Washington, D. C. 20549
Lawson Products, Inc.
See notes to condensed consolidated financial statements.
Lawson Products, Inc.
See notes to condensed consolidated financial statements.
10
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| | | | | | | | | | | | | | | |
| (Dollars in thousands) |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Net sales | | | | | | | |
Actual | $ | 75,651 |
| | $ | 70,199 |
| | $ | 225,274 |
| | $ | 209,258 |
|
Pro forma | 75,651 |
| | 70,978 |
| | 225,274 |
| | 212,738 |
|
| | | | | | | |
Net income | | | | | | | |
Actual | $ | 1,321 |
| | $ | 1,825 |
| | $ | 9,451 |
| | $ | 3,014 |
|
Pro forma | 1,321 |
| | 2,048 |
| | 9,451 |
| | 3,662 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | (Dollars in thousands) |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
Revenue | | | | | | | | |
Actual | | $ | 90,277 | | | $ | 94,779 | | | $ | 253,458 | | | $ | 282,219 | |
Pro forma | | 101,222 | | | 109,174 | | | 298,546 | | | 332,234 | |
| | | | | | | | |
Net income | | | | | | | | |
Actual | | $ | 1,738 | | | $ | 4,774 | | | $ | 14,890 | | | $ | 10,227 | |
Pro forma | | 1,982 | | | 4,598 | | | 16,312 | | | 10,166 | |
The pro forma disclosures in the table above include adjustments for amortization of intangible assets, implied interest expense and acquisition costs to reflect results that are more representative of the combined results of the transactions as if the Mattic, F.B Feeney and Perfect Product acquisitionsacquisition of Partsmaster had closed on January 1, 20152019 rather than on the actual acquisition dates.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.
Note 3 - Revenue Recognition
As part of the Company's revenue recognition analysis, it concluded that it has two separate performance obligations, and accordingly, two separate revenue streams: products and services. Under the definition of a contract as defined by ASC 606, 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.
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.
The Lawson segment, including the recent Partsmaster acquisition, offers a vendor managed inventory ("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.
In previous financial statements, the Company presented the disaggregated components of total revenue: product revenue and service revenue, along with the cost of sales associated with each of these revenue streams as the service revenues exceeded 10% of consolidated sales. Since the Company qualifies as a smaller reporting company, the Company has elected to discontinue disclosure of the disaggregated components of revenue and cost of sales in its condensed consolidated statements of income and comprehensive income and in the related notes to the condensed consolidated financial statements. This presentation decision is effective beginning with this Quarterly Report on Form 10-Q for the period ended September 30, 2020. For the three and nine months ended September 30, 2019, service revenue of $10.3 million and $29.9 million, respectively, were reported as service revenue which have now been combined as reported within total revenue.
Disaggregated revenue by geographic area follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
(Dollars in thousands) | 2020 | | 2019 | | 2020 | | 2019 |
| | | | | | | |
United States | $ | 72,030 | | | $ | 75,160 | | | $ | 202,709 | | | $ | 225,327 | |
Canada | 18,247 | | | 19,619 | | | 50,749 | | | 56,892 | |
Consolidated total | $ | 90,277 | | | $ | 94,779 | | | $ | 253,458 | | | $ | 282,219 | |
Disaggregated revenue by product type follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
| | | | | | | |
Fastening Systems | 22.3 | % | | 24.1 | % | | 22.7 | % | | 24.0 | % |
Specialty Chemicals | 13.3 | % | | 11.7 | % | | 11.7 | % | | 11.6 | % |
Fluid Power | 12.6 | % | | 15.1 | % | | 13.2 | % | | 15.2 | % |
Cutting Tools and Abrasives | 12.2 | % | | 13.1 | % | | 13.1 | % | | 13.1 | % |
Electrical | 10.0 | % | | 10.4 | % | | 10.2 | % | | 10.8 | % |
Safety | 7.0 | % | | 4.7 | % | | 6.4 | % | | 4.7 | % |
Aftermarket Automotive Supplies | 7.0 | % | | 7.6 | % | | 7.1 | % | | 7.9 | % |
Welding and Metal Repair | 1.4 | % | | 1.3 | % | | 1.4 | % | | 1.5 | % |
Other | 14.2 | % | | 12.0 | % | | 14.2 | % | | 11.2 | % |
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.
Note 5 — Inventories, Net
Inventories, net, consisting primarily of purchased goods which are offered for resale, were as follows:
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| (Dollars in thousands) |
| September 30, 2020 | | December 31, 2019 |
Inventories, gross | $ | 67,083 | | | $ | 60,500 | |
Reserve for obsolete and excess inventory | (4,865) | | | (4,595) | |
Inventories, net | $ | 62,218 | | | $ | 55,905 | |
Note 6 - Goodwill
Goodwill activity for the first nine months of 20172020 and 20162019 is included in the table below:
| | | | | | | | | | | |
| (Dollars in thousands) |
| Nine Months Ended September 30, |
| 2020 | | 2019 |
Beginning balance | $ | 20,923 | | | $ | 20,079 | |
Acquisition | 15,952 | | | — | |
Adjustment to original acquisition allocation | 0 | | | (12) | |
Impact of foreign exchange | (447) | | | 515 | |
Ending balance | $ | 36,428 | | | $ | 20,582 | |
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| (Dollars in thousands) |
| Nine Months Ended September 30, |
| 2017 | | 2016 |
Beginning balance | $ | 5,520 |
| | $ | 319 |
|
Acquisition | (73 | ) | | 2,442 |
|
Impact of foreign exchange | 342 |
| | 12 |
|
Ending balance | $ | 5,789 |
| | $ | 2,773 |
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The reduction in acquisition activityCompany performed a quantitative impairment test on the Bolt goodwill as of $0.1March 31, 3020 and June 30, 2020. As of June 30, 2020 the Bolt reporting unit's fair value exceeded its carrying value by approximately $5.4 million in 2017 resulted from a non-cash adjustment to the estimated purchase price allocation to inventory originally recorded in 2016.or 16%. As of
Note 6 — 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.
Effective October 3, 2017, the Company entered into a Consent and Ninth Amendment to Loan and Security Agreement that provides the creditor's consent, to the acquisition of all of the issued and outstanding shares of The Bolt Supply House Ltd. ("Bolt Supply House") (see Note 11 - Subsequent Events) and revised the Loan Facility to permit Bolt Supply House to continue its existing line of credit. Additionally, in October, the Company borrowed $16.3 million from its revolving line of credit facility relatedJune 30, 2020 goodwill allocated to the Bolt Supply House acquisition.operating unit was $12.8 million. Related to the Lawson reporting unit, the Company performed a qualitative assessment as of March 31, 2020 and June 30, 2020 and determined that it was more likely than not the fair value of the reporting unit exceeded the carrying value of the reporting unit. The Company determined that no triggering event occurred in the third quarter.
Although the Company believes the projected future operating results and cash flows and related estimates regarding the values were based on reasonable assumptions, it is reasonably possible that estimates made may be materially and adversely impacted in the near term as a result of the COVID-19 pandemic, including impairment losses related to goodwill.
Note 7 - Intangible Assets
The Loan Agreement,gross carrying amount and accumulated amortization by intangible asset class were as amended, expiresfollows:
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| (Dollars in thousands) |
| September 30, 2020 | | December 31, 2019 |
| Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Value | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Value |
Trade names | $ | 11,022 | | | $ | (2,436) | | | $ | 8,586 | | | $ | 8,422 | | | $ | (2,020) | | | $ | 6,402 | |
Customer relationships | 12,181 | | | (2,040) | | | 10,141 | | | 7,337 | | | (1,404) | | | 5,933 | |
| $ | 23,203 | | | $ | (4,476) | | | $ | 18,727 | | | $ | 15,759 | | | $ | (3,424) | | | $ | 12,335 | |
Amortization expense of $1.1 million and $1.0 million related to intangible assets was recorded in August 2020. Due to the lock box arrangementGeneral 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:
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a) | 85% of the face amount of the Company’s eligible accounts receivable, generally less than 60 days past due, and |
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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. |
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 September 30, 2017, the Company had no borrowings under its revolving line of credit facility and additional borrowing availability of $36.0 million. The Company paid interest of $0.4 million and $0.5 millionadministrative expenses for the nine months ended September 30, 20172020 and 2016,2019, respectively.
As of September 30, 2020, there were no events or circumstances that indicate the carrying value may not be recoverable and thus no recoverability test was required.
Note 8 - Leases
The weighted average interest rateCompany 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.
The expenses and income generated by the leasing activity of Lawson as lessee for the three months ended September 30, 2020 and September 30, 2019 are as follows (Dollars in thousands):
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Lease Type | | Classification | | Three Months Ended September 30, 2020 | | Three Months Ended September 30, 2019 |
| | | | | | |
Consolidated Operating Lease Expense (1) | | Operating expenses | | $ | 1,262 | | | $ | 1,190 | |
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Consolidated Financing Lease Amortization | | Operating expenses | | 63 | | | $ | 60 | |
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Consolidated Financing Lease Interest | | Interest expense | | 8 | | | 10 | |
| | | | | | |
Consolidated Financing Lease Expense | | | | 71 | | | 70 | |
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Sublease Income (2) | | Operating expenses | | 0 | | | 0 | |
Net Lease Cost | | | | $ | 1,333 | | | $ | 1,260 | |
(1) Includes short term lease expense, which is immaterial
(2) Sublease income from sublease of a portion of the Company headquarters. The sublease was 3.91%terminated in June 2019 and the Company has no other subleases.
The expenses and income generated by the leasing activity of Lawson as lessee for the nine months ended September 30, 20172020 and 3.50%September 30, 2019 are as follows (Dollars in thousands):
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Lease Type | | Classification | | Nine Months Ended September 30, 2020 | | Nine Months Ended September 30, 2019 |
Consolidated Operating Lease Expense (1) | | Operating expenses | | $ | 3,630 | | | $ | 3,532 | |
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Consolidated Financing Lease Amortization | | Operating expenses | | 165 | | | 159 |
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Consolidated Financing Lease Interest | | Interest expense | | 22 | | | 23 | |
| | | | | | |
Consolidated Financing Lease Expense | | | | 187 | | | 182 | |
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Sublease Income (2) | | Operating expenses | | 0 | | | (160) | |
Net Lease Cost | | | | $ | 3,817 | | | $ | 3,554 | |
(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 value of the net assets and liabilities generated by the leasing activity of Lawson as lessee as of September 30, 2020 and December 31, 2019 are as follows (Dollars in thousands):
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Lease Type | | September 30, 2020 | | December 31, 2019 |
| | | | |
Total Right Of Use ("ROU") operating lease assets (1) | | $ | 8,938 | | | $ | 10,592 | |
Total ROU financing lease assets (2) | | 575 | | | 654 | |
Total lease assets | | $ | 9,513 | | | $ | 11,246 | |
| | | | |
Total current operating lease obligation | | $ | 4,276 | | | $ | 3,591 | |
Total current financing lease obligation | | 233 | | | 239 | |
Total current lease obligations | | $ | 4,509 | | | $ | 3,830 | |
| | | | |
Total long term operating lease obligation | | $ | 6,414 | | | $ | 9,133 | |
Total long term financing lease obligation | | 279 | | | 371 | |
Total long term lease obligation | | $ | 6,693 | | | $ | 9,504 | |
(1) Operating lease assets are recorded net of accumulated amortization of $5.1 million and $2.4 million as of September 30, 2020 and December 31, 2019, respectively
(2) Financing lease assets are recorded net of accumulated amortization of $0.4 million and $0.2 million as of September 30, 2020 and December 31, 2019, respectively
The value of the lease liabilities generated by the leasing activities of Lawson as lessee as of September 30, 2020 were as follows (Dollars in thousands):
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Maturity Date of Lease Liabilities | | Operating Leases | | Financing Leases | | Total |
| | | | | | |
Year one | | $ | 4,599 | | | $ | 254 | | | $ | 4,853 | |
Year two | | 3,780 | | | 153 | | | 3,933 | |
Year three | | 1,733 | | | 101 | | | 1,834 | |
Year four | | 720 | | | 35 | | | 755 | |
Year five | | 175 | | | 2 | | | 177 | |
Subsequent years | | 471 | | | 0 | | | 471 | |
Total lease payments | | 11,478 | | | 545 | | | 12,023 | |
Less: Interest | | 788 | | | 33 | | | 821 | |
Present value of lease liabilities | | $ | 10,690 | | | $ | 512 | | | $ | 11,202 | |
(1) Minimum lease payments exclude payments to landlord for real estate taxes and common area maintenance $0.7 million
The weighted average lease terms and interest rates of the leases held by Lawson as of September 30, 2020 are as follows:
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Lease Type | | Weighted Average Term in Years | | Weighted Average Interest Rate |
| | | | |
Operating Leases | | 3.1 | | 5.08% |
Financing Leases | | 2.7 | | 5.37% |
The cash outflows of the leasing activity of Lawson as lessee for the nine months endedending September 30, 2016.2020 are as follows (Dollars in thousands):
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Cash Flow Source | | Classification | | Amount |
| | | | |
Operating cash flows from operating leases | | Operating activities | | $ | 3,072 | |
Operating cash flows from financing leases | | Operating activities | | 22 | |
Financing cash flows from financing leases | | Financing activities | | 192 | |
Note 9 — Credit Agreement
In the fourth quarter of 2019, the Company entered into a five-year credit agreement led by J.P. Morgan Chase Bank N.A, as administrative agent and including CIBC Bank USA and Bank of America, N.A. as other lenders. The credit agreement matures on October 11, 2024 and provides for $100.0 million of revolving commitments. The credit agreement allows borrowing capacity to increase to $150.0 million subject to meeting certain criteria and additional commitments from its lenders.
The Credit Agreement consists of borrowings as alternate base rate loans, Canadian prime rate loans, Eurodollar loans, and Canadian dollar offered rate loans as the Company requests. The applicable interest rate spread is determined by the type of borrowing used and the Total Net Leverage Ratio as of the most recent fiscal quarter as defined in the Credit Agreement.
The covenants associated with the Credit Agreement restrict the ability of the Company to, among other things: incur additional indebtedness and liens, make certain investments, merge or consolidate, engage in certain transactions such as the disposition of assets and sales-leaseback transactions, and make certain restricted cash payments such as dividends in excess of defined amounts contained within the Credit Agreement. In addition to these items and other customary terms and conditions, the Credit Agreement requires the Company to comply with certain financial covenants as follows:
a) The Company is required to maintain an EBITDA to Fixed Charge Coverage Ratio of at least 1.15 to 1.00 for any period of four consecutive fiscal quarters ending on the last day of any fiscal quarter; and
b) The Company is required to maintain a Total Net Leverage Ratio of no more than 3.25 to 1.00 on the last day of any fiscal quarter. The maximum Total Net Leverage Ratio will be allowed to increase to 3.75 to 1.00 after certain permitted acquisitions.
The Credit Agreement also includes events of default for, among others, non-payment of obligations under the Credit Agreement, change of control, cross default to other indebtedness in an aggregate amount in excess of $5.0 million, failure to comply with covenants, and insolvency.
In addition to other customary representations, warranties and covenants, the Company is required to meet a minimum trailing twelve month EBITDA to fixed charges ratio, as defined in the amended Loan Agreement, if the excess borrowing capacity is below $10.0 million. On September 30, 2017, the Company's borrowing capacity exceeded $10.0 million. Therefore, the Company was not subject to this financial covenant, however, for informational purposes the resultresults of the financial covenant iscovenants are provided below:
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Quarterly Financial CovenantCovenants | | Requirement | | Actual |
EBITDA to fixed charges ratio | | 1.101.15 : 1.00 | | 3.204.73 : 1.00 |
Total net leverage ratio | | 3.25 : 1.00 | | 0.71 : 1.00 |
The Company was in compliance with all covenants as of September 30, 2020.
During the third quarter of 2020 the Company entered into an amendment to the Credit Agreement which among other items increased the letter of credit basket from $15.0 million to $40.0 million until August 31, 2021 and authorized the Company to incur indebtedness in an amount up to $36.0 million for the acquisition of Partsmaster.
The Company had no outstanding borrowings under its Credit Agreement and $66.0 million of availability under its revolving line of credit facility. The weighted average interest rate was 2.64% and 4.54% for the nine months ended September 30, 2020 and 2019, respectively.
Note 710 - Accrued Acquisition Liability
On August 31, 2020, Lawson acquired Partsmaster from NCH Corporation. As part of the purchase price the Company agreed to pay $33.0 million in May 2021. The payment obligation has been discounted to present value using an implied interest rate of 1.8% and is recognized as a current liability of $32.5 million in the Company's condensed consolidated balance sheet. Payment has been guaranteed under the Purchase Agreement which includes the issuance of a $33.0 million irrevocable standby letter of credit. The accrued acquisition liability is included as outstanding debt in the quarterly financial covenant calculations.
Note 11 - Stock Repurchase Program
In the second quarter of 2019, the 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 the first quarter of 2020 the Company purchased 47,504 shares of common stock at an average purchase price of $36.93 under the repurchase program. No shares were repurchased in the second or third quarters of 2020 under the Company stock repurchase plan.
Note 12 — Severance Reserve
Changes in the Company’s reserve for severance as of September 30, 20172020 and 20162019 were as follows:
| | | | | | | | | | | |
| (Dollars in thousands) |
| Nine Months Ended September 30, |
| 2020 | | 2019 |
Balance at beginning of period | $ | 909 | | | $ | 359 | |
Charged to earnings | 1,520 | | | 1,542 | |
Payments | (1,239) | | | (925) | |
Balance at end of period | $ | 1,190 | | | $ | 976 | |
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| (Dollars in thousands) |
| Nine Months Ended September 30, |
| 2017 | | 2016 |
Balance at beginning of period | $ | 1,710 |
| | $ | 697 |
|
Charged to earnings | 595 |
| | 714 |
|
Payments | (1,625 | ) | | (950 | ) |
Balance at end of period | $ | 680 |
| | $ | 461 |
|
The remaining severance liabilities outstanding as of September 30, 2017 will be substantially paid by the end of 2017.
Note 813 — Stock-Based Compensation
The Company recorded stock-based compensation income of $2.8 million and expense of $2.7 million and a benefit of $1.3$7.6 million for the first nine months of 20172020 and 2016,2019, respectively. A portion of stock-based compensation is related to the change in the market value of the Company's common stock. Stock-based compensation liability of $10.4 million as of September 30, 2020 and $14.9 million as of December 31, 2019 is included in Accrued expenses and other liabilities.
A summary of stock-based awards activityissued during the nine months ended September 30, 20172020 follows:
Restricted Stock Performance RightsUnits ("SPRs"RSUs")
SPRs entitle the recipientThe Company issued 6,847 RSUs to receive a cash payment equalkey employees that cliff vest on December 31, 2022. The Company issued 2,500 RSUs to the excess of the market valuean executive that cliff vest on March 2, 2023 and 3,000 RSUs that cliff vest on March 9, 2023. The Company issued 10,965 RSUs to certain members of the Company's common stock over the SPR exercise price when the SPRs are surrendered. A liabilityBoard of $9.0 million, reflecting the estimated fair valueDirectors with a vesting date of future pay-outs is included as a component of Accrued expenses in the condensed consolidated balance sheets. Activity related to the Company’s SPRs for the nine months ended September 30, 2017 was as follows:
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| | | | | | |
| Number of SPRs | | Weighted Average Exercise Price |
Outstanding on December 31, 2016 | 946,701 |
| | $ | 19.60 |
|
Granted | 78,948 |
| | 25.12 |
|
Exercised | (34,095 | ) | | 12.99 |
|
Cancelled | (30,000 | ) | | 36.71 |
|
Outstanding on September 30, 2017 | 961,554 |
| | 19.76 |
|
Restricted Stock Awards ("RSAs")
May 12, 2021. Each RSARSU is exchangeable for one share of the Company's common stock at the end of the vesting period. Activity related to the Company’s RSAs for the nine months ended September 30, 2017 was as follows:
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| | |
| Restricted Stock Awards |
Outstanding on December 31, 2016 | 31,897 |
|
Granted | 83,920 |
|
Exchanged for shares | (31,897 | ) |
Outstanding on September 30, 2017 | 83,920 |
|
Market Stock Units ("MSUs")
MSU'sThe Company issued 22,284 MSUs to key employees that cliff vest on December 31, 2022. MSUs 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 zero0 to 150% of the underlying MSU,33,426, will be determined based upon the trailing sixty-day weighted average closing price of the Company's common stock on December 31, 2022.
Performance Awards ("PAs")
The Company issued 10,852 PAs to key employees that cliff vest on December 31, 2022. PAs are exchangeable for the Company's common stock ranging from 0 to 16,278, or the equivalent amount in cash, based upon vesting. Activity related to the Company’s MSUsachievement of certain financial performance metrics.
NaN stock options were excluded from the computation of diluted earnings per share for the three months ended September 30, 2020 or the nine months ended September 30, 2019.
Note 14 — Income Taxes
The Company recorded income tax expense of $6.0 million, a 28.7% effective tax rate for the nine months ended September 30, 20172020. The effective tax rate is higher than the U.S. statutory tax rate due primarily to state taxes, recording of reserves for uncertain tax positions, and an inclusion for Global Intangible Low Taxed Income. Income tax expense of $3.7 million, a 26.6% effective tax rate was as follows:
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| | | | | |
| Number of Market Stock Units | | Maximum Shares Potentially Issuable |
Outstanding on December 31, 2016 | 149,532 |
| | 224,298 |
|
Granted | 98,243 |
| | 147,065 |
|
Outstanding on September 30, 2017 | 247,775 |
| | 371,363 |
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Note 9 — Income Taxes
At each reporting date, Lawson’s management considers new evidence, both positive and negative, that could impact management’s view with regard to the realization of its deferred tax assets and the reversal of the corresponding valuation allowances. Although the Company has generated pre-tax profits over the past three quarters and has begun to utilize a small portion of its net operating loss carryforwards over the past two years, management feels that additional positive evidence is necessary in order to conclude that it is more likely than not that it will be able to realize its deferred tax assets. We believe that there is a reasonable possibility that within the next twelve months, sufficient evidence may become available to allow us to reach a conclusion that a significant portion of the valuation allowance will no longer be needed. As of September 30, 2017, substantially all deferred tax assets remain subject to a tax valuation allowance.
If the Company continues to demonstrate that it can consistently generate income in future quarters, it may lead to a determination that there is sufficient positive evidence to conclude that it is more likely than not that the company will be able to utilize its deferred tax assets to offset future taxable income. This would lead to the reduction of all or a portion of the valuation allowance resulting in an income tax benefit for the period in which the reduction is recorded. The Company will continue to closely monitor all positive and negative evidence and will re-assess its position on a quarterly basis.
Although the Company is in this full tax valuation allowance position, income tax expenses of $0.8 million and $0.5 million were recorded for the nine months ended September 30, 20172019. This effective tax rate was higher than the U.S. statutory rate due primarily to state taxes, income in higher tax jurisdictions and 2016, respectively, primarily due to reservesan inclusion for uncertain tax positions, federal alternative minimum taxes and state taxes.Global Intangible Low Tax Income.
In 2017, the company increased its deferred tax assets and related valuation allowance by $7.2 million that may arise from future settlement of uncertain tax positions in Canada. There was no impact to the Company's consolidated statements of income and comprehensive income, balance sheets or statements of cash flows, as the company had valuation allowances equal to the value of the deferred tax assets.
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 September 30, 2017,2020, the Company is subject to U.S. Federal income tax examinations for the years 20142017 through 20162019 and income tax examinations from various other jurisdictions for the years 20112013 through 2016.2019.
Earnings from the Company’s foreign subsidiarysubsidiaries are considered to be indefinitely reinvested. A distribution of these non-U.S. earnings in the form of dividends or otherwise wouldmay subject the Company to bothforeign withholding taxes and U.S. Federalfederal and state income taxes, as adjusted for foreign tax credits.taxes.
Note 1015 — 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. In August 2013,site and the site was enrolled in Alabama'sthe Alabama Department of Environmental Management (“ADEM") voluntary cleanup program. On October 30, 2014, the Company received estimates from its environmental consulting firm for three potential
The remediation solutions.plan was approved by ADEM in 2018. The estimates included a range of viable remedial approaches. The first solution included limited excavation and removal of the contaminated soil along with an extensive monitoring period. The second solution included the first solution plus the installation of a groundwater extraction system. The third scenario included the first and second solutions plus treatment injections to reduce the degradation time. The estimated expenditures over the life of the three scenarios ranged from $0.3 million to $1.4 million. As the Company had determined that a loss was probable and no scenario was more likely than the other at that time, a liability in the amount of $0.3 million was established in 2014.
During 2015, after further evidence had been collected and analyzed, the Company concluded that it was probable that future remediation would be required, and accordingly accrued an additional $0.9 million for the estimated costs.
In the third quarter of 2017 the Company received estimates from its environmental consulting firm for two new remediation solutions based on a chemical injection process. The first solution would consistplan consists of chemical injections throughout the entire site to directly eliminateaffected area, as well as subsequent monitoring of the hazardous substancesarea for three consecutive periods. The injection process was completed in the soilfirst quarter of 2019 and groundwater.the environmental consulting firm is monitoring the affected area. The second solution would consistCompany utilized its remaining liability balance in the third quarter of chemical injections around2020. there may be some additional nominal filing fees that are charged to the perimeter ofCompany by the site to prevent the migration of the hazardous chemicals off-site. Neither solution would require additional excavation or repairsenvironmental consulting firm and ADEM, however these amounts are expected to be made to the property. Additionally, the estimated required monitoring period wouldimmaterial and will be substantially reduced. The estimated expenditures over an 18 month period under the two injection scenarios ranged from $0.9 million to $2.0 million.expensed as incurred. The Company does not expect to capitalize any amounts related to the remediation plan.
Note 16 — Related Party Transaction
During the three and nine months ended September 30, 2020 the Company purchased approximately $0.7 million and $0.9 million, respectively, of inventory from a company owned by an immediate relative of a Board member at fair market value. The Company paid substantially all of the amount owed in the third quarter and therefore immaterial remaining liabilities exist as of September 30, 2020.
Note 17 – Segment Information
The Company operates in 2 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. Given the nature of the acquired Partsmaster business, it is included in the Lawson segment for reporting purposes. 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 third quarter of 2020.
Financial information for the Company's reportable segments follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
Revenue | | | | | | | |
| | | | | | | |
| | | | | | | |
Lawson | $ | 79,806 | | | $ | 83,461 | | | $ | 224,511 | | | $ | 250,895 | |
Bolt Supply | 10,471 | | | 11,318 | | | 28,947 | | | 31,324 | |
Consolidated total | $ | 90,277 | | | $ | 94,779 | | | $ | 253,458 | | | $ | 282,219 | |
| | | | | | | |
Gross profit | | | | | | | |
| | | | | | | |
| | | | | | | |
Lawson | $ | 43,038 | | | $ | 46,148 | | | $ | 123,031 | | | $ | 138,524 | |
Bolt Supply | 4,187 | | | 4,426 | | | 11,428 | | | 12,016 | |
Consolidated total | $ | 47,225 | | | $ | 50,574 | | | $ | 134,459 | | | $ | 150,540 | |
| | | | | | | |
Operating income | | | | | | | |
Lawson | $ | 1,112 | | | $ | 5,377 | | | $ | 19,003 | | | $ | 11,490 | |
Bolt Supply | 889 | | | 1,069 | | | 2,205 | | | 2,123 | |
Consolidated total | 2,001 | | | 6,446 | | | 21,208 | | | 13,613 | |
Interest expense | (142) | | | (138) | | | (329) | | | (481) | |
Other income (expense), net | 615 | | | (13) | | | 15 | | | 798 | |
Income before income taxes | $ | 2,474 | | | $ | 6,295 | | | $ | 20,894 | | | $ | 13,930 | |
Note 18 - COVID-19 Risks and Uncertainties
There is substantial uncertainty as to the overall effect the COVID-19 pandemic will have on the results of the Company for 2020 and beyond. Various events related to COVID-19 have resulted in lost revenue to our Company, limitations on our ability to source high demand products, limitations on our sales force to perform certain functions due to state or federal stay-at-home orders, slow-down of customer demand for our products and limitations of some customers to pay us on a timely basis.
On March 27, 2020, Congress enacted the Coronavirus Aid, Relief, and Economic Security ("CARES") Act to provide certain relief as a result of the COVID-19 outbreak. The Company has elected to defer the employer side social security payments in accordance with the CARES Act. The Company will continue to evaluate how the provisions of the CARES Act will impact its financial position, results of operations and cash flows. The Company has utilized the Canadian Emergency Wage Subsidy ("CEWS") Act for both Lawson Canada and Bolt for assistance with hourly employee costs. The CEWS is a program that provides a subsidy of certain eligible wages commencing March 15, 2020 through December 31, 2020 subject to meeting certain criteria. During the second quarter of 2020 the Company recorded $0.9 million in subsidies from the CEWS program which is recognized as a reduction to selling, general and administrative expenses in the consolidated statement of income and comprehensive income. No subsidies were recognized in the three months ended September 30, 2020.
In the first quarter of 2020, the government of the state of Illinois defined essential businesses, allowing Lawson to operate during the pandemic. A change in this status could result in the temporary closure of our business. Additionally the COVID-19 pandemic could result in a temporary closure of any or all of our distribution facilities or the Bolt branch locations, which would negatively impact our operations. Other disruptions to our supply chain such as reduced capacity or temporary
shutdowns of freight carriers could also negatively impact Company performance. The pandemic is negatively impacting sales and operations currently and may negatively impact future financial results, liquidity and overall performance of the Company. Additionally, it is reasonably possible that estimates made in the financial statements may be materially and adversely impacted in the near term as a result of these remediation options.conditions, including delay in payment of receivables, impairment losses related to goodwill and other long-lived assets, and inability to utilize deferred tax assets.
The Lawson MRO business model relies upon customer interaction as well as a consistent schedule of onsite visits by our sales representatives to customer locations. The Bolt business model relies on foot traffic in its branch locations. The onset of the COVID-19 pandemic, as well as social distancing guidelines and government mandated shelter in place orders, have negatively impacted the ability of our sales reps to visit our customers and for foot traffic to return to our Bolt branch locations, resulting in an overall negative impact on our business.
The second quarter 2020 financial performance of the Company was substantially negatively impacted as state and local governments throughout the United States and Canada imposed strict COVID-19 related restrictions, including shutdowns of nonessential businesses and stay-at-home orders, particularly in April. These restrictions were relaxed in May and June, and were further relaxed throughout the third quarter. The economic climate in the third quarter improved as non-essential businesses reopened in both limited capacity and full capacity. The relaxed restrictions resulted in increased customer contact and more consistent customer visits for Lawson MRO sales representatives, as well as increased customer visits to Bolt branch locations. The improved economic climate and increased activity of the Lawson MRO and Bolt segments led to a sequential improvement in financial results in the third quarter 2020 compared to the second quarter 2020.
The Company has determined that it will initially proceed withtaken several steps to mitigate the methodpotential negative impacts of injecting chemicals aroundCOVID-19. The actions taken included, but are not limited to, furloughing employees, reducing base salaries for a period of time, canceling travel and award trips, temporarily consolidating its Suwanee distribution center operations into the perimeterMcCook facility, eliminating non-critical capital expenditures and eliminating various positions throughout the Company. In the third quarter the Company brought back approximately 70% of the site to preventpreviously furloughed employees. The Company reopened the migration ofSuwanee distribution center in a reduced capacity in the hazardous chemicals off-site. As of September 30, 2017, approximately $1.0 million remains accrued for this remediation in other long-term liabilities on the accompanying consolidated balance sheet. This estimate was based on the information provided to date andthird quarter as the remediation efforts proceed, additional information may impact the final cost. As of September 30, 2017, agreement with Alabama’s voluntary cleanup program on viable treatment of the property has not yet been reached and theoverall business activity increased.
The Company continues to evaluate potential remediation alternatives that could impactmonitor its balance sheet and liquidity position and is taking actions to protect cash flows from operations, while at the ultimate costsame time managing its operating expenses in relation to current sales trends. At September 30, 2020, the Company had $17.2 million of remediation.
Note 11 - Subsequent Events
On October 3, 2017, Lawson Products completed the purchaseunrestricted cash and cash equivalents and an additional $66.0 million of The Bolt Supply House Ltd. ("Bolt Supply House"), an industrial parts distributor located in Western Canada for approximately $32.1 million which was paid using a combinationborrowing capacity, net of cash on hand and borrowingsoutstanding letters of $16.3 million from the Company's existing revolvingcredit, under its committed credit facility. The Bolt Supply House operates thirteen strategically located branches across Alberta, Manitoba and Saskatchewan, Canada. Company recorded a liability of $32.5 million in relation to the acquisition of Partsmaster.
The Bolt Supply HouseCompany will continue to operate separately underclosely monitor the operating environment and will take appropriate actions to protect the safety for its own brand as a subsidiary of Lawson's Canadian operating company.employees, customers and suppliers while continuing to meet its working capital needs and remain in compliance with its debt covenants.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Partsmaster Acquisition
The
In September 2020, we acquired Partsmaster, a leading Maintenance, Repair and Operations ("MRO") distributor from NCH Corporation. Partsmaster has over 200 sales representatives and serves approximately 16,000 customers throughout the United States and Canada. We also assumed the lease on the Partsmaster distribution center located in Greenville, Texas, and we will continue to fulfill orders from this facility as we integrate Partsmaster into our MRO segment operations.
The purchase price of the acquisition was $35.3 million in cash and the assumption of certain liabilities. We paid $2.3 million at the time of the acquisition and we will pay the remaining $33.0 million in May 2021. We plan to pay the remaining portion of the purchase price with cash on hand and, as necessary, any remaining portion using our existing credit facility. The liabilities assumed include approximately $2.9 million relating to deferred employee compensation and $4.1 million of accounts payable and other accrued liabilities.
Assets acquired and liabilities assumed as a result of the acquisition were accounted for at their fair value on the acquisition date. The identified assets include $5.0 million of intangible assets for customer relationships and $2.8 million for trade names with estimated useful lives of 10 years and 5 years, respectively. Goodwill of $16.0 million related to this acquisition reflects the purchase price less the fair market value of the identifiable assets. The appropriate fair values of the assets acquired and liabilities assumed are based on preliminary estimates and assumptions. These preliminary estimates and assumptions could change significantly during the purchase price measurement period as we finalize the valuations of the assets acquired and liabilities assumed.
Additional information related to the Partsmaster acquisition is provided in Note 2 - Acquisition in the notes to the consolidated financial statements.
COVID-19 Pandemic
In March 2020, the World Health Organization declared a new strain of coronavirus (“COVID-19”) a pandemic. The COVID-19 pandemic continues to negatively impact the global economy by disrupting global supply chains and financial markets and has negatively impacted our operational and financial performance, including the ability of our sales representatives to call on customers in person and perform VMI services at customer locations. The Bolt Supply House saw a decline in sales in the second quarter and third quarter as the ability of customers to visit branch locations was restricted and certain customers temporarily closed. The continued impact of the COVID-19 pandemic on our operational and financial performance, including our ability to execute our business strategies and initiatives in the expected time frame, will depend on future developments, including the duration and spread of the pandemic and related restrictions on travel and transports, all of which remain uncertain. An extended period of global supply chain and economic disruption could materially affect our business, sales, results of operations and financial condition.
Lawson continues to be defined as an essential business by the state of Illinois. A change in this status could result in the temporary closure of our business. Additionally the COVID-19 pandemic could result in a temporary closure of some or all of our distribution facilities or the Bolt branch locations, which would negatively impact our operations. Other disruptions to our supply chain such as reduced capacity or temporary shutdowns of freight carriers could also negatively impact our performance.
The pandemic has negatively impacted our current operations and may negatively impact our future financial results, liquidity and overall performance. Additionally, it is possible that estimates made in support of our financial statements may be materially and adversely impacted in the near term as a result of these conditions, including delay in payment of receivables, impairment losses related to goodwill and other long-lived assets, and inability to utilize deferred tax assets.
The economic climate in the third quarter has improved as many nonessential businesses have reopened in both limited capacity and full capacity. The relaxed restrictions have resulted in increased customer contact and more consistent customer visits for Lawson MRO sales representatives and customers were also allowed in Bolt branch locations. The improved economic climate and increased activity of the Lawson MRO and Bolt segments led to a sequential improvement in financial results in the third quarter of 2020 compared to the second quarter of 2020. However, restrictions related to the COVID-19 pandemic and a downturn in the oil and gas industry has led to lower sales and operating income compared to the third quarter of 2019.
We continue to take action to mitigate the potential negative impacts of COVID-19. The actions taken included, but are not limited to, furloughing employees, reducing base salaries for a period of time and incentive awards, canceling travel and award trips, temporarily consolidating our Suwanee distribution center operations into the McCook facility eliminating non-critical capital expenditures and eliminating various positions throughout the Company. In the third quarter we brought back approximately 70% of the previously furloughed employees and reopened our Suwanee distribution center in a reduced capacity as overall business activity increased.
We continue to monitor our balance sheet and liquidity position and take actions to protect our cash flows from operations while at the same time managing our operating expenses in relation to current sales trends. At September 30, 2020, we had $17.2 million of unrestricted cash and cash equivalents and an additional $66.0 million of borrowing capacity, net of outstanding letters of credit. Our outstanding letters of credit include a letter of credit for $33.0 million for the remaining payment of the Partsmaster acquisition.
We will continue to closely monitor the overall economic and operating environment and we will take appropriate actions to protect the safety of our employees, customers and suppliers while continuing to meet our working capital needs and remain in compliance with our debt covenants. While COVID-19 has negatively impacted our sales, cost control measures and ability to effectively service our customers, we have continued to generate positive cash flow that has enabled us to maintain a strong financial position. We plan to continue to respond to pandemic developments in a prompt and disciplined manner with an emphasis on maintaining our strong financial position.
Sales Drivers
The 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.economy which has been significantly affected by the COVID-19 pandemic. 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 58.6 in the third quarter of 2017 compared to 51.255.2 in the third quarter of 2016, indicating2020 compared to 49.4 in the third quarter of 2019. The third quarter 2020 PMI of 55.2 follows a strong U.S. manufacturing economy.second quarter PMI of 45.7 and a first quarter PMI of 50.0. This high degree of volatility in 2020, primarily reflecting the effect of the COVID-19 pandemic on the current economic environment, makes this indicator more difficult to interpret in measuring year over year economic growth.
Our sales are also affected by the number of sales representatives and their productivity. OurThe acquisition of Partsmaster in September increased our sales force by approximately 200 sales representatives in September 2020 and contributed a weighted average of 67 sales representatives to the sales force consistedhead count in the third quarter 2020. Including the Partsmaster sales representatives, the average sales rep headcount for the quarter was 993 sales representatives in the third quarter of an average of 991 and 1,0072020 compared to 989 sales representatives during the third quartersthird quarter of 2017 and 2016, respectively. Our2019.
Lawson segment sales reprepresentative productivity, measured as sales per rep per day increasedand including the Partsmaster sales reps, decreased 4.6% to $1,212$1,249 in the third quarter of 20172020 from $1,089$1,309 in the third quarter of 2016.2019. Partsmaster contributed $5.4 million in sales in the third quarter. The decrease in sales rep productivity compared to the third quarter of 2019 was primarily driven by the negative impacts of COVID-19 and the downturn in the oil and gas industry. We anticipate moderate growth in the size of our sales force to increase slightly for the remainder of 2017 as we2020, however, the size of our sales force will be influenced by the performance of the overall economy. We also plan to continue to concentrate our efforts on providing training and support to continue to increaseincreasing the productivity of our existing and acquired sales representatives.
In orderNon-GAAP Financial Measure - Adjusted Operating Income
We believe that certain non-GAAP financial measures may provide users of this financial information with additional meaningful comparisons between current results and results in prior operating periods. We believe that these non-GAAP financial measures can provide additional meaningful reflection of underlying trends of the business because they provide a comparison of historical information that excludes certain infrequently occurring, seasonal or non-operational items that impact the overall comparability. These non-GAAP financial measures should be viewed in addition to, utilize excess capacityand not as an alternative for, our reported results prepared in accordance with GAAP.
Adjusted operating income is defined by us as GAAP operating income excluding stock-based compensation, severance expenses and acquisition costs in the period in which these items are incurred.
Operating income was $2.0 million for the third quarter of our discontinued Fairfield distribution center2020 compared to $6.4 million for the third quarter of 2019. Excluding stock-based compensation, severance expense and acquisition costs, adjusted non-GAAP operating income was $7.7 million in the third quarter of 2020 compared to $8.9 million in the third quarter of 2019, driven by decreased sales due to the COVID-19 pandemic, partially offset by inclusion of Partsmaster adjusted operating income of $0.4 million in the third quarter of 2020. Operating income was $21.2 million for the first nine months of 2020 compared to $13.6 million for the first nine months of 2019. Excluding stock-based compensation, severance expense and acquisition costs, adjusted non-GAAP operating income was $20.5 million in the first nine months of 2017, resulting2020 compared to $22.8 million in the first nine months of 2019.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Reconciliation of GAAP Operating Income to Adjusted Non-GAAP Operating Income (Unaudited) |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
(Dollars in Thousands) | | 2020 | | 2019 | | 2020 | | 2019 |
| | | | | | | | |
Operating income as reported by GAAP | | $ | 2,001 | | | $ | 6,446 | | | $ | 21,208 | | | $ | 13,613 | |
Stock based compensation (1) | | 4,746 | | | 2,374 | | | (2,767) | | | 7,621 | |
Severance expense | | 488 | | | 30 | | | 1,520 | | | 1,542 | |
Acquisition costs | | 473 | | | — | | | 555 | | | — | |
Adjusted non-GAAP operating income | | $ | 7,708 | | | $ | 8,850 | | | $ | 20,516 | | | $ | 22,776 | |
(1) Expense for stock-based compensation, of which a gain of $5.4 million.
In October 2017 the Company acquired The Bolt Supply House Ltd (See Note 11 - Subsequent Events) which will affect Lawson's operating results beginningportion varies with the fourth quarter of 2017.Company's stock price
Quarter ended September 30, 20172020 compared to quarter ended September 30, 20162019
| | | | | | | | | | | | | | | | | | | | | | | |
| 2020 | | 2019 |
(Dollars in thousands) | Amount | | % of Net Sales | | Amount | | % of Net Sales |
| | | | | | | |
Revenue | $ | 90,277 | | | 100.0 | % | | $ | 94,779 | | | 100.0 | % |
Cost of goods sold | 43,052 | | | 47.7 | % | | 44,205 | | | 46.6 | % |
Gross profit | 47,225 | | | 52.3 | % | | 50,574 | | | 53.4 | % |
| | | | | | | |
Operating expenses: | | | | | | | |
Selling expenses | 19,155 | | | 21.2 | % | | 21,255 | | | 22.4 | % |
General and administrative expenses | 26,069 | | | 28.9 | % | | 22,873 | | | 24.2 | % |
Total operating expenses | 45,224 | | | 50.1 | % | | 44,128 | | | 46.6 | % |
| | | | | | | |
Operating income | 2,001 | | | 2.2 | % | | 6,446 | | | 6.8 | % |
| | | | | | | |
Interest expense | (142) | | | (0.2) | % | | (138) | | | (0.1) | % |
Other income (expenses), net | 615 | | | 0.7 | % | | (13) | | | (0.1) | % |
| | | | | | | |
Income before income taxes | 2,474 | | | 2.7 | % | | 6,295 | | | 6.6 | % |
| | | | | | | |
Income tax expense | 736 | | | 0.8 | % | | 1,521 | | | 1.6 | % |
| | | | | | | |
Net income | $ | 1,738 | | | 1.9 | % | | $ | 4,774 | | | 5.0 | % |
22
|
| | | | | | | | | | | | | |
| 2017 | | 2016 |
($ in thousands) | Amount | | % of Net Sales | | Amount | | % of Net Sales |
| | | | | | | |
Net sales | $ | 75,651 |
| | 100.0 | % | | $ | 70,199 |
| | 100.0 | % |
Cost of goods sold | 29,646 |
| | 39.2 | % | | 27,626 |
| | 39.4 | % |
Gross profit | 46,005 |
| | 60.8 | % | | 42,573 |
| | 60.6 | % |
| | | | | | | |
Operating expenses: | | | | | | | |
Selling expenses | 24,354 |
| | 32.2 | % | | 23,568 |
| | 33.6 | % |
General and administrative expenses | 20,561 |
| | 27.2 | % | | 16,616 |
| | 23.6 | % |
Operating expenses | 44,915 |
| | 59.4 | % | | 40,184 |
| | 57.2 | % |
| | | | | | | |
Operating income | 1,090 |
| | 1.4 | % | | 2,389 |
| | 3.4 | % |
| | | | | | | |
Interest expense | (133 | ) | | (0.1 | )% | | (167 | ) | | (0.2 | )% |
Other income, net | 843 |
| | 1.1 | % | | 66 |
| | 0.1 | % |
| | | | | | | |
Income before income taxes | 1,800 |
| | 2.4 | % | | 2,288 |
| | 3.3 | % |
| | | | | | | |
Income tax expense | 479 |
| | 0.7 | % | | 463 |
| | 0.7 | % |
| | | | | | | |
Net income | $ | 1,321 |
| | 1.7 | % | | $ | 1,825 |
| | 2.6 | % |
Net SalesRevenue and Gross Profits
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Increase/(Decrease) |
(Dollars in thousands) | 2020 | | 2019 | | Amount | | % |
| | | | | | | |
Revenue | | | | | | | |
Lawson | $ | 79,806 | | | $ | 83,461 | | | $ | (3,655) | | | (4.4)% |
Bolt Supply | 10,471 | | | 11,318 | | | (847) | | | (7.5)% |
Consolidated | $ | 90,277 | | | $ | 94,779 | | | $ | (4,502) | | | (4.7)% |
| | | | | | | |
Gross profit | | | | | | | |
Lawson | $ | 43,038 | | | $ | 46,148 | | | $ | (3,110) | | | (6.7)% |
Bolt Supply | 4,187 | | | 4,426 | | | (239) | | | (5.4)% |
Consolidated | $ | 47,225 | | | $ | 50,574 | | | $ | (3,349) | | | (6.6)% |
| | | | | | | |
Gross profit margin | | | | | | | |
Lawson | 53.9 | % | | 55.3 | % | | | | |
Bolt Supply | 40.0 | % | | 39.1 | % | | | | |
Consolidated | 52.3 | % | | 53.4 | % | | | | |
Net
Total sales increased 7.8%decreased 4.7% to $75.7$90.3 million in the third quarter of 20172020 compared to $70.2$94.8 million in the third quarter of 2016 with one less selling day. 2019. Sales were negatively impacted by the effect of the COVID-19 pandemic and a downturn in the oil and gas industry, partially offset by the contribution of $5.4 million of sales from Partsmaster in the third quarter 2020. Sales productivity, measured as sales per rep per day, decreased 4.6% in the third quarter of 2020 compared to the same quarter of 2019, primarily driven by the COVID-19 pandemic. Bolt Supply sales were also negatively impacted by COVID-19 compared to the prior year quarter. Consolidated average daily sales increased on a sequential basis throughout the third quarter, from $1.294 million in July to $1.315 million in August and $1.629 million in September as the economy continued to improve. Partsmaster contributed $0.257 million in average daily sales in September. Average daily sales improved 9.5%declined 4.7% to $1.201$1.411 million in the third quarter of 20172020 compared to $1.097$1.481 million in the prior year quarter. ThePartsmaster contributed $0.085 million of average daily sales in the third quartersquarter 2020. Both the third quarter of 20172020 and 20162019 had 63 and 64 selling days, respectively. Sales were positively impacted by increased productivity of sales representatives and the effect of acquisitions completed in 2016, augmented by the overall improvement in the MRO marketplace. We experienced strong growth in our large national and regional accounts. Average daily sales from the 2016 acquisitions grew 1.0%.days.
Gross Profit
GrossReported gross profit increaseddecreased $3.3 million to $46.0$47.2 million in the third quarter of 20172020 compared to $42.6$50.6 million as a result of the sales decline. Partsmaster contributed $3.6 million to reported gross profit in the third quarter of 2016, primarily due2020 before giving effect to higher sales, and increased slightlyservice costs. Consolidated gross profit as a percent of sales was 52.3% in the third quarter of 2020 compared to 60.8%53.4% in the prior year quarter. Gross profit as a percentage of sales generated by sales representative acquired from 60.6%Partsmaster was 66.8% before giving affect to service related costs. The organic Lawson MRO segment gross margin as a year ago. The increasepercent of sales declined to 58.8% in gross profit margin fromthe third quarter of 2020 compared to 60.9% a year ago was primarily driven by volume related vendor concessionsquarter before giving effect to the service-related costs, as a result of de-leveraging of fixed distribution costs over a lower sales base, a shift to lower margin products in the quarter and lower bins and cabinets provided to our customers which were partially offset by higher sales to larger national customers, who typically generate lower product margins.net transportation costs.
Selling, General and Administrative Expenses
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Increase (Decrease) |
(Dollars in thousands) | 2020 | | 2019 | | Amount | | % |
| | | | | | | |
Selling expenses | | | | | | | |
Lawson | $ | 18,373 | | | $ | 20,402 | | | $ | (2,029) | | | (9.9)% |
Bolt Supply | 782 | | | 853 | | | (71) | | | (8.3)% |
Consolidated | $ | 19,155 | | | $ | 21,255 | | | $ | (2,100) | | | (9.9)% |
| | | | | | | |
General and administrative expenses | | | | | | | |
Lawson | $ | 23,553 | | | $ | 20,369 | | | $ | 3,184 | | | 15.6% |
Bolt Supply | 2,516 | | | 2,504 | | | 12 | | | 0.5% |
Consolidated | $ | 26,069 | | | $ | 22,873 | | | $ | 3,196 | | | 14.0% |
Selling expenses consist of compensation and support for our sales representatives. Selling expenses increased to $24.4were $19.2 million in the third quarter of 2017 from $23.62020 compared to $21.3 million in the prior year quarter due primarily to an increase in compensation costs resulting from higher sales, partially offset by lower health insurance expenses. Selling expensesand, as a percent of sales, decreased to 32.2%21.2% from 33.6%22.4% in the third quarter of 2016, as fixed2019. The decrease in selling expenses were leveraged over a higherexpense is primarily related to reduced sales base.compensation driven by lower sales and lower travel related expenses. Partsmaster contributed $1.6 million to selling expense in the third quarter 2020.
General and Administrative Expenses
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 $20.6$26.1 million in the third quarter of 20172020 from $16.6$22.9 million in the prior year quarter. The increased General and administrative expense was driven by an increase in stock-based compensation expense of $2.4 million, inclusion of Partsmaster expenses of $1.5 million, increased severance of $0.5 million, and acquisition costs of $0.5 million. These items were partially offset by lower compensation costs.
Interest Expense
Interest expense was $0.1 million in the third quarter of 2020, which was flat compared to the third quarter of 2019.
Other Income, Net
Other income, net increased $0.6 million in the third quarter of 2020 over the prior year quarter primarily due to $3.0 million of additional stock-based compensation of which a portion varies with the company stock price and restoring incentive compensation accruals based on improved operating results.
Interest Expense
Interest expense decreased slightly due to lower average borrowings outstanding.
Other Income, Net
Other income, net increased $0.8 million over the prior year quarter, due primarily to the effect of changes in theCanadian currency exchange rate on Canadian transactions.effect.
Income Tax Expense
Primarily due to historical cumulative losses, substantially all of our deferredIncome tax assets are subject to a tax valuation allowance. Although we areexpense was $0.7 million, resulting in a full29.7% effective tax valuation allowance position,rate for the three months ended September 30, 2020 compared to an income tax expense of $0.5$1.5 million and $0.5 million were recorded in the third quartersan effective tax rate of 2017 and 2016, respectively, primarily due to reserves for uncertain tax positions, federal alternative minimum taxes and state taxes.
If the Company continues to demonstrate that it can consistently generate income, we may be able to make a determination that there is a sufficient amount of positive evidence to conclude that it is more likely than not that we will be able to utilize our deferred tax assets to offset future taxable income. This would lead to the reduction of all or a portion of the valuation allowance resulting in an income tax benefit24.2% for the period in which the reduction is recorded. We will continue to closely monitor all positive and negative evidence and will re-assess our position on a quarterly basis.three months ended September 30, 2019.
Nine months ended September 30, 20172020 compared to September 30, 20162019
| | | | | | | | | | | | | | | | | | | | | | | |
| 2020 | | 2019 |
(Dollars in thousands) | Amount | | % of Net Sales | | Amount | | % of Net Sales |
| | | | | | | |
Revenue | $ | 253,458 | | | 100.0 | % | | $ | 282,219 | | | 100.0 | % |
Cost of goods sold | 118,999 | | | 47.0 | % | | 131,679 | | | 46.7 | % |
Gross profit | 134,459 | | | 53.0 | % | | 150,540 | | | 53.3 | % |
| | | | | | | |
Operating expenses: | | | | | | | |
Selling expenses | 55,445 | | | 21.9 | % | | 64,864 | | | 23.0 | % |
General and administrative expenses | 57,806 | | | 22.8 | % | | 72,063 | | | 25.5 | % |
Total operating expenses | 113,251 | | | 44.6 | % | | 136,927 | | | 48.5 | % |
| | | | | | | |
Operating income | 21,208 | | | 8.4 | % | | 13,613 | | | 4.8 | % |
| | | | | | | |
Interest expense | (329) | | | (0.1) | % | | (481) | | | (0.2) | % |
Other income (expense), net | 15 | | | (0.1) | % | | 798 | | | 0.3 | % |
| | | | | | | |
Income before income taxes | 20,894 | | | 8.2 | % | | 13,930 | | | 4.9 | % |
| | | | | | | |
Income tax expense | 6,004 | | | 2.3 | % | | 3,703 | | | 1.3 | % |
| | | | | | | |
Net income | $ | 14,890 | | | 5.9 | % | | $ | 10,227 | | | 3.6 | % |
|
| | | | | | | | | | | | | |
| 2017 | | 2016 |
($ in thousands) | Amount | | % of Net Sales | | Amount | | % of Net Sales |
| | | | | | | |
Net sales | $ | 225,274 |
| | 100.0 | % | | $ | 209,258 |
| | 100.0 | % |
Cost of goods sold | 89,249 |
| | 39.6 | % | | 81,700 |
| | 39.0 | % |
Gross profit | 136,025 |
| | 60.4 | % | | 127,558 |
| | 61.0 | % |
| | | | | | | |
Operating expenses: | | | | | | | |
Selling expenses | 72,964 |
| | 32.4 | % | | 69,525 |
| | 33.2 | % |
General and administrative expenses | 58,790 |
| | 26.1 | % | | 54,446 |
| | 26.1 | % |
Total S,G&A | 131,754 |
| | 58.5 | % | | 123,971 |
| | 59.3 | % |
Gain on sale of property | (5,422 | ) | | (2.4 | )% | | — |
| | — | % |
Operating expenses | 126,332 |
| | 56.1 | % | | 123,971 |
| | 59.3 | % |
| | | | | | | |
Operating income | 9,693 |
| | 4.3 | % | | 3,587 |
| | 1.7 | % |
| | | | | | | |
Interest expense | (393 | ) | | (0.2 | )% | | (486 | ) | | (0.2 | )% |
Other income, net | 953 |
| | 0.5 | % | | 439 |
| | 0.2 | % |
| | | | | | | |
Income before income taxes | 10,253 |
| | 4.6 | % | | 3,540 |
| | 1.7 | % |
| | | | | | | |
Income tax expense | 802 |
| | 0.4 | % | | 526 |
| | 0.3 | % |
| | | | | | | |
Net income | $ | 9,451 |
| | 4.2 | % | | $ | 3,014 |
| | 1.4 | % |
Revenue and Gross Profit
Net Sales
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, | | Increase/(Decrease) |
(Dollars in thousands) | 2020 | | 2019 | | Amount | | % |
| | | | | | | |
Revenue | | | | | | | |
Lawson | $ | 224,511 | | | $ | 250,895 | | | $ | (26,384) | | | (10.5)% |
Bolt Supply | 28,947 | | | 31,324 | | | (2,377) | | | (7.6)% |
Consolidated | $ | 253,458 | | | $ | 282,219 | | | $ | (28,761) | | | (10.2)% |
| | | | | | | |
Gross profit | | | | | | | |
Lawson | $ | 123,031 | | | $ | 138,524 | | | $ | (15,493) | | | (11.2)% |
Bolt Supply | 11,428 | | | 12,016 | | | (588) | | | (4.9)% |
Consolidated | $ | 134,459 | | | $ | 150,540 | | | $ | (16,081) | | | (10.7)% |
| | | | | | | |
Gross profit margin | | | | | | | |
Lawson | 54.8 | % | | 55.2 | % | | | | |
Bolt Supply | 39.5 | % | | 38.4 | % | | | | |
Consolidated | 53.0 | % | | 53.3 | % | | | | |
Net sales
Revenue
Revenue for the nine months ended September 30, 2017 increased 7.7%2020 decreased 10.2% to $225.3$253.5 million from $209.3$282.2 million for the nine months ended September 30, 2016.2019. All customer sales categories have been negatively impacted by the effect of the COVID-19 pandemic which began in March 2020. The decrease in sales compared to the prior year was partially offset by $5.4 million of sales from the inclusion of Partsmaster in the third quarter 2020. Average daily sales improved 8.2%decreased 10.7% to $1.179$1.320 million in the first nine months of 20172020 compared to $1.090$1.478 million in the prior year period. The first nine months of 2017 and 2016 had 191 and 192period with one more selling days, respectively.
Salesday in the first nine monthscurrent year to date period compared to the corresponding prior year period.
Gross Profit
Gross profit increaseddecreased to $136.0$134.5 million in the first nine months of 20172020 compared to $127.6$150.5 million in the first nine months of 20162019, primarily driven by decreased sales, partially offset by lower service costs classified as cost of goods sold and decreasedthe inclusion of the Partsmaster acquisition. Consolidated gross profit as a percent of sales was 53.0% compared to 60.4% from 61.0%53.3% a year ago. The declineorganic Lawson MRO segment gross margin as a percent of sales was 59.8% in gross profit margin fromthe first nine months of 2020 compared to 60.7% a year ago was primarily driven by higher sales to larger national customers, who typically generate lower product margins, the impact of the 2016 acquisitions, and transportation costs associated with the movement of certain inventory due to the closure of the Fairfield, New Jersey, distribution center.ago.
Selling, General and Administrative Expenses
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, | | Decrease |
(Dollars in thousands) | 2020 | | 2019 | | Amount | | % |
| | | | | | | |
Selling expenses | | | | | | | |
Lawson | $ | 53,222 | | | $ | 62,334 | | | $ | (9,112) | | | (14.6)% |
Bolt Supply | 2,223 | | | 2,530 | | | (307) | | | (12.1)% |
Consolidated | $ | 55,445 | | | $ | 64,864 | | | $ | (9,419) | | | (14.5)% |
| | | | | | | |
General and administrative expenses | | | | | | | |
Lawson | $ | 50,816 | | | $ | 64,700 | | | $ | (13,884) | | | (21.5)% |
Bolt Supply | 6,990 | | | 7,363 | | | (373) | | | (5.1)% |
Consolidated | $ | 57,806 | | | $ | 72,063 | | | $ | (14,257) | | | (19.8)% |
Selling expenses increaseddecreased to $73.0$55.4 million for the first nine months of 20172020 from $69.5$64.9 million in the first nine months of 2016, due primarily to increased compensation costs on higher sales. Selling expenses2019 and, as a percent of sales, decreased to 32.4%21.9% in thethe first nine months of 20172020 from 33.2%23.0% a year ago. The decrease in selling expense is primarily related to reduced sales compensation driven by lower sales and a reduction in travel related expenses in the first nine monthsthird quarter. These declines were partially offset by the inclusion of 2016, as fixed$1.7 million of selling expenses were leveraged over a higher sales base.from the Partsmaster acquisition.
General and Administrative Expenses
General and administrative expenses increaseddecreased to $58.8$57.8 million in the first nine months of 20172020 from $54.4$72.1 million in the prior year period primarily due to $4.1 million of additionala decrease in stock-based compensation expense of $10.4 million, a portion of which a portion varies with the companyCompany stock priceprice. Lower employee compensation, travel expenses and restoring incentive compensation accruals dueother cost control measures put in place as a result of COVID-19 also contributed to improved operating results.the decline. These increasedeclines were partially offset partially by lower depreciationthe inclusion of $1.5 million of general and acquisition related expenses.
Gain on sale of property
In the second quarter of 2017, we received net cash proceeds of $6.2 million and recognized a gain of $5.4 millionadministrative expenses from the sale of our Fairfield, New Jersey distribution center.Partsmaster acquisition.
Interest Expense
Interest expenses decreased $0.1$0.2 million in the first nine months of 2017, over the prior year,2020, due primarily to lowerdecreased average outstanding borrowings oustanding.compared to the prior year.
Other Income (Expense), Net
Other income (expense), net increased $0.5decreased $0.8 million in the first nine months of 2017, over the prior year,2020, primarily due primarily to the effect of favorable changes in theCanadian currency exchange rate on Canadian transactions.effect.
Income Tax Expense
Primarily due to historical cumulative losses, substantially all of our deferredIncome tax assets are subject to a tax valuation allowance. Although we areexpenses were $6.0 million resulting in a full28.7% effective tax valuation allowance position, income tax expenses of $0.8 million and $0.5 million were recorded inrate for the first nine months of both 2017 and 2016, primarily due2020 compared to reserves for uncertain tax positions, federal alternative minimum taxes and state taxes.
If the Company continues to demonstrate that it can consistently generate income, we may be able to make a determination that there is a sufficient amount of positive evidence to conclude that it is more likely than not that we will be able to utilize our deferred tax assets to offset future taxable income. This would lead to the reduction of all or a portion of the valuation allowance resulting in an income tax benefitexpense of $3.7 million and a 26.6% effective tax rate for the period in which the reduction is recorded. We will continue to closely monitor all positive and negative evidence and will re-assess our position on a quarterly basis.
first nine months of 2019.
Liquidity and Capital Resources
Available cash and cash equivalents were $19.0$17.2 million on September 30, 20172020 compared to $10.4$5.5 million on December 31, 2016.2019. Net cash provided bygenerated from operations was $3.8 million infor the nine months ended September 30, 2017, as2020 was $20.0 million, primarily due to operating earnings and the Company managing working capital. Net cash generated by operating earnings was partially offset by cash invested in working capital, primarily to support the increase in sales. The $5.3 million of cash provided byfrom operations infor the nine months ended September 30, 20162019 was $8.0 million, primarily generateddue to operating earnings offset by operating earnings.an increase in working capital to support higher sales.
In 2017, we completed the salethird quarter of our distribution center located2020, the Company paid $2.3 million in Fairfield, New Jersey, receiving net cash proceeds of $6.2 million.related to the Partsmaster acquisition. Capital expenditures were $1.3 million and $1.4 million for the nine month periods ended September 30, 2020 and 2019, respectively, primarily for improvements to our distribution centers and information technology, were $1.2technology.
We used $4.6 million and $2.6 millionof cash in financing activities in the first nine month periods ended September 30, 2017months of 2020, primarily to repurchase shares of common stock and 2016, respectively.
On September 30, 2017, we had no borrowings on ourto pay down the revolving line of credit and nocredit. No dividends were paid to shareholders in the nine months ended September 30, 20172020 and 2016. Dividends are currently restricted2019.
In 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. In the first quarter of 2020 we purchased 47,504 shares of our common stock at an average purchase price of $36.93, under the Loan Agreement to amounts not to exceed $7.0 million annually.repurchase program. No shares were repurchased under this program in the second and third quarters. In the third quarter of 2020, we repurchased 12,077 shares of our common stock at an average price of $36.07, for the purpose of satisfying tax withholding obligations of certain employees upon the vesting of their Company issued restricted stock units.
Subsequent to the reporting period ended September 30, 2017, we completed the acquisition of The Bolt Supply House Ltd. for for approximately $32.1 million which was paid by using a combination of cash on hand and borrowings of $16.3 million from our existing revolving credit facility.
Loan Agreement
AtOn September 30, 2017,2020, we had additional$66.0 million of borrowing availability remaining, net of $36.0 million. We believe cash provided by operations and funds availableoutstanding letters of credit, under our LoanCredit Agreement. Our outstanding letters of credit include a $33.0 million letter of credit to secure the remaining payment for the Partsmaster acquisition. We had no outstanding borrowing under our Credit Agreement are sufficient to fundas of September 30, 2020.
Along with certain standard terms and conditions of our operating requirements, strategic initiatives and capital improvements throughout the remainder of 2017.
In addition to other customary representations, warranties and covenants, if the excess borrowing capacity is below $10.0 million,Credit Agreement, we are requiredable to meetborrow up to 3.25 times its EBITDA, as defined, and a minimum trailing twelve month EBITDA to fixed chargescharge ratio, as defined, in the amended Loan Agreement. Onof 1.15. As of September 30, 2017, our borrowing capacity exceeded $10.0 million, therefore,2020, we were not subject to this financial covenant. However, for informational purposes we have provided the result of the financial covenant below:in compliance with all covenants.
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| | | | |
Quarterly Financial Covenant | | Requirement | | Actual |
EBITDA to fixed charges ratio | | 1.10 : 1.00 | | 3.20 : 1.00 |
While we were in compliance with theour financial covenantcovenants included in our Credit Agreement for the quarter ended September 30, 2017,2020, failure to meet thisthe covenant requirementrequirements of the Credit Agreement 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.
We believe cash provided by operations and funds available under our Credit Agreement are sufficient to fund our operating requirements, strategic initiatives and capital improvements, including the potential impact of COVID-19 over the next twelve months although we cannot provide assurance that events beyond our control will not have a material adverse impact on our liquidity.
Partsmaster Acquisition Liability
As a part of the Partsmaster acquisition, payment of $33.0 million is due to the sellers in May 2021. The payment has been guaranteed under the Purchase Agreement, which includes the issuance of a $33.0 million irrevocable standby letter of credit. Payment will be made with cash on hand and, as necessary, any remaining portion using our existing credit facility. The $33.0 million obligation has been discounted to present value and is recognized as a current liability of $32.5 million in our condensed consolidated balance sheet as of September 30, 2020.
.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There haveITEM 3 of Part I is inapplicable and has been no material changes in market risk at September 30, 2017omitted from that reported in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.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 (i) 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) include,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.
The Company is in the process of integrating Partsmaster, which was acquired from NCH Corporation on August 31, 2020, into its overall internal control over financial reporting. Management elected to exclude the internal controls of Partsmaster from its assessment of the effectiveness of internal control over financial reporting for the quarter ended September 30, 2020, as permitted by the SEC's interpretive guidance. Partsmaster constituted 17% of total assets as of September 30, 2020 and 2% of revenue and less than 2% of operating income in the first nine months of 2020.
There were no changes in our internal control over financial reporting during the quarter ended September 30, 20172020 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II
OTHER INFORMATION
ITEMS 1, 1A, 2, 3, 4 and 5 of Part II are inapplicable and have been omitted from this report.
ITEM 1A. RISK FACTORS
Other than the risk factor related to a new strain of coronavirus (“COVID-19”) set forth below, there have been no material changes from the risk factors disclosed in our Annual Report in Part I, Item 1A of the Form 10-K filed on February 27, 2020.
COVID-19
The COVID-19 pandemic has resulted in lost revenue to our Company, limitations on our ability to source high demand product, limitations on our sales force to perform certain functions due to state or federal stay-at-home orders, a slow-down of customer demand for our products and limitations of some customers to pay us on a timely basis. The impact of the COVID-19 pandemic on our operational and financial performance includes affecting our ability to execute our business strategies and initiatives in the expected time frame. The extent of the effect will depend on future developments, including the duration and spread of the pandemic and related restrictions on travel, transports and person to person contact, all of which are uncertain and cannot be predicted at the present time. On a broader scale, the COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains and created significant volatility and disruption of financial markets. An extended period of global supply chain and economic disruption could materially affect our sales, workforce, supply chains, results of operations, and our ability to access our Credit Agreement to fund operations.
In the first quarter of 2020, our business was defined by the state of Illinois as an essential businesses, allowing us to operate during the pandemic. A change in this status could result in the temporary closure of our business. Additionally the COVID-19 pandemic could result in a temporary closure of any or all of our distribution facilities or the Bolt branch locations, which would negatively impact our operations. Other disruptions to our supply chain such as reduced capacity or temporary shutdowns of freight carriers could also negatively impact Company performance.
Our sales results have been and are expected to be negatively impacted in the future by any social distancing guidelines and government mandated shelter in place orders that would prevent our sales representatives in our MRO business segment from visiting customers in person. Shelter in place orders also reduce customer visits to our Bolt branch locations. The reduction of operations and temporary shut down by many of our customers in response to COVID-19 has also negatively impacted sales
and our ability to collect on existing credit balances, and we expect to be impacted by those reductions and shut downs in the future. Further, vendors who are negatively impacted by COVID-19 may temporarily shut down operations or have difficulty obtaining inventory, which could negatively impact our ability to fulfill customer orders.
Certain items on our balance sheet require judgments on their valuation, including intangible assets and goodwill. These valuations are based on assumptions that take future financial performance into account. COVID-19 may have a detrimental impact to our future financial performance that would require us to revise assumptions about future financial performance and impair the value of these assets. Although the Company believes that its projected future operating results and cash flows and related estimates regarding the values were based on reasonable assumptions, it is reasonably possible that estimates made may be materially and adversely impacted in the near term as a result of the COVID-19 pandemic, including impairment losses related to goodwill.
All Lawson employees have been encouraged to follow the recommended social distancing guidelines and work remotely whenever possible to reduce the spread of COVID-19 during the pandemic. The increased number of employees working remotely can exacerbate the risks previously mentioned in regards to internal controls and cybersecurity.
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 September 30, 2020.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | (a) | | (b) | | (c) | | (d) |
Period | | Total Number of Shares Purchased (1) | | 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 (2) |
July 1 to July 31, 2020 | | 357 | | | $ | 31.25 | | | — | | | $ | 4,512,000 | |
August 1 to August 31, 2020 | | 11,720 | | | 36.22 | | | — | | | 4,512,000 | |
September 1 to September 30, 2020 | | — | | | — | | | — | | | 4,512,000 | |
Total | | 12,077 | | | | | — | | | |
(1) These shares were purchased for the purpose of satisfying tax withholding obligations of certain employees upon the vesting of market stock units granted to them by the Company.
(2) In 2019, the Company's Board of Directors authorized a program in which up to $7.5 million of the Company's common stock may be repurchased from time to time in open market transactions, privately negotiated transactions or by other methods. No shares were repurchased in the open market during the third quarter under this program.
ITEM 6. EXHIBITS
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Exhibit # | |
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| |
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101.INS101 | The following financial statements from the Quarterly Report on Form 10-Q for the quarter ended September 30, 2020, formatted in Inline XBRL: (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statement of Income and Comprehensive Income, (iii) Condensed Consolidated Statements of Stockholders’ Equity, (iv) Condensed Consolidated Statements of Cash Flows, and (v) Notes to Condensed Consolidated Financial Statements.
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104 | The cover page from the Quarterly Report on Form 10-Q for the quarter ended September 30, 2020, formatted in Inline XBRL |
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 |
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 29, 2020 | | /s/ Michael G. DeCata |
| | | Michael G. DeCata President and Chief Executive Officer (principal executive officer) |
| | | |
| | | LAWSON PRODUCTS, INC. |
Dated: | October 29, 2020 | | (Registrant) |
| | |
Dated: | October 26, 2017 | | /s/ Michael G. DeCata |
| | | Michael G. DeCata
President and Chief Executive Officer
(principal executive officer)
|
| | | |
| | |
Dated: | October 26, 2017 | | /s/ Ronald J. Knutson |
| | | Ronald J. Knutson Executive Vice President, Chief Financial Officer, Treasurer and Controller
(principal financial and accounting officer)
|