC 842, which resulted in no restatement of prior period results. At December 31, 2018, prior to adoption of the new lease standard, operating lease obligations were not included as a liability on the balance sheet. Therefore, the operating lease obligations are included in the table for comparative purposes only and the total lease liability is not included as it is not applicable

(3)
The $5.1 million minimum lease obligation attributable to the McCook lease that was classified as a financing lease on December 31, 2018 was reclassified as an operating lease under the new accounting standard adopted on January 1, 2019

(4)
Lease obligations classified as capital leases on December 31, 2018 were reclassified as financing leases under the new lease standard adopted on January 1, 2019

The weighted average lease terms and interest rates of the leases held by Lawson as of June 30, 2019 are as follows:
Lease Type
 
Weighted Average Term in Years
 
Weighted Average Interest Rate
 
 
 
 
 
Operating Leases
 
3.8
 
5.2%
Financing Leases
 
3.2
 
5.5%

The cash outflows of the leasing activity of Lawson as lessee for the six months ending June 30, 2019 are as follows (Dollars in thousands):
Cash Flow Source
 
Classification
 
Amount
 
 
 
 
 
Operating cash flows from operating leases
 
Operating activities
 
$
1,857

Operating cash flows from financing leases
 
Operating activities
 
7

Financing cash flows from financing leases
 
Financing activities
 
123




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Table of Contents

Lawson as Lessor

The Company is a lessor of its facility in Decatur, Alabama, which was previously used in conjunction with a discontinued operation. The lease expires in February, 2024. Both the lessor and lessee have a put option to each other upon the completion of the remediation of the environmental matter at a pre-negotiated price less 50% of the rent paid upon the put option being exercised. The net book value at June 30, 2019 is $0.4 million. The Company classifies this lease as an operating lease. The operating lease of the Decatur facility generated approximately $0.1 million of income to the Company for the six months ending June 30, 2019.
Annual lease income classified as operating expenses of $0.2 million is anticipated through the earlier of the put option exercise or February, 2024.

Note 3 - Revenue Recognition

Adoption of ASC 606

On January 1, 2018 the Company adopted Accounting Standards Codification 606-Revenue From Contracts With Customers (“ASC 606”). As part of the Company's adoption of ASC 606, it concluded that it has two separate performance obligations, and accordingly, two separate revenue streams: products and services. As a result, the Company reports two separate revenue streams and two separate costs of revenues.

ASC 606 defines a five step process to recognize revenues at the time and in an amount that reflects the consideration expected to be received for the performance obligations that have been provided. ASC 606 defines contracts as written, oral and through customary business practice. Under this definition, the Company considers contracts to be created at the time an order to purchase product is agreed upon regardless of whether or not there is a written contract.

Performance Obligations

Lawson has two operating segments; the Lawson segment and the Bolt Supply segment. Customer contracts have the following performance obligations:

The Lawson segment has two distinct performance obligations offered to its customers: a product performance obligation and a service performance obligation. Although the Company has identified that it offers its customers both a product and a service obligation, the customer only receives one invoice per transaction with no price breakout between these obligations. The Company does not price its offerings based on any breakout between these obligations.

Lawson generates revenue primarily from the sale of MRO products to its customers. Revenue related to product sales is recognized at the time that control of the product has been transferred to the customer: either at the time the product is shipped or the time the product has been received by the customer. The Company does not commit to long-term contracts to sell customers a certain minimum quantity of products.

The Lawson segment offers a VMI service proposition to its customers. A portion of these services, primarily related to stocking of product and maintenance of the MRO inventory, is provided a short period of time after control of the purchased product has been transferred to the customer. Since some components of VMI service have not been provided at the time the control of the product transfers to the customer, that portion of expected consideration is deferred until the time that those services have been provided.

The Bolt Supply segment does not provide VMI services for its customers or provide services in addition to product sales to customers. Revenue is recognized at the time that control of the product has been transferred to the customer which is either upon delivery or shipment depending on the terms of the contract.

Accounting Policy Elections

The Company has elected to treat shipping and handling costs after the control of the product has been transferred to the customer as a fulfillment cost.

Sales taxes that are imposed on our sales and collected from customers are excluded from revenues.

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The Company expenses sales commissions when incurred as the amortization period is one year or less.

Significant Judgments

The Company employs certain significant judgments to estimate the dollar amount of revenue, and related expenses, allocated to the sale of product and service. These judgments include, among others, the percentage of customers that take advantage of the VMI services offered, the amount of revenue to be allocated to the VMI service based on the value of the service to its customers, and the amount of time after control of the product passes to the customer that the VMI service obligation is completed. It is assumed that any customer who averages placing orders at a frequency of longer than 30 days does not take advantage of the available VMI services offered. The estimate of the cost of sales is based on expenses directly related to sales representatives that provide direct VMI services to the customer.

Financial Impact of ASC 606 Adoption

As a result of applying ASC 606 the Company recorded a liability of $0.7 million for deferred revenue on January 1, 2018. Expenses related to these revenues of $0.4 million were also deferred resulting in a net reduction to opening retained earnings of $0.3 million as of January 1, 2018. At June 30, 2019, the Company had a deferred revenue liability of $0.7 million and a deferred expense of $0.3 million for related expenses associated with the deferred service performance obligations, respectively. The deferral of revenue and expenses does not affect the amount, timing and any uncertainty of cash flows generated from operations.

Disaggregated revenue by geographic area follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(Dollars in thousands)
2019
 
2018
 
2019
 
2018
 
 
 
 
 
 
 
 
United States
$
76,119

 
$
71,626

 
$
150,167

 
$
139,944

Canada
19,978

 
18,756

 
37,273

 
34,897

Consolidated total
$
96,097

 
$
90,382

 
$
187,440

 
$
174,841


Disaggregated revenue by product type follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
 
 
 
 
 
 
 
 
Fastening Systems
24.3
%
 
24.6
%
 
23.9
%
 
24.4
%
Fluid Power
15.2
%
 
14.8
%
 
15.2
%
 
14.7
%
Cutting Tools and Abrasives
13.0
%
 
13.4
%
 
13.1
%
 
12.3
%
Specialty Chemicals
11.7
%
 
12.3
%
 
11.5
%
 
13.4
%
Electrical
10.7
%
 
10.8
%
 
11.1
%
 
11.0
%
Aftermarket Automotive Supplies
7.6
%
 
7.8
%
 
8.0
%
 
8.2
%
Safety
4.7
%
 
4.7
%
 
4.7
%
 
4.7
%
Welding and Metal Repair
1.6
%
 
2.1
%
 
1.7
%
 
2.0
%
Other
11.2
%
 
9.5
%
 
10.8
%
 
9.3
%
Consolidated Total
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%

Note 4 — Restricted Cash

The Company has agreed to maintain $0.8 million in a money market account as collateral for an outside party that is providing certain commercial card processing services for the Company. The Company is restricted from withdrawing this balance without the prior consent of the outside party during the term of the agreement.


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Table of Contents

Note 5 — Inventories, Net

Inventories, net, consisting primarily of purchased goods which are offered for resale, were as follows:
 
(Dollars in thousands)
 
June 30, 2019
 
December 31, 2018
Inventories, gross
$
60,144

 
$
58,215

Reserve for obsolete and excess inventory
(4,784
)
 
(5,328
)
Inventories, net
$
55,360

 
$
52,887


Note 6 - Goodwill

Goodwill activity for the first six months of 2019 and 2018 is included in the table below:
 
(Dollars in thousands)
 
Six Months Ended June 30,
 
2019
 
2018
Beginning balance
$
20,079

 
$
19,614

Adjustment to original acquisition allocation
2

 
(17
)
Impact of foreign exchange
713

 
(793
)
Ending balance
$
20,794

 
$
18,804


Note 7 - Intangible Assets

The gross carrying amount and accumulated amortization by intangible asset class were as follows:
 
(Dollars in thousands)
 
June 30, 2019
 
December 31, 2018
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Value
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Value
Trade names
$
8,367

 
$
(1,741
)
 
$
6,626

 
$
8,090

 
$
(1,447
)
 
$
6,643

Customer relationships
7,301

 
(1,032
)
 
6,269

 
7,114

 
(645
)
 
6,469

 
$
15,668

 
$
(2,773
)
 
$
12,895

 
$
15,204

 
$
(2,092
)
 
$
13,112


Amortization expense of $0.7 million and $0.4 million related to intangible assets was recorded in General and administrative expenses for the six months ended June 30, 2019 and 2018, respectively.

Note 8 — Loan Agreement

Lawson Loan Agreement

In 2012, the Company entered into a Loan and Security Agreement (“Loan Agreement”). The Loan Agreement consists of a $40.0 million revolving line of credit facility, which includes a $10.0 million sub-facility for letters of credit. Certain terms of the original Loan Agreement have been revised by subsequent amendments.

The Loan Agreement, as amended, expires in August 2020. Due to the lock box arrangement and a subjective acceleration clause contained in the Loan Agreement, any outstanding borrowings under the revolving line of credit are classified as a current liability.

Currently, credit available under the Loan Agreement, as amended, is based upon:

a)
85% of the face amount of the Company’s eligible accounts receivable, generally less than 60 days past due, and

b)
the lesser of 60% of the lower of cost or market value of the Company’s eligible inventory, generally inventory expected to be sold within 18 months, or $20.0 million.

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The applicable interest rates for borrowings are at the Prime rate or, if the Company elects, the LIBOR rate plus 1.50% to 1.85% based on the Company’s debt to EBITDA ratio. The Loan Agreement is secured by a first priority perfected security interest in substantially all existing assets of the Company. Dividends are restricted to amounts not to exceed $7.0 million annually.

At June 30, 2019, the Company had $6.0 million of borrowings under its revolving line of credit facility and additional borrowing availability of $30.7 million. The Company paid interest of $0.4 million and $0.5 million for the six months ended June 30, 2019 and 2018, respectively. The weighted average interest rate was 4.48% and 3.74% for the six months ended June 30, 2019 and 2018, respectively.

In the second quarter of 2019, the Company's Board of Directors authorized a program in which the Company may repurchase up to $7.5 million of the Company’s common stock from time to time in open market transactions, privately negotiated transactions or by other methods.

In addition to other customary representations, warranties and covenants, if the excess borrowing capacity is below $10.0 million the Company is required to meet a minimum trailing twelve month EBITDA to fixed charges ratio, as defined in the amended Loan Agreement. On June 30, 2019, the Company's borrowing capacity exceeded $10.0 million. Therefore, the Company was not subject to this financial covenant, however, for informational purposes the result of the financial covenant is provided below:
Quarterly Financial Covenant
 
Requirement
 
Actual
EBITDA to fixed charges ratio
 
1.10 : 1.00
 
7.55 : 1.00

Commitment Letter

Bolt Supply has a Commitment Letter with BMO Bank of Montreal ("BMO") dated March 30, 2017 which allows Bolt Supply to access up to $5.5 million Canadian dollars in the form of either an overdraft facility or as commercial letters of credit. The Commitment Letter is cancellable at any time at BMOs sole discretion and is secured by substantially all of Bolt Supply’s assets. It carries an interest rate of the bank's prime rate plus 0.25%. At June 30, 2019, Bolt Supply had $3.7 million Canadian dollars of outstanding borrowings and remaining borrowing availability of $1.8 million Canadian dollars. The Commitment Letter is subject to a working capital ratio of 1.35:1, a maximum ratio of debt to tangible net worth of 2.5:1 of the Bolt Supply assets and Debt Service Coverage Ratio 1.25:1 as defined in the Commitment Letter. At June 30, 2019, Bolt Supply was in compliance with all covenants which are subject to periodic review, at least annually, with the next review due by August 31, 2019.

Note 9 — Severance Reserve

Changes in the Company’s reserve for severance as of June 30, 2019 and 2018 were as follows:
 
(Dollars in thousands)
 
Six Months Ended June 30,
 
2019
 
2018
Balance at beginning of period
$
359

 
$
483

Charged to earnings
1,512

 
692

Payments
(409
)
 
(532
)
Balance at end of period
$
1,462

 
$
643



16

Table of Contents

Note 10 — Stock-Based Compensation

The Company recorded stock-based compensation expense of $5.2 million and $1.1 million for the first six months of 2019 and 2018, respectively. A portion of stock-based compensation is related to the change in the market value of the Company's common stock.

A summary of stock-based awards issued during the six months ended June 30, 2019 follows:

Stock Performance Rights ("SPRs")
The Company issued 25,793 SPRs to key employees with an exercise price of $30.54 per share that cliff vest on December 31, 2021 and have a termination date of December 31, 2026. SPRs entitle the recipient to receive a cash payment equal to the excess of the market value of the Company's common stock over the SPR exercise price when the SPRs are surrendered.

Restricted Stock Units ("RSUs")
The Company issued 10,045 RSUs to certain members of the Company's Board of Directors with a vesting date of May 14, 2020. The Company issued 16,781 RSUs to key employees that cliff vest on December 31, 2021. Each RSU is exchangeable for one share of the Company's common stock at the end of the vesting period.

Market Stock Units ("MSUs")
The Company issued 39,948 MSUs to key employees that cliff vest on December 31, 2021. MSU's are exchangeable for the Company's common stock at the end of the vesting period. The number of shares of common stock that will be issued upon vesting, ranging from zero to 59,922, will be determined based upon the trailing sixty-day weighted average closing price of the Company's common stock on December 31, 2021.
 
No stock options were excluded from the computation of diluted earnings per share for the three months ended June 30, 2019. For the three months ended June 30, 2018, stock options to purchase approximately 80,000 shares of the Company's common stock were excluded from the computation of diluted earnings per share because they were anti-dilutive. For the six months ended June 30, 2019 and 2018, stock options to purchase approximately 9,524 and 63,210 shares of the Company's common stock were excluded from the computation of diluted earnings per share because they were anti-dilutive.

Note 11 — Income Taxes

The Company recorded income tax expenses of $2.2 million, a 28.6% effective tax rate for the six months ended June 30, 2019 and an income tax expense of $2.0 million, a 30.7% effective tax rate for the six months ended June 30, 2018. The effective tax rates were higher than the U.S. statutory rate due primarily to state taxes, income in higher tax jurisdictions and an inclusion for global intangible low taxed income.
 
The Company and its subsidiaries are subject to U.S. Federal income tax, as well as income tax of multiple state and foreign jurisdictions. As of June 30, 2019, the Company is subject to U.S. Federal income tax examinations for the years 2015 through 2017 and income tax examinations from various other jurisdictions for the years 2011 through 2018.

Earnings from the Company’s foreign subsidiaries are considered to be indefinitely reinvested. A distribution of these non-U.S. earnings in the form of dividends or otherwise may subject the Company to foreign withholding taxes and U.S. federal and state taxes.

Note 12 — Contingent Liabilities

In 2012, the Company identified that a site it owns in Decatur, Alabama, contains hazardous substances in the soil and groundwater as a result of historical operations prior to the Company's ownership. The Company retained an environmental consulting firm to further investigate the contamination including the measurement and monitoring of the site and the site was enrolled in the Alabama Department of Environmental Management (“ADEM") voluntary cleanup program.

The remediation plan was approved by ADEM in 2018. The plan consists of chemical injections throughout the affected area, as well as subsequent monitoring of the area for three consecutive periods. The injection process was completed in the first quarter of 2019 and the environmental consulting firm is monitoring the affected area. The Company made payments of $1.3 million in the first two quarters of 2019 for services rendered by the environmental consulting firm. These payments were applied to the previously accrued environmental remediation liability. The Company believes the remaining environmental remediation liability of approximately $0.1 million, classified within Accrued expenses and other liabilities on the accompanying Consolidated Balance

17

Table of Contents

Sheet, will be sufficient to cover the remaining cost of the plan. The Company does not expect to capitalize any amounts related to the remediation plan.

Note 13 — Acquisition

The Company completed the acquisition of Screw Products, Inc. in October 2018 for approximately $5.2 million. The purchase price was funded with cash on hand and utilization of the Company's existing credit facility. Screw Products, Inc. is a distributor of bulk industrial products to large manufacturers and job shops. The Company allocated $2.6 million of the purchase price to an intangible asset for customer relationships and $0.5 million for intangible asset for trade names. These amounts were determined by a third party valuation firm with estimated useful lives of 10 and 15 years, respectively. The excess of the purchase price over the fair values of the identifiable assets and liabilities was recorded as goodwill and represents the expected future benefit to the Company from the acquisition of Screw Products. The Company's Lawson operating segment includes revenues of approximately $0.7 million and $1.5 million from Screw Products in the three and six months ended June, 30 2019, respectively.

The following table contains unaudited pro forma revenue and net income for Lawson Products assuming the Screw Products acquisition closed on January 1, 2018.
 
(Dollars in thousands)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Revenue
 
 
 
 
 
 
 
     Actual
$
96,097

 
$
90,382

 
$
187,440

 
$
174,841

     Pro forma
96,097

 
91,261

 
187,440

 
176,469

 
 
 
 
 
 
 
 
Net income
 
 
 
 
 
 
 
     Actual
$
1,307

 
$
3,194

 
$
5,453

 
$
4,430

     Pro forma
1,307

 
3,308

 
5,453

 
4,632


The pro forma disclosures in the table above include adjustments for, amortization of intangible assets and acquisition costs to reflect results as if the acquisition of Screw Products had closed on January 1, 2018 rather than on the actual acquisition date. This pro forma information utilizes certain estimates, is presented for illustrative purposes only and is not intended to be indicative of the actual results of operation. In addition, future results may vary significantly from the results reflected in the pro forma information. The unaudited pro forma financial information does not reflect the impact of future positive or negative events that may occur after the acquisition, such as anticipated cost savings from operating synergies.


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Table of Contents

Note 14 – Segment Information

The Company operates in two reportable segments. The businesses have been determined to be separate reportable segments because of differences in their financial characteristics and the methods they employ to deliver product to customers. The operating segments are reviewed by the Company’s chief operating decision maker responsible for reviewing operating performance and allocating resources. The Lawson segment primarily relies on its large network of sales representatives to visit the customer at the customers' work location and provide VMI service and produce sales orders for product that is then shipped to the customer. The Bolt Supply segment primarily sells product to customers through its branch locations. Bolt Supply had 14 branches in operation at the end of the second quarter 2019.

Financial information for the Company's reportable segments follows:
 
(Dollars in thousands)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Revenue
 
 
 
 
 
 
 
   Lawson product revenue
$
74,866

 
$
70,632

 
$
147,905

 
$
137,569

   Lawson service revenue
10,101

 
9,985

 
19,529

 
19,474

   Total Lawson revenue
84,967

 
80,617

 
167,434

 
157,043

   Bolt Supply
11,130

 
9,765

 
20,006

 
17,798

      Consolidated total
$
96,097

 
$
90,382

 
$
187,440

 
$
174,841

 
 
 
 
 
 
 
 
Gross profit
 
 
 
 
 
 
 
Lawson product gross profit
$
41,130

 
$
38,707

 
$
81,734

 
$
75,549

Lawson service gross profit
5,627

 
6,590

 
10,642

 
12,670

Total Lawson gross profit
46,757

 
45,297

 
92,376

 
88,219

Bolt Supply
4,286

 
3,834

 
7,590

 
7,130

Consolidated total
$
51,043

 
$
49,131

 
$
99,966

 
$
95,349

 
 
 
 
 
 
 
 
Operating income
 
 
 
 
 
 
 
   Lawson
$
654

 
$
4,794

 
$
6,113

 
$
6,284

   Bolt Supply
969

 
760

 
1,054

 
1,107

      Consolidated total
1,623

 
5,554

 
7,167

 
7,391

Interest expense
(146
)
 
(264
)
 
(343
)
 
(504
)
Other income (expense), net
339

 
(777
)
 
811

 
(490
)
      Income before income taxes
$
1,816

 
$
4,513

 
$
7,635

 
$
6,397


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Table of Contents


ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

The Maintenance, Repair and Operations ("MRO") distribution industry is highly fragmented. We compete for business with several national distributors as well as a large number of regional and local distributors. The MRO business is significantly impacted by the overall strength of the manufacturing sector of the U.S. economy. One measure used to evaluate the strength of the industrial products market is the PMI index published by the Institute for Supply Management, which is considered by many economists to be a reliable near-term economic barometer of the manufacturing sector. A measure above 50 generally indicates expansion of the manufacturing sector while a measure below 50 generally represents contraction. The average monthly PMI was 52.2 in the second quarter of 2019 compared to 58.9 in the second quarter of 2018, indicating the U.S. manufacturing economy continues to grow, but at a slower pace than a year ago.

Our sales are also affected by the number of sales representatives and their productivity. Our sales force increased to an average of 980 sales representatives in the second quarter of 2019 from 966 sales representatives during the second quarter of 2018. Our Lawson segment sales representative productivity, measured as sales per rep per day, increased 3.0% to $1,343 in the second quarter of 2019 from $1,304 in the second quarter of 2018. Sales in 2019 also benefited from the acquisition of Screw Products, Inc. ("Screw Products") in the fourth quarter of 2018. We anticipate the size of our sales force to remain relatively stable for the remainder of 2019 as we concentrate our efforts on providing training and support to continue to increase the productivity of our existing sales representatives.

Quarter ended June 30, 2019 compared to quarter ended June 30, 2018
 
2019
 
2018
(Dollars in thousands)
Amount
 
% of
Net Sales
 
Amount
 
% of
Net Sales
 
 
 
 
 
 
 
 
Revenue
$
96,097

 
100.0
 %
 
$
90,382

 
100.0
 %
Cost of goods sold
45,054

 
46.9
 %
 
41,251

 
45.6
 %
Gross profit
51,043

 
53.1
 %
 
49,131

 
54.4
 %
 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
Selling expenses
21,867

 
22.8
 %
 
22,004

 
24.3
 %
General and administrative expenses
27,553

 
28.6
 %
 
21,573

 
24.0
 %
Total operating expenses
49,420

 
51.4
 %
 
43,577

 
48.3
 %
 
 
 
 
 
 
 
 
Operating income
1,623

 
1.7
 %
 
5,554

 
6.1
 %
 
 
 
 
 
 
 
 
Interest expense
(146
)
 
(0.2
)%
 
(264
)
 
(0.2
)%
Other income (expense), net
339

 
0.4
 %
 
(777
)
 
(0.9
)%
 
 
 
 
 
 
 
 
Income before income taxes
1,816

 
1.9
 %
 
4,513

 
5.0
 %
 
 
 
 
 
 
 
 
Income tax expense
509

 
0.5
 %
 
1,319

 
1.5
 %
 
 
 
 
 
 
 
 
Net income
$
1,307

 
1.4
 %
 
$
3,194

 
3.5
 %

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Table of Contents


Revenue and Gross Profits
 
Three Months Ended June 30,
 
Increase
(Dollars in thousands)
2019
 
2018
 
Amount
 
%
 
 
 
 
 
 
 
 
Revenue
 
 
 
 
 
 
 
Lawson
$
84,967

 
$
80,617

 
$
4,350

 
5.4%
Bolt Supply
11,130

 
9,765

 
1,365

 
14.0%
Consolidated
$
96,097

 
$
90,382

 
$
5,715

 
6.3%
 
 
 
 
 
 
 
 
Gross profit
 
 
 
 
 
 
 
Lawson
$
46,757

 
$
45,297

 
$
1,460

 
3.2%
Bolt Supply
4,286

 
3,834

 
452

 
11.8%
Consolidated
$
51,043

 
$
49,131

 
$
1,912

 
3.9%
 
 
 
 
 
 
 
 
Gross profit margin
 
 
 
 
 
 
 
Lawson
55.0
%
 
56.2
%
 
 
 
 
Bolt Supply
38.5
%
 
39.3
%
 
 
 
 
Consolidated
53.1
%
 
54.4
%
 
 
 
 

Total sales increased 6.3% to $96.1 million in the second quarter of 2019 compared to $90.4 million in the second quarter of 2018. The Lawson segment total sales were positively impacted by a 3.0% improvement in sales productivity of Lawson sales representatives and a solid MRO marketplace. A 14.0% improvement in Bolt Supply sales spread across multiple product categories and the inclusion of Screw Products sales of $0.7 million which was acquired in the fourth quarter of 2018, also contributed to the increase. Average daily sales grew to $1.502 million in the second quarter of 2019 compared to $1.412 million in the prior year quarter with 64 selling days in both quarters. Excluding the impact of currency fluctuations, consolidated sales increased 7.1% for the quarter.

Gross Profit

Gross profit increased $1.9 million to $51.0 million in the second quarter of 2019 compared to $49.1 million in the second quarter of 2018, primarily driven by increased sales, partially offset by an increase of service-related costs. Consolidated gross profit as a percent of sales was 53.1% compared to 54.4% a year ago. Lower gross margin profiles on both the Bolt Supply and Screw Products businesses also drove the lower consolidated percentage. The organic Lawson MRO segment gross margin as a percent of sales of 60.5% in the second quarter 2019 was essentially flat compared to a year ago before giving effect to the service-related costs.
.
Selling, General and Administrative Expenses
 
Three Months Ended June 30,
 
Increase (Decrease)
(Dollars in thousands)
2019
 
2018
 
Amount
 
%
 
 
 
 
 
 
 
 
Selling expenses
 
 
 
 
 
 
 
Lawson
$
20,979

 
$
21,199

 
$
(220
)
 
(1.0)%
Bolt Supply
888

 
805

 
83

 
10.3%
Consolidated
$
21,867

 
$
22,004

 
$
(137
)
 
(0.6)%
 
 
 
 
 
 
 
 
General and administrative expenses
 
 
 
 
 
 
 
Lawson
$
25,124

 
$
19,304

 
$
5,820

 
30.1%
Bolt Supply
2,429

 
2,269

 
160

 
7.1%
Consolidated
$
27,553

 
$
21,573

 
$
5,980


27.7%

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Selling expenses consist of compensation and support for our sales representatives. Selling expenses were $21.9 million in the second quarter of 2019, essentially flat compared to $22.0 million in the prior year quarter and, as a percent of sales, decreased to 22.8% from 24.3% in the second quarter of 2018. The decrease in selling expense as a percent of sales is primarily due to leveraging selling expenses over a higher sales base and an increase in service-related costs classified within gross profit.

General and administrative expenses consist of expenses to operate our distribution network and overhead expenses to manage the business. General and administrative expenses increased to $27.6 million in the second quarter of 2019 from $21.6 million in the prior year quarter. The increase was primarily driven by the $4.8 million of stock based compensation expense, of which a portion fluctuates with the Company's stock price, and an increase in severance expense of $1.4 million. During the second quarter of 2019 the Company incurred $1.5 million of severance expense primarily related to the elimination of certain positions to better align various operating areas within the Company.

Interest Expense

Interest expense decreased to $0.1 million compared to $0.3 million in the second quarter of 2019 and 2018 due to lower average debt balances.

Other Income (Expense), Net

Other income (expense), net increased $1.1 million in the second quarter of 2019 over the prior year quarter primarily due to the effect of changes in the Canadian currency exchange rate.

Income Tax Expense

Income tax expense was $0.5 million, resulting in a 28.0% effective tax rate for the three months ended June 30, 2019 compared to income tax expense of $1.3 million and an effective tax rate of 29.2% for the three months ended June 30, 2018.


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Six months ended June 30, 2019 compared to June 30, 2018
 
2019
 
2018
($ in thousands)
Amount
 
% of
Net Sales
 
Amount
 
% of
Net Sales
 
 
 
 
 
 
 
 
Revenue
$
187,440

 
100.0
 %
 
$
174,841

 
100.0
 %
Cost of goods sold
87,474

 
46.7
 %
 
79,492

 
45.5
 %
Gross profit
99,966

 
53.3
 %
 
95,349

 
54.5
 %
 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
Selling expenses
43,609

 
23.3
 %
 
43,944

 
25.1
 %
General and administrative expenses
49,190

 
26.2
 %
 
44,014

 
25.2
 %
Total operating expenses
92,799

 
49.5
 %
 
87,958

 
50.3
 %
 
 
 
 
 
 
 
 
Operating income
7,167

 
3.8
 %
 
7,391

 
4.2
 %
 
 
 
 
 
 
 
 
Interest expense
(343
)
 
(0.2
)%
 
(504
)
 
(0.3
)%
Other income (expense), net
811

 
0.5
 %
 
(490
)
 
(0.2
)%
 
 
 
 
 
 
 
 
Income before income taxes
7,635

 
4.1
 %
 
6,397

 
3.7
 %
 
 
 
 
 
 
 
 
Income tax expense
2,182

 
1.2
 %
 
1,967

 
1.2
 %
 
 
 
 
 
 
 
 
Net income
$
5,453

 
2.9
 %
 
$
4,430

 
2.5
 %

Revenue and Gross Profit

 
Six Months Ended June 30,
 
Increase
(Dollars in thousands)
2019
 
2018
 
Amount
 
%
 
 
 
 
 
 
 
 
Revenue
 
 
 
 
 
 
 
Lawson
$
167,434

 
$
157,043

 
$
10,391

 
6.6%
Bolt Supply
20,006

 
17,798

 
2,208

 
12.4%
Consolidated
$
187,440

 
$
174,841

 
$
12,599

 
7.2%
 
 
 
 
 
 
 
 
Gross profit
 
 
 
 
 
 
 
Lawson
$
92,376

 
$
88,219

 
$
4,157

 
4.7%
Bolt Supply
7,590

 
7,130

 
460

 
6.5%
Consolidated
$
99,966

 
$
95,349

 
$
4,617

 
4.8%
 
 
 
 
 
 
 
 
Gross profit margin
 
 
 
 
 
 
 
Lawson
55.2
%
 
56.2
%
 
 
 
 
Bolt Supply
37.9
%
 
40.1
%
 
 
 
 
Consolidated
53.3
%
 
54.5
%
 
 
 
 

Revenue

Revenue for the six months ended June 30, 2019 increased 7.2% to $187.4 million from $174.8 million for the six months ended June 30, 2018. The Lawson segment total sales were positively impacted by a 3.7% improvement in sales productivity of Lawson sales representatives and a strong MRO marketplace. A 12.4% improvement in Bolt Supply sales spread across multiple product categories and the inclusion of Screw Products sales of $1.5 million which was acquired in the fourth quarter of 2018, also contributed to the increase. Average daily sales improved 7.2% to $1.476 million in the first six months of 2019 compared to $1.377 million in the prior year period with 127 selling days in both periods. Excluding the impact of currency fluctuations, consolidated sales increased 8.1% for the year to date.

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Gross Profit

Gross profit increased to $100.0 million in the first six months of 2019 compared to $95.3 million in the first six months of 2018, primarily driven by increased sales. Consolidated gross profit as a percent of sales was 53.3% compared to 54.5% a year ago. Higher service-related costs and lower gross margin profiles on both the Bolt Supply and Screw Products businesses drove the lower consolidated percentage. Excluding these businesses, the core Lawson MRO segment gross margin as a percent of sales was 60.6% in the first half of 2019 compared to 60.5% a year ago before giving effect to the allocated service costs.

Selling, General and Administrative Expenses
 
Six Months Ended June 30,
 
Increase (Decrease)
(Dollars in thousands)
2019
 
2018
 
Amount
 
%
 
 
 
 
 
 
 
 
Selling expenses
 
 
 
 
 
 
 
Lawson
$
41,932

 
$
42,498

 
$
(566
)
 
(1.3)%
Bolt Supply
1,677

 
1,446

 
231

 
16.0%
Consolidated
$
43,609

 
$
43,944

 
$
(335
)
 
(0.8)%
 
 
 
 
 
 
 
 
General and administrative expenses
 
 
 
 
 
 
 
Lawson
$
44,331

 
$
39,437

 
$
4,894

 
12.4%
Bolt Supply
4,859

 
4,577

 
282

 
6.2%
Consolidated
$
49,190

 
$
44,014

 
$
5,176

 
11.8%

Selling expenses decreased to $43.6 million for the first six months of 2019 from $43.9 million in the first six months of 2018 and, as a percent of sales, decreased to 23.3% in the first six months of 2019 from 25.1% a year ago. The decrease in selling expense as a percent of sales is primarily due to leveraging selling expenses over a higher sales base and an increase of service-related costs within gross profit.

General and administrative expenses increased to $49.2 million in the first six months of 2019 from $44.0 million in the prior year period primarily driven by increased stock-based compensation expense of $4.2 million, a portion of which varies with the company stock price, and increased severance expense of $0.8 million. During the second quarter of 2019 the Company incurred $1.5 million of severance expense primarily related to the elimination of certain positions to better align various operating areas within the Company.
 
Interest Expense

Interest expenses decreased $0.2 million in the first six months of 2019, over the prior year, due primarily to lower average borrowings outstanding.

Other Income (Expense), Net

Other income (expense), net increased $1.3 million in the first six months of 2019, primarily due to the effect of changes in the Canadian currency exchange rate.

Income Tax Expense

Income tax expenses were $2.2 million resulting in a 28.6% effective tax rate for the first six months of 2019 compared to income tax expense of $2.0 million and a 30.7% effective tax rate for the first six months of 2018.

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Table of Contents

Liquidity and Capital Resources

Available cash and cash equivalents were $6.9 million on June 30, 2019 compared to $11.9 million on December 31, 2018. Net cash used in operations for the six months ended June 30, 2019 was $2.2 million. Net cash generated by operations for the six months ended June 30, 2018 was $1.8 million. Cash generated by operating earnings was partially offset by an increase in accounts receivable, primarily to support the increase in sales, and payments primarily for incentives, environmental remediation and other accruals that existed at December 31, 2018.
 
Capital expenditures, primarily for improvements to our distribution centers and information technology, were $0.9 million and $1.4 million for the six month periods ended June 30, 2019 and 2018, respectively.

The Company used $2.1 million in financing activities in the first six months of 2019 primarily through a net paydown on its revolving lines of credit.

In the second quarter of 2019, our Board of Directors authorized a program in which we may repurchase up to $7.5 million of our common stock from time to time in open market transactions, privately negotiated transactions or by other methods.

We believe cash provided by operations and funds available under our Loan Agreements are sufficient to fund our operating requirements, strategic initiatives and capital improvements for the next 12 months.

Lawson Loan Agreement

On June 30, 2019, we had $6.0 million of borrowings under our Lawson revolving line of credit facility and we had additional borrowing availability of $30.7 million. Dividends are currently restricted under the Lawson Loan Agreement to amounts not to exceed $7.0 million annually and no dividends were paid to shareholders in the six months ended June 30, 2019 and 2018.

In addition to other customary representations, warranties and covenants, if the excess borrowing capacity under our revolving line of credit facility is below $10.0 million, we are required to meet a minimum trailing twelve month EBITDA to fixed charges ratio, as defined in the amended Loan Agreement. On June 30, 2019, our borrowing capacity exceeded $10.0 million, therefore, we were not subject to this financial covenant. However, for informational purposes we have provided the result of the financial covenant below:
Quarterly Financial Covenant
 
Requirement
 
Actual
EBITDA to fixed charges ratio
 
1.10 : 1.00
 
7.55 : 1.00

While we were in compliance with the financial covenant for the quarter ended June 30, 2019, failure to meet this covenant requirement in future quarters could lead to higher financing costs, increased restrictions, or reduce or eliminate our ability to borrow funds and could have a material adverse effect on our business, financial condition and results of operations.

Bolt Commitment Letter

At June 30, 2019, Bolt had $3.7 million Canadian dollars of outstanding borrowings and remaining borrowing availability of $1.8 million Canadian dollars under a Commitment Letter. The Commitment Letter is subject to a working capital ratio of 1.35:1, a maximum ratio of debt to tangible net worth of 2.5:1 of the Bolt assets and Debt Service Coverage Ratio 1.25:1 as defined in the Commitment Letter. At June 30, 2019, Bolt was in compliance with all covenants which are subject to periodic review, at least annually, with the next review due by August 31, 2019.

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Table of Contents

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

ITEM 3 of Part I is inapplicable and has been omitted from this report.

ITEM 4. CONTROLS AND PROCEDURES

Under the supervision and with the participation of our senior management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this report (the “Evaluation Date”). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded as of the Evaluation Date that our disclosure controls and procedures were effective such that the information relating to Lawson, including our consolidated subsidiaries, required to be disclosed in our SEC reports (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) includes, without limitation, controls and procedures designed to ensure that information required to be disclosed is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

There were no changes in our internal control over financial reporting during the quarter ended June 30, 2019 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


PART II
OTHER INFORMATION
ITEMS 1, 1A, 3, 4 and 5 of Part II are inapplicable and have been omitted from this report.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The following table summarizes the repurchases of the Company's common stock for the three months ended June 30, 2019. The shares that were purchased were purchased for the sole purpose of satisfying tax withholding obligations of certain individuals upon the vesting of restricted stock awards granted to them by the Company. No shares were purchased in the open market.
 
 
(a)
 
(b)
 
(c)
 
(d)
Period
 
Total Number of  Shares
Purchased
 
Average Price
Paid per Share
 
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
 
Maximum Number (or
Approximate Dollar
Value) of Shares that
May Yet Be Purchased
Under the Plans or
Programs
April 1 to April 30, 2019
 
—

 
$
—

 
—

 
$
—

May 1 to May 31, 2019
 
—

 
—

 
—

 
7,500,000

June 1 to June 30, 2019
 
—

 
—

 
—

 
7,500,000

Total
 
—

 
 
 
—

 



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Table of Contents

ITEM 6. EXHIBITS
 
Exhibit #
  


101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema Document
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document

27

Table of Contents

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
 
LAWSON PRODUCTS, INC.
 
 
 
(Registrant)
 
 
 
Dated:
July 25, 2019
 
/s/ Michael G. DeCata
 
 
 
Michael G. DeCata
President and Chief Executive Officer
(principal executive officer)
 
 
 
 
 
 
 
Dated:
July 25, 2019
 
/s/ Ronald J. Knutson
 
 
 
Ronald J. Knutson
Executive Vice President, Chief Financial Officer, Treasurer and Controller
(principal financial and accounting officer)

28