SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
-----------------------
FORM 10-Q
Quarterly Report under Section 13 or 15(d) of
The Securities Exchange Act of 1934
-----------------------
For Quarter Ended September 30, 1999 Commission file no. 0-10546
------------------ -------
LAWSON PRODUCTS, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 36-2229304
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1666 East Touhy Avenue, Des Plaines, Illinois 60018
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone no., including area code: (847) 827-9666
--------------
Not applicable
- --------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed
since last report.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
10,348,822 shares, $1 par value, as of October 15, 1999.
--------------------------------------------------------
<PAGE>
Part I - FINANCIAL INFORMATION
---------------------
Item 1. Financial Statements.
<TABLE>
LAWSON PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<CAPTION>
September 30, December 31,
(Amounts in thousands, except share data) 1999 1998
----------------- ------------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 13,817 $ 13,872
Marketable securities 9,657 13,816
Accounts receivable, less allowance for doubtful accounts 40,241 35,255
Inventories (Note B) 53,154 46,670
Miscellaneous receivables and prepaid expenses 8,144 7,533
Deferred income taxes 1,317 1,256
---------------- ------------------
Total Current Assets 126,330 118,402
Marketable securities 2,399 11,020
Property, plant and equipment, less allowances for depreciation and
amortization 42,421 41,142
Investments in real estate 4,149 4,054
Deferred income taxes 8,013 6,747
Other assets 23,776 17,617
---------------- ------------------
Total Assets $ 207,088 $ 198,982
================ ==================
LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities:
Accounts payable $ 6,498 $ 5,113
Accrued expenses and other liabilities 24,041 22,405
Income taxes 2,597 3,283
---------------- ------------------
Total Current Liabilities 33,136 30,801
---------------- ------------------
Accrued liability under security bonus plans 16,144 15,315
Other 10,502 9,931
---------------- ------------------
26,646 25,246
---------------- ------------------
Stockholders' Equity:
Preferred Stock, $1 par value:
Authorized - 500,000 shares
Issued and outstanding - None --- ---
Common Stock, $1 par value:
Authorized - 35,000,000 shares
Issued and outstanding-(1999-10,353,822 shares; 1998-10,663,822
shares) 10,354 10,664
Capital in excess of par value 728 749
Retained earnings 137,332 132,209
Accumulated other comprehensive income (1,108) (687)
---------------- ------------------
Total Stockholders' Equity 147,306 142,935
---------------- ------------------
Total Liabilities and Stockholders' Equity $ 207,088 $ 198,982
================ ==================
See notes to condensed consolidated financial statements
</TABLE>
<PAGE>
<TABLE>
LAWSON PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
<CAPTION>
(Amounts in thousands, except per share data)
For the For the
Three Months Ended Nine Months Ended
September 30, September 30
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 82,515 $ 75,530 $ 234,910 $ 218,427
Cost of goods sold (Note B) 29,595 25,941 82,104 75,645
------------ ----------- ------------ ------------
Gross profit 52,920 49,589 152,806 142,782
Selling, general and administrative expenses 43,678 41,043 125,720 119,520
Non-recurring charge --- --- 2,053 ---
------------ ----------- ------------ ------------
Operating income 9,242 8,546 25,033 23,262
Investment and other income 700 592 2,617 1,870
------------ ----------- ------------ ------------
Income before income taxes 9,942 9,138 27,650 25,132
Provision for income taxes 4,081 3,884 11,386 10,627
------------ ----------- ------------ ------------
Net income $ 5,861 $ 5,254 $ 16,264 $ 14,505
============ =========== ============ ============
Net income per share of common stock:
Basic $ 0.57 $ 0.48 $ 1.55 $ 1.31
============ =========== ============ ============
Diluted $ 0.57 $ 0.48 $ 1.55 $ 1.30
============ =========== ============ ============
Cash dividends declared per share of common stock $ 0.14 $ 0.14 $ 0.42 $ 0.42
============ =========== ============ ============
Weighted average shares outstanding:
Basic 10,354 11,054 10,500 11,103
============ =========== ============ ============
Diluted 10,360 11,057 10,502 11,125
============ =========== ============ ============
See notes to condensed consolidated financial statement.
</TABLE>
<PAGE>
<TABLE>
LAWSON PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
(UNAUDITED)
(Amounts in thousands)
For the
Nine Months Ended
September 30,
1999 1998
---- ----
<S> <C> <C>
Operating activities:
Net income $ 16,264 $ 14,505
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 4,682 4,196
Changes in operating assets and liabilities (7,120) (8,970)
Other 44 (118)
---------------- -------------------
Net Cash Provided by Operating Activities 13,870 9,613
---------------- ------------------
Investing activities:
Additions to property, plant and equipment (5,319) (3,949)
Purchases of marketable securities (83,794) (172,749)
Proceeds from sale of marketable securities 96,412 181,418
Acquisition of SunSource Inventory Management
Company, Inc. (10,192) ---
Other 492 629
---------------- ------------------
Net Cash (Used in)/Provided by Investing Activities (2,401) 5,349
----------------- ------------------
Financing activities:
Purchases of treasury stock (7,094) (6,201)
Dividends paid (4,430) (4,677)
Other --- 14
---------------- ------------------
Net Cash Used in Financing Activities (11,524) (10,864)
----------------- -------------------
Increase in Cash and Cash Equivalents (55) 4,098
Cash and Cash Equivalents at Beginning of Period 13,872 10,248
---------------- ------------------
Cash and Cash Equivalents at End of Period $ 13,817 $ 14,346
================ ==================
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
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 Annual Report on Form
10-K for the year ended December 31, 1998 for Lawson Products, Inc. ("Lawson" or
the "Company"). The Condensed Consolidated Balance Sheet as of September 30,
1999, the Condensed Consolidated Statements of Income for the three and nine
month periods ended September 30, 1999 and 1998 and the Condensed Consolidated
Statements of Cash Flows for the nine month periods ended September 30, 1999 and
1998 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 nine month periods ended September 30, 1999 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1999.
B) Inventories (consisting of primarily finished goods) at September 30, 1999
and cost of goods sold for the three and nine month periods ended September 30,
1999 and 1998 were determined through the use of estimated gross profit rates.
The difference between actual and estimated gross profit is adjusted in the
fourth quarter. In 1998, this adjustment increased net income by approximately
$1,146,000.
C) Total comprehensive income and its components, net of related tax, for the
first three and nine months of 1999 and 1998 are as follows (in thousands):
<TABLE>
Three months ended
September 30
1999 1998
------------------ -------------
<S> <C> <C>
Net income $ 5,861 $ 5,254
Unrealized gain(loss) on marketable securities --- (43)
Foreign currency translation adjustments 111 (280)
------------------ ------------------
Comprehensive income $ 5,972 $ 4,931
================== ==================
Nine months ended
September 30
1999 1998
------------------ -------------
Net income $ 16,264 $ 14,505
Unrealized gain(loss) on marketable securities (683) 123
Foreign currency translation adjustments 262 (50)
------------------ -------------------
Comprehensive income $ 15,843 $ 14,578
================== ==================
</TABLE>
The components of accumulated other comprehensive income, net of related tax, at
September 30, 1999 and December 31, 1998 are as follows (in thousands):
<PAGE>
<TABLE>
1999 1998
------------------ -------------
<S> <C> <C>
Unrealized gain (loss) on marketable securities $ (15) $ 668
Foreign currency translation adjustments (1,093) (1,355)
------------------ ------------------
Accumulated other comprehensive income $ (1,108) $ (687)
==================- ==================-
</TABLE>
D) Earnings per Share
The calculation of dilutive weighted average shares outstanding for the three
and nine months ended September 30, 1999 and 1998 are as follows (in thousands):
<TABLE>
Three months ended
September 30
1999 1998
------------------ -------------
<S> <C> <C>
Basic weighted average shares outstanding $ 10,354 $ 11,054
Dilutive impact of options outstanding 6 3
------------------ ------------------
Dilutive weighted average shares outstanding $ 10,360 $ 11,057
================== ==================
Nine months ended
September 30
1999 1998
------------------ -------------
Basic weighted average shares outstanding $ 10,500 $ 11,103
Dilutive impact of options outstanding 2 22
------------------ ------------------
Dilutive weighted average shares outstanding $ 10,502 $ 11,125
================== ==================
</TABLE>
E) In the second quarter of 1999, the Company recorded a non-recurring charge of
$1,237,000, net of income tax benefit of $816,000, for severance and early
retirement benefits in connection with previously announced management changes.
Additionally, in the second quarter of 1999, a gain of $554,000, net of income
taxes of $369,000, was recorded on the sale of marketable securities.
F) On July 1, 1999, the Company's newly created subsidiary, ACS/SIMCO, signed a
purchase agreement to acquire substantially all of the assets and assume
substantially all liabilities of SunSource Inventory Management Company, Inc.
and Hillman Industrial Division which comprised the original equipment fastener
business of SunSource Inc., for approximately $10,197,000, with certain
contingent purchase price adjustment features based on future operating results.
This all-cash transaction was accounted for as a purchase, and accordingly, the
accounts and transactions of these operations have been included in the
consolidated financial statements since the date of acquisition.
<PAGE>
Independent Accountants' Review Report
Board of Directors and Stockholders
Lawson Products, Inc.
We have reviewed the accompanying condensed consolidated balance sheet of Lawson
Products, Inc. and subsidiaries as of September 30, 1999 and the related
condensed consolidated statements of income for the three month and nine month
periods ended September 30, 1999 and 1998 and the condensed consolidated
statements of cash flows for the nine month periods ended September 30, 1999 and
1998. 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, 1998, 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 26, 1999, 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, 1998, is fairly stated, in all material respects, in relation
to the consolidated balance sheet from which it has been derived.
ERNST & YOUNG LLP
October 15, 1999
<PAGE>
This Quarterly Report on Form 10-Q for the quarter ended September 30, 1999,
contains certain forward-looking statements pertaining to the Year 2000 issue
and other matters. These statements are subject to uncertainties and other
factors which could cause actual events or results to vary materially from those
anticipated.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Net sales for the three and nine month periods ended September 30, 1999
increased 9.2% to $82,515,000 and 7.5% to $234,910,000 relative to the
comparable periods of 1998. The sales gains for the three month period result
principally from the sales made by our new subsidiary, ACS/SIMCO. See Note F to
Notes to Condensed Consolidated Financial Statements. The sales increase for the
nine month period also reflects increases from substantially all Lawson
operations.
Net income for the third quarter advanced 11.6% to $5,861,000 ($.57 per diluted
share) from $5,254,000 ($.48 per diluted share) for the comparable period of
1998. Net income for the nine months ended September 30, 1999 gained 12.1% to
$16,264,000 ($1.55 per diluted share) from $14,505,000 ($1.30 per diluted share)
for the same period of 1998. These increases are primarily attributable to cost
containment efforts and the gains in net sales noted above. In the second
quarter of 1999, the Company recorded a non-recurring charge of $1,237,000, net
of income tax benefit of $816,000, for severance and early retirement benefits
in connection with previously announced management changes. Additionally, in the
second quarter of 1999, an after tax gain of $554,000 was recorded on the sale
of marketable securities. Excluding the effects of these items, net income for
the nine month period ended September 30, 1999 was $16,947,000 ($1.61 per
diluted share), an increase of 16.8%. Per share net income for 1999 and 1998 was
positively impacted by the Company's share repurchase program.
Cash flows provided by operations for the nine months ended September 30, 1999
advanced to $13,870,000 from $9,613,000 in the comparable period of the prior
year. This gain was due primarily to a smaller increase in operating assets
(principally inventories) as compared to the increase in operating assets and
the gain in net income from the same period of 1998. 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 $5,319,000 and $3,949,000,
respectively, for the nine months ended September 30, 1999 and 1998. Capital
expenditures during 1999 and 1998 primarily reflect costs incurred relative to
the construction of a new Lawson outbound facility in Suwanee, Georgia and
purchases of computer related equipment. The new facility was substantially
completed during the third quarter of 1999 at a cost of approximately
$7,000,000. The new facility will be used in place of the Norcross, Georgia
facility, which was disposed of in a tax-free exchange as a component of the
purchase price of the new facility.
<PAGE>
During the third quarter of 1999, the Company purchased substantially all of the
assets and liabilities of SunSource Inventory Management Company, Inc.
("SunSource") and Hillman Industrial Division ("Hillman"), headquartered in
Lenexa, Kansas, at a cost of approximately $10,197,000. SunSource and Hillman
are distributors of fasteners in the original equipment manufacturing
marketplace. The former business operations of SunSource and Hillman are
conducted by a new subsidiary known as ACS/SIMCO.
During the first nine months of 1999, the Company purchased 310,000 shares of
its own common stock for approximately $7,094,000. Of these purchases, 261,500
shares were acquired relative to the 1998 Board authorization of 500,000 shares
and 48,500 shares represented the remaining shares relative to a 1996 stock
repurchase authorization of 1,000,000 shares. All treasury shares purchased as
of September 30, 1999 have been retired.
Year 2000
The Company has developed a plan to modify its information technology in light
of problems associated with the Year 2000 (the "Year 2000 Issue"). The Year 2000
Issue involves computer programs being written using two digits rather than four
to define the applicable year. Computer programs or hardware that have
date-sensitive software or embedded chips may recognize a date using "00" as the
year 1900 rather than the year 2000, which could result in a system failure or
miscalculations causing disruptions in the processing of normal business
transactions.
Based on the Company's assessment of the Year 2000 Issue, the Company was
required to modify or replace portions of its software and certain hardware to
insure the proper recognition of dates beyond December 31, 1999. The Company
presently believes that these modifications or replacements of certain existing
software and hardware have mitigated the Year 2000 Issue.
The Company's plan to resolve the Year 2000 Issue involved the following four
phases: assessment, remediation, testing, and implementation. The Company has
fully completed its assessment of all systems that could be significantly
impacted by the Year 2000 and virtually completed converting its critical data
processing systems.
Based on a review of its product line, the Company has determined that the
products it has sold and will continue to sell do not require remediation to be
Year 2000 compliant. Accordingly, the Company does not believe that the Year
2000 presents exposure as it relates to the Company's products.
The Company has contacted substantially all of its suppliers and has gathered
information about their Year 2000 compliance status. To date, the Company is not
aware of any supplier with a Year 2000 Issue that would have a material impact
on the operations of the Company. However, the Company does not have the means
to ensure that third parties will be Year 2000 compliant. The inability of third
parties to complete their Year 2000 compliance process in a timely manner could
materially impact the Company. The effect of non-compliance by third parties is
not determinable.
<PAGE>
The Company has utilized both internal and external resources to reprogram, or
replace, test, and implement the software and operating equipment for Year 2000
modifications. This project remains on schedule, including testing and
implementation. The Company presently believes all phases of the conversion will
be completed in the fourth quarter of 1999 at a total cost of approximately
$550,000, of which $500,000 of expense has been incurred as of September 30,
1999. These costs are primarily for modifying code and testing computer software
programs. This project is not expected to have a significant effect on
operations.
If the Company is unsuccessful in its remediation efforts or if the remediation
efforts of its key suppliers or customers are unsuccessful, there may be a
material adverse impact on the Company's results of operations and financial
position. If the Company's efforts to become Year 2000 compliant are
unsuccessful, the worst case scenario is that the Company will be unable to
distribute its products. As the Company cannot predict the magnitude or time
length of Year 2000 business interruptions, the Company is unable to estimate
the financial impact of Year 2000 issues. The Company does not currently have a
contingency plan although one is under development.
Although the project is not yet complete, the management of the Company believes
it has an effective program in place to resolve the Year 2000 Issue in a timely
manner. The Company is committed to providing the necessary resources, including
additional funding and manpower, as required, until such time that all phases of
the Year 2000 project are completed.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
There have been no material changes in market risk at September 30, 1999 from
that reported in the Company's Annual Report on Form 10-K for the year ended
December 31, 1998.
<PAGE>
Part II - OTHER INFORMATION
-----------------
Items 1, 2, 3, 4 and 5 are inapplicable and have been omitted from this report.
Item 6. Exhibits and Reports on Form 8-K.
(a) 15 Letter from Ernst & Young LLP Regarding Unaudited
Interim Financial Information
27 Financial Data Schedule
(b) The registrant was not required to file a Current Report on Form
8-K for the most recently completed quarter.
<PAGE>
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 October 15, 1999 /s/ Robert J. Washlow
---------------------- -----------------------------------------
Robert J. Washlow
Chairman of the Board
Dated October 15, 1999 /s/ Joseph L. Pawlick
---------------------- -----------------------------------------
Joseph L. Pawlick
Vice President and Controller
(principal accounting officer)
Exhibit 15
October 15, 1999
Board of Directors and Sahreholders
Lawson Products, Inc.
We are aware of the incorporation by reference in the Registration Statement
(Form S-8 No. 33-17912 dated November 4, 1987) of Lawson Products, Inc. of our
report dated October 15, 1999 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 September 30, 1999.
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
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 13,817
<SECURITIES> 12,056
<RECEIVABLES> 42,320
<ALLOWANCES> 2,079
<INVENTORY> 53,154
<CURRENT-ASSETS> 126,330
<PP&E> 79,048
<DEPRECIATION> 36,627
<TOTAL-ASSETS> 207,088
<CURRENT-LIABILITIES> 33,136
<BONDS> 0
0
0
<COMMON> 10,354
<OTHER-SE> 136,952
<TOTAL-LIABILITY-AND-EQUITY> 207,088
<SALES> 234,910
<TOTAL-REVENUES> 237,527
<CGS> 82,104
<TOTAL-COSTS> 82,104
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 819
<INTEREST-EXPENSE> 6
<INCOME-PRETAX> 27,650
<INCOME-TAX> 11,386
<INCOME-CONTINUING> 16,264
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,264
<EPS-BASIC> 1.55
<EPS-DILUTED> 1.55
</TABLE>
