SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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FORM 10-Q
Quarterly Report under Section 13 or 15(d) of
The Securities Exchange Act of 1934
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For Quarter Ended June 30, 1998 Commission file no. 0-10546
LAWSON PRODUCTS, INC.
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(Exact name of registrant as specified in its charter)
Delaware 36-2229304
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1666 East Touhy Avenue, Des Plaines, Illinois 60018
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(Address of principal executive offices) (Zip Code)
Registrant's telephone no., including area code: (847) 827-9666
Not applicable
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Former name, former address and former fiscal year, if changed
since last report.
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable
date.
11,135,633 Shares, $1 par value, as of July 17, 1998.
<TABLE>
LAWSON PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<CAPTION>
(Amounts in thousands, except per share data) June 30, December 31,
1998 1997
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 14,905 $ 10,248
Marketable securities 13,660 11,638
Accounts receivable, less allowance for
doubtful accounts 33,883 33,714
Inventories (Note B) 43,875 41,788
Miscellaneous receivables and prepaid
expenses 7,736 5,760
Deferred income taxes 856 836
Total Current Assets 114,915 103,984
Marketable securities 13,228 21,713
Property, plant and equipment, less
allowances for depreciation and
amortization 41,829 40,963
Investments in real estate 3,956 3,731
Deferred income taxes 4,727 4,447
Other assets 14,861 14,136
Total Assets $ 193,516 $ 188,974
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 5,363 $ 4,928
Accrued expenses and other liabilities 16,277 17,902
Income taxes 1,243 1,641
Total Current Liabilities 22,883 24,471
Accrued liability under security bonus plans 14,572 14,000
Other 9,595 10,578
24,167 24,578
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 - (1998 - 11,135,633 shares;
1997 - 11,135,233 shares) 11,136 11,135
Capital in excess of par value 780 770
Retained earnings 134,842 128,708
Accumulated other comprehensive income (292) (688)
Total Stockholders' Equity 146,466 139,925
Total Liabilities and Stockholders'
Equity $ 193,516 $ 188,974
See notes to condensed consolidated financial statements.
</TABLE>
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<TABLE>
LAWSON PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<CAPTION>
(Amounts in thousands, except per share data)
For the Three For the Six
Months Ended Months Ended
June 30, June 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net sales $72,535 $70,390 $142,897 $136,273
Investment and other income 636 362 1,278 780
73,171 70,752 144,175 137,053
Cost of goods sold (Note B) 24,876 24,105 49,704 46,836
Selling, general and administrative
expenses 40,028 37,184 78,476 72,805
64,904 61,289 128,180 119,641
Income before income taxes 8,267 9,463 15,995 17,412
Provision for income taxes 3,538 3,814 6,743 7,041
Net income $4,729 $ 5,649 $ 9,252 $ 10,371
Net income per share of common stock:
Basic $ 0.42 $ 0.51 $ 0.83 $ 0.93
Diluted $ 0.42 $ 0.51 $ 0.83 $ 0.93
Cash dividends declared per share of
common stock $ 0.14 $ 0.13 $ 0.28 $ 0.26
Weighted average shares outstanding:
Basic 11,136 11,128 11,135 11,173
Diluted 11,161 11,140 11,167 11,179
See notes to condensed consolidated financial statements.
</TABLE>
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<TABLE>
LAWSON PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<CAPTION>
(Amounts in thousands)
For the
Six Months Ended
June 30,
1998 1997
<S> <C> <C>
Operating activities:
Net income $ 9,252 $ 10,371
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,789 2,463
Changes in operating assets and liabilities (7,568) (10,814)
Other (183) 1,072
Net Cash Provided by Operating Activities 4,290 3,092
Investing activities:
Additions to property, plant and equipment (3,504) (2,711)
Purchases of marketable securities (102,548) (91,284)
Proceeds from sale of marketable securities 109,201 94,854
Other 325 40
Net Cash Provided by Investing Activities 3,474 899
Financing activities:
Purchases of treasury stock --- (4,062)
Dividends paid (3,118) (2,919)
Other 11 12
Net Cash Used in Financing Activities (3,107) (6,969)
Increase/(Decrease) in Cash and Cash 4,657 (2,978)
Equivalents
Cash and Cash Equivalents at Beginning of
Period 10,248 14,515
Cash and Cash Equivalents at End of Period $ 14,905 $ 11,537
See notes to condensed consolidated financial statements.
</TABLE>
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Part I
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
A) As contemplated by the Securities and Exchange Commission, the
accompanying consolidated financial statements and footnotes have
been condensed and therefore, do not contain all disclosures
required by generally accepted accounting principles. Reference
should be made to the Company's Annual Report to Stockholders for
the year ended December 31, 1997. The Condensed Consolidated
Balance Sheet as of June 30, 1998, the Condensed Consolidated Statements of
Income for the three and six month periods ended June 30, 1998 and 1997 and the
Condensed Consolidated Statements of Cash Flows for the six month periods ended
June 30, 1998 and 1997 are unaudited. In the opinion of the Company, all
adjustments (consisting only of normal recurring accruals) have been made, which
are necessary to present fairly the results of operations for the interim
periods. Operating results for the three and six month periods ended June 30,
1998 are not necessarily indicative of the results that may be expected for the
year ending December 31, 1998.
B) Inventories (consisting of primarily finished goods) at June 30, 1998 and
cost of goods sold for the three and six month periods ended June 30, 1998 and
1997 were determined through the use of estimated gross profit rates.
C) As of January 1, 1998, the Company adopted FASB Statement 130, "Reporting
Comprehensive Income," (SFAS 130). SFAS 130 establishes new rules for reporting
and display of comprehensive income and its components; however, the adoption of
this Statement had no impact on the Company's net income or stockholders'
equity. SFAS 130 requires unrealized gains or losses on the Company's
available-for-sale marketable securities and foreign currency translation
adjustments to be included in other comprehensive income, which prior to
adoption were reported separately in stockholders' equity.
Total comprehensive income and its components, net of related tax, for the first
three and six months of 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
Three months ended June 30
1998 1997
<S> <C> <C>
Net income $4,728,753 $ 5,648,375
Unrealized gains on marketable
securities 18,000 48,000
Foreign currency translation
adjustments (217,917) 58,728
Comprehensive income $4,528,836 $ 5,755,103
</TABLE>
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<TABLE>
Six months ended June 30
1998 1997
<CAPTION>
<S> <C> <C>
Net income $9,251,502 $10,370,532
Unrealized gains(losses) on marketable
securities 166,000 (82,000)
Foreign currency translation
adjustments 229,951 (183,193)
Comprehensive income $9,647,453 $10,105,339
</TABLE>
The components of accumulated other comprehensive income, net of related tax, at
June 30, 1998 and December 31, 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Unrealized gain on marketable
securities $ 729,000 $ 563,000
Foreign currency translation
adjustments (1,020,744) (1,250,695)
Accumulated other
comprehensive income $ (291,744) $ (687,695)
</TABLE>
In June 1997, the Financial Accounting Standards Board issued Statement of
Accounting Standards No. 131, Disclosure about Segments of an Enterprise and
Related Information (SFAS 131), which is effective for years beginning after
December 15, 1997. SFAS 131 establishes standards for the way that public
business enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. SFAS 131 is effective for financial
statements for fiscal years beginning after December 15, 1997, and therefore the
Company will adopt the new requirements retroactively in 1998. Management has
not completed its review of SFAS 131, but does not anticipate that the adoption
of the statement will have a significant effect on the Company's reported
financial disclosures.
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D) Earnings per Share
The calculation of dilutive weighted average shares outstanding for the three
and six months ended June 30, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
Three months ended June 30
1998 1997
<S> <C> <C>
Basic weighted average shares
outstanding 11,135,583 11,127,627
Dilutive impact of options
outstanding 25,277 11,973
Dilutive weighted average
shares outstanding 11,160,860 11,139,600
Six months ended June 30
1998 1997
<S> <C> <C>
Basic weighted average shares
outstanding 11,135,476 11,172,843
Dilutive impact of options
outstanding 31,531 5,989
Dilutive weighted average
shares outstanding 11,167,007 11,178,832
</TABLE>
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Independent Accountants' Review Report
Board of Directors
Lawson Products, Inc.
We have reviewed the accompanying condensed consolidated balance sheet of Lawson
Products, Inc. and subsidiaries as of June 30, 1998 and the related condensed
consolidated statements of income and cash flows for the three month and six
month periods ended June 30, 1998 and 1997. These financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data, and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit in accordance with
generally accepted auditing standards, which will be performed for the full year
with the objective of expressing an opinion regarding the financial statements
taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the accompanying condensed consolidated financial statements referred
to above for them to be in conformity with generally accepted accounting
principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Lawson Products, Inc. as of
December 31, 1997, and the related consolidated statements of income, changes in
stockholders' equity and cash flows for the year then ended, not presented
herein, and in our report dated February 27, 1998, we expressed an unqualified
opinion on those consolidated financial statements. In our opinion, the
information set forth in the accompanying condensed consolidated balance sheet
as of December 31, 1997, is fairly stated, in all material respects, in relation
to the consolidated balance sheet from which it has been derived.
ERNST & YOUNG LLP
July 17, 1998
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ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS
Net sales for the three and six month periods ended June 30, 1998 advanced 3.0%
to $72,535,000 and 4.9% to $142,897,000 relative to the comparable periods of
1997. The sales gains reflect increased contribution from substantially all
Lawson operations.
Net income for the second quarter declined 16.3% to $4,729,000 ($.42 per diluted
share) from $5,649,000 ($.51 per diluted share) for the comparable period of
1997. Net income for the six months ended June 30, 1998 decreased 10.8% to
$9,252,000 ($.83 per diluted share) from $10,371,000 ($.93 per diluted share)
for the similar period of 1997. These declines are primarily attributable to
lower gross margins and higher selling costs due to a restructuring of the sales
force, which more than offset the gains in net sales noted above. Per share net
income was positively impacted by purchases in 1997 under the Company's share
repurchase program.
Cash flows provided by operations for the six months ended June 30, 1998
increased to $4,290,000 from $3,092,000 in the comparable period of the prior
year. This increase was due primarily to a smaller increase in operating assets
(principally accounts receivable and inventories), which more than offset the
decline in net income from the similar period of 1997. Current investments and
cash flows from operations are expected to be sufficient to finance the
Company's future growth, cash dividends and capital expenditures. Additions to
property, plant and equipment were $3,504,000 and $2,711,000, respectively, for
the six months ended June 30, 1998 and 1997. Capital expenditures during 1998
primarily reflect costs incurred relative to the construction of a new Lawson
outbound facility in Atlanta, Georgia and purchases of computer related
equipment. The new facility, expected to be completed during 1999 at a cost of
approximately $7,000,000, will be used in place of the Norcross, Georgia
facility, which will be closed. Capital expenditures during 1997 primarily
reflect costs incurred for the completion of the facilities expansion at the
Company's specialty chemical subsidiary, Drummond American Corporation. This
project was completed at a cost of approximately $3,000,000.
In 1996, the Board of Directors authorized the purchase of up to 1,000,000
shares of the Company's common stock. No shares were purchased during 1998,
while during the first six months of 1997, the Company expended $4,062,000 to
acquire 187,500 shares under the 1996 stock repurchase program. To date,
479,500 shares have been purchased relative to the 1996 stock repurchase
program. All treasury shares purchased as of June 30, 1998 have been retired.
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Part II
OTHER INFORMATION
Items 1, 2, 3 and 5 are inapplicable and have been omitted
from this report.
Item 4. Submission of Matters to a Vote of Security Holders.
(a) The annual meeting of stockholders of Lawson
Products, Inc. was held on May 12, 1998.
(b) Not applicable.
(c1) Set forth below is the tabulation of the votes on
each nominee for election as a director:
Withheld
For Authority
Bernard Kalish 9,727,041 866,082
Sidney L. Port 9,729,841 863,282
Robert J. Washlow 9,735,116 858,007
(c2) Set forth below is the tabulation of the votes on
the stockholder proposal concerning the sale or
merger of the Company:
For Against Abstain
1,053,046 8,655,057 48,711
(c3) Set forth below is the tabulation of the votes on
the stockholder proposal concerning the elimination
of a classified Board of Directors:
For Against Abstain
2,755,894 6,963,112 37,808
(d) Not applicable.
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Item 6. Exhibits and Reports on Form 8-K.
(a) 15 Letter from Ernst & Young LLP Regarding
Unaudited Interim Financial Information
27 Financial Data Schedule
(b) The registrant was not required to file Form 8-K
for the most recently completed quarter.
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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 17, 1998 /s/ Bernard Kalish
Bernard Kalish
Chairman of the Board
Dated July 17, 1998 /s/ Joseph L. Pawlick
Joseph L. Pawlick
Vice President and Controller
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Exhibit 15
Consent of Independent Auditors
We are aware of the incorporation by reference in the Registration Statement
(Form S-8 No. 33-17912 dated November 4, 1987) of Lawson Products, Inc. of our
report dated July 17, 1998 relating to the unaudited condensed consolidated
interim financial statements of Lawson Products, Inc. which are included in its
Form 10-Q for the quarter ended June 30, 1998.
Pursuant to Rule 436(c) of the Securities Act of 1933 our report is not part of
the registration statement prepared or certified by accountants within the
meaning of Section 7 or 11 of the Securities Act of 1933.
ERNST & YOUNG LLP
Chicago, Illinois
July 17, 1998
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<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 14,905
<SECURITIES> 26,888
<RECEIVABLES> 35,773
<ALLOWANCES> 1,890
<INVENTORY> 43,875
<CURRENT-ASSETS> 114,915
<PP&E> 72,317
<DEPRECIATION> 30,488
<TOTAL-ASSETS> 193,516
<CURRENT-LIABILITIES> 22,883
<BONDS> 0
0
0
<COMMON> 11,136
<OTHER-SE> 135,330
<TOTAL-LIABILITY-AND-EQUITY> 193,516
<SALES> 142,897
<TOTAL-REVENUES> 144,175
<CGS> 49,704
<TOTAL-COSTS> 49,704
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 548
<INTEREST-EXPENSE> 20
<INCOME-PRETAX> 15,995
<INCOME-TAX> 6,743
<INCOME-CONTINUING> 9,252
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,252
<EPS-PRIMARY> 0.83
<EPS-DILUTED> 0.83
</TABLE>
