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 March 31, 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. 10,563,822 Shares, $1 par value, as of April 16, 1999.
<TABLE> LAWSON PRODUCTS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS <CAPTION> (Amounts in thousands, except share data) March 31, December 31, 1999 1998 ---------- ----------- (unaudited) <S> <C> <C> ASSETS Current Assets: Cash and cash equivalents $ 16,491 $ 13,872 Marketable securities 11,220 13,816 Accounts receivable, less allowance for 35,137 35,255 doubtful accounts Inventories (Note B) 46,414 46,670 Miscellaneous receivables and prepaid 7,614 7,533 expenses Deferred income taxes 1,284 1,256 --------- --------- Total Current Assets 118,160 118,402 Marketable securities 13,284 11,020 Property, plant and equipment, less allowances for depreciation and amortization 42,233 41,142 Investments in real estate 4,202 4,054 Deferred income taxes 6,768 6,747 Other assets 19,309 17,617 --------- --------- Total Assets $ 203,956 $ 198,982 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable $ 5,848 $ 5,113 Accrued expenses and other liabilities 21,039 22,405 Income taxes 5,744 3,283 --------- --------- Total Current Liabilities 32,631 30,801 --------- --------- Accrued liability under security bonus plans 15,421 15,315 Other 10,036 9,931 --------- --------- 25,457 25,246 --------- --------- Stockholders' Equity: Preferred Stock, $1 par value: --- --- Authorized - 500,000 shares Issued and outstanding - None Common Stock, $1 par value: 10,624 10,664 Authorized - 35,000,000 shares Issued and outstanding - (1999- 10,623,822 shares; 1998 - 10,663,822 shares) Capital in excess of par value 747 749 Retained earnings 135,208 132,209 Accumulated other comprehensive income (711) (687) --------- --------- Total Stockholders' Equity 145,868 142,935 --------- --------- Total Liabilities and Stockholders' $ 203,956 $ 198,982 ========= ========= Equity See notes to condensed consolidated financial statements. </TABLE>
<TABLE> LAWSON PRODUCTS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME <CAPTION> (UNAUDITED) (Amounts in thousands, except per share data) For the Three Months Ended March 31, 1999 1998 -------- ------- <S> <C> <C> Net sales $74,148 $70,363 Cost of goods sold (Note B) 25,837 24,828 ------- ------- Gross Profit 48,311 45,535 Selling, general and administrative expenses 39,925 38,448 ------- ------- Operating income 8,386 7,087 Investment and other income 606 641 ------- ------- Income before income taxes 8,992 7,728 Provision for income taxes 3,715 3,205 ------- ------- Net income $ 5,277 $ 4,523 ======= ======= Net income per share of common stock: $ 0.50 $ 0.41 ======= ======= Basic Diluted $ 0.50 $ 0.40 ======= ======= Cash dividends declared per share of common stock $ 0.14 $ 0.14 ======= ======= Weighted average shares outstanding: 10,651 11,135 ======= ======= Basic Diluted 10,651 11,175 ======= ======= See notes to condensed consolidated financial statements </TABLE>
<TABLE> LAWSON PRODUCTS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS <CAPTION> (UNAUDITED) (Amounts in thousands) For the Three Months Ended March 31, 1999 1998 -------- --------- <S> <C> <C> Operating activities: Net income $ 5,277 $ 4,523 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,594 1,403 Changes in operating assets and liabilities 26 1,330 Other 325 517 -------- -------- Net Cash Provided by Operating Activities 7,222 7,773 -------- -------- Investing activities: Additions to property, plant and equipment (2,546) (2,601) Purchases of marketable securities (36,355) (59,005) Proceeds from sale of marketable securities 36,617 61,171 Other 15 100 -------- -------- Net Cash Used in Investing Activities (2,269) (335) -------- -------- Financing activities: Purchases of treasury stock (841) --- Dividends paid (1,493) (1,559) Other --- 8 -------- -------- Net Cash Used in Financing Activities (2,334) (1,551) -------- -------- Increase in Cash and Cash 2,619 5,887 Equivalents Cash and Cash Equivalents at Beginning of Period 13,872 10,248 -------- -------- Cash and Cash Equivalents at End of Period $ 16,491 $ 16,135 ======== ======== See notes to condensed consolidated financial statements. </TABLE>
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 on Form 10-K for the year ended December 31, 1998. The Condensed Consolidated Balance Sheet as of March 31, 1999, the Condensed Consolidated Statements of Income for the three month periods ended March 31, 1999 and 1998 and the Condensed Consolidated Statements of Cash Flows for the three month periods ended March 31, 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 quarter ended March 31, 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 March 31, 1999 and cost of goods sold for the three month periods ended March 31, 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) 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 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 quarter of 1999 and 1998 are as follows: 1999 1998 ---- ---- Net income $ 5,277,034 $ 4,522,749 Unrealized gains(losses) on securities (54,000) 148,000 Foreign currency translation adjustments 29,829 447,858 ----------- ----------- Comprehensive income $ 5,252,863 $ 5,118,607 =========== =========== The components of accumulated other comprehensive income, net of related tax, at March 31, 1999 and December 31, 1998 are as follows: 1999 1998 ---- ---- Unrealized gain on securities $ 614,000 $ 668,000 Foreign currency translation adjustments (1,325,242) (1,355,071) --------------------------- Accumulated other comprehensive income $ (711,242) $ (687,071) =========================== D) Earnings per Share The calculation of dilutive weighted average shares outstanding at March 31, 1999 and 1998 are as follows: 1999 1998 ---- ---- Basic weighted average shares outstanding 10,651,322 11,135,383 Dilutive impact of options outstanding --- 39,388 ---------------------- Dilutive weighted average shares outstanding 10,651,322 11,174,771 ======================
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 March 31, 1999 and the related condensed consolidated statements of income and cash flows for the three month periods ended March 31, 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 review, 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 April 16, 1999
This Quarterly Report on Form 10-Q for the quarter ended March 31, 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 ------------------------------------ Net sales for the three month period ended March 31, 1999 rose 5.4% to $74,148,000 relative to the similar period of 1998. The sales gain reflects increased contribution from substantially all Lawson operations. Net income advanced 16.7% to $5,277,000 ($.50 per diluted share) for the three months ended March 31, 1999 from $4,523,000 ($.40 per share) for the comparable period of 1998. This gain is attributable to higher gross margins, cost containment efforts and the increase in net sales noted above. 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 three months ended March 31, 1999 decreased to $7,222,000 from $7,773,000 in the similar period of the prior year. This decline was due primarily to a smaller increase in operating liabilities (principally accounts payable and income taxes payable) from 1998 levels as compared to the increase noted from 1997 to 1998, which more than offset the gain in net income from the comparable 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 $2,546,000 and $2,601,000, respectively, for the three months ended March 31, 1999 and 1998. Capital expenditures during 1999 and 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 sold. During the first quarter of 1999, the Company purchased 40,000 shares of its own common stock for approximately $841,000, relative to the Board's 1996 authorization to repurchase 1,000,000 shares. No shares were purchased during the quarter ended March 31, 1998. To date, 991,500 shares have been purchased relative to the 1996 stock repurchase program. All shares purchased as of March 31, 1999 have been retired. Funds to purchase these shares were provided by
investments and cash flows from operations. In 1998, the Board of Directors authorized the purchase of up to 500,000 additional shares of the Company's common stock, of which none had been purchased as of March 31, 1999. The Company has developed a plan to modify its information technology to recognize 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, it has been determined that it will be 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 with modifications or replacements of certain existing software and hardware, the Year 2000 Issue can be mitigated. The Company's plan to resolve the Year 2000 Issue involves 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 is currently 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 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 ready. The inability of third parties to complete their Year 2000 resolution process in a timely fashion could materially impact the Company. The effect of non-compliance by third parties is not determinable. The Company will utilize 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 by the end of the second quarter of 1999 at a total cost of approximately $500,000, of which $400,000 of expense has been incurred as of March 31, 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 Year 2000 Issue project is 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.
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) 3(ii) By-laws of the Company 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.
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 April 16, 1999 /s/ Bernard Kalish ------------------ ------------------------------ Bernard Kalish Chairman of the Board Dated April 16, 1999 /s/ Joseph L. Pawlick ------------------- ------------------------------- Joseph L. Pawlick Vice President and Controller