UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
(Mark One)
|
| | |
| ý | Quarterly Report under Section 13 OR 15(d) of the Securities Exchange Act of 1934 |
For quarterly period ended June 30, 2019March 31, 2020
or
|
| | |
| ¨ | Transition Report under Section 13 OR 15(d) of the Securities Exchange Act of 1934 |
For the transition period from to
Commission file Number: 0-10546
(Exact name of registrant as specified in its charter)
|
| | |
Delaware | | 36-2229304 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
| |
8770 W. Bryn Mawr Avenue, Suite 900, Chicago, Illinois | | 60631 |
(Address of principal executive offices) | | (Zip Code) |
(773) 304-5050(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
|
| | | | |
Title of each class | | Trading Symbol | | Name of each exchange on which registered |
Common stock, $1.00 par value | | LAWS | | NASDAQ Global Select Market |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. |
| | | |
Large accelerated filer | ¨ | Accelerated filer | ý |
Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | Smaller reporting company | ý |
| | Emerging growth company | ¨
|
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý
The number of shares outstanding of the registrant’s common stock, $1 par value, as of JulyApril 15, 20192020 was 8,989,343.8,996,267.
TABLE OF CONTENTS
|
| | |
| | Page # |
|
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
Item 3. | Quantitative and Qualitative Disclosure About Market Risk | |
| | |
| | |
| | |
|
| | |
Item 1A. | | |
| | |
Item 2. | Unregistered Sales of EquityUnregistered Securities and Use of Proceeds | |
| | |
| | |
| | |
| | |
“Safe Harbor” Statement under the Securities Litigation Reform Act of 1995:
This Quarterly Report on Form 10-Q contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties. The terms “may,” “should,” “could,” “anticipate,” “believe,” “continues,” “estimate,” “expect,” “intend,” “objective,” “plan,” “potential,” “project” and similar expressions are intended to identify forward-looking statements. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. These statements are based on management’s current expectations, intentions or beliefs and are subject to a number of factors, assumptions and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. Factors that could cause or contribute to such differences or that might otherwise impact the business include:
the effect of the COVID-19 virus on the overall economy, demand for our products, our workforce, our supply chain and operating results;
the effect of general economic and market conditions;
the ability to generate sufficient cash to fund our operating requirements;
the ability to meet the covenant requirements of our lines of credit;
the market price of our common stock may decline;
inventory obsolescence;
work stoppages and other disruptions at transportation centers or shipping ports;
changing customer demand and product mixes;
increases in energy costs, tariffs and the cost of raw materials, including commodity prices;
decreases in demand from oil and gas customers due to lower oil prices;
disruptions of our information and communication systems;
cyber attacks or other information security breaches;
failure to recruit, integrate and retain a talented workforce including productive sales representatives;
the inability to successfully make or integrate acquisitions into the organization;
foreign currency fluctuations
failure to manage change within the organization;
highly competitive market;
changes that affect governmental and other tax-supported entities;
violations of environmental protection or other governmental regulations;
negative changes related to tax matters;
Luther King Capital's significant influence over the Company given its ownership percentage; and
all other factors discussed in the Company’s “Risk Factors” set forth in its Annual Report on Form 10-K for the year ended December 31, 2018.2019 and in this Quarterly Report on Form 10-Q for the period ended March 31, 2020.
The Company undertakes no obligation to update any such factors or to publicly announce the results of any revisions to any forward-looking statements contained herein whether as a result of new information, future events or otherwise.
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
Lawson Products, Inc.
Condensed Consolidated Balance Sheets
(Dollars in thousands, except share data)
| | | June 30, | | December 31, | March 31, | | December 31, |
| 2019 | | 2018 | 2020 | | 2019 |
ASSETS | (Unaudited) | | | (Unaudited) | | |
Current assets: | | | | | | |
Cash and cash equivalents | $ | 6,915 |
| | $ | 11,883 |
| $ | 4,095 |
| | $ | 5,495 |
|
Restricted cash | 800 |
| | 800 |
| 802 |
| | 802 |
|
Accounts receivable, less allowance for doubtful accounts of $596 and $549, respectively | 45,570 |
| | 37,682 |
| |
Accounts receivable, less allowance for doubtful accounts of $793 and $593, respectively | | 41,406 |
| | 38,843 |
|
Inventories, net | 55,360 |
| | 52,887 |
| 56,182 |
| | 55,905 |
|
Miscellaneous receivables and prepaid expenses | 4,742 |
| | 3,653 |
| 6,674 |
| | 5,377 |
|
Total current assets | 113,387 |
| | 106,905 |
| 109,159 |
| | 106,422 |
|
| | | | | | |
Property, plant and equipment, net | 17,630 |
| | 23,548 |
| 15,662 |
| | 16,546 |
|
Deferred income taxes | 19,021 |
| | 20,592 |
| 18,525 |
| | 21,711 |
|
Goodwill | 20,794 |
| | 20,079 |
| 19,555 |
| | 20,923 |
|
Cash value of life insurance | 13,167 |
| | 12,599 |
| 13,808 |
| | 14,969 |
|
Intangible assets, net | 12,895 |
| | 13,112 |
| 11,276 |
| | 12,335 |
|
Lease assets | 11,840 |
| | — |
| |
Right of use assets | | 10,178 |
| | 11,246 |
|
Other assets | 298 |
| | 307 |
| 252 |
| | 277 |
|
Total assets | $ | 209,032 |
| | $ | 197,142 |
| $ | 198,415 |
| | $ | 204,429 |
|
| | | | | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | |
Current liabilities: | | | | | | |
Revolving lines of credit | $ | 8,823 |
| | $ | 10,823 |
| |
Accounts payable | 16,550 |
| | 15,207 |
| $ | 13,730 |
| | $ | 13,789 |
|
Lease obligation | 3,708 |
| | — |
| 3,825 |
| | 3,830 |
|
Accrued expenses and other liabilities | 34,904 |
| | 40,179 |
| 18,960 |
| | 39,311 |
|
Total current liabilities | 63,985 |
| | 66,209 |
| 36,515 |
| | 56,930 |
|
| | | | | | |
Revolving line of credit | | 10,460 |
| | 2,271 |
|
Security bonus plan | 12,353 |
| | 12,413 |
| 11,677 |
| | 11,840 |
|
Lease obligation | 10,500 |
| | 5,213 |
| 8,331 |
| | 9,504 |
|
Deferred compensation | 5,670 |
| | 5,304 |
| 5,327 |
| | 6,370 |
|
Deferred tax liability | 2,900 |
| | 2,761 |
| 5,994 |
| | 6,188 |
|
Other liabilities | 4,292 |
| | 6,069 |
| 3,376 |
| | 3,325 |
|
Total liabilities | 99,700 |
| | 97,969 |
| 81,680 |
| | 96,428 |
|
| | | | | | |
Stockholders’ equity: | | | | | | |
Preferred stock, $1 par value: | | | | | | |
Authorized - 500,000 shares, Issued and outstanding — None | — |
| | — |
| — |
| | — |
|
Common stock, $1 par value: | | | | | | |
Authorized - 35,000,000 shares Issued - 9,032,948 and 9,005,716 shares, respectively Outstanding - 8,983,162 and 8,955,930 shares, respectively | 9,033 |
| | 9,006 |
| |
Authorized - 35,000,000 shares Issued - 9,190,171 shares Outstanding - 8,996,267 and 9,043,771 shares, respectively | | 9,190 |
| | 9,190 |
|
Capital in excess of par value | 16,973 |
| | 15,623 |
| 18,528 |
| | 18,077 |
|
Retained earnings | 84,728 |
| | 77,338 |
| 99,029 |
| | 86,496 |
|
Treasury stock – 49,786 shares | (1,234 | ) | | (1,234 | ) | |
Treasury stock – 193,904 and 146,400 shares, respectively | | (7,517 | ) | | (5,761 | ) |
Accumulated other comprehensive loss | (168 | ) | | (1,560 | ) | (2,495 | ) | | (1 | ) |
Total stockholders’ equity | 109,332 |
| | 99,173 |
| 116,735 |
| | 108,001 |
|
Total liabilities and stockholders’ equity | $ | 209,032 |
| | $ | 197,142 |
| $ | 198,415 |
| | $ | 204,429 |
|
See notes to condensed consolidated financial statements.
Lawson Products, Inc.
Condensed Consolidated Statements of Income and Comprehensive Income
(Dollars in thousands, except per share data)
(Unaudited)
| | | Three Months Ended June 30, | | Six Months Ended June 30, | Three Months Ended March 31, |
| 2019 | | 2018 | | 2019 | | 2018 | 2020 | | 2019 |
| | | | | | | | | | |
Product revenue | $ | 85,996 |
| | $ | 80,397 |
| | $ | 167,911 |
| | $ | 155,367 |
| $ | 81,335 |
| | $ | 81,915 |
|
Service revenue | 10,101 |
| | 9,985 |
| | 19,529 |
| | 19,474 |
| 9,700 |
| | 9,428 |
|
Total revenue | 96,097 |
| | 90,382 |
| | 187,440 |
| | 174,841 |
| 91,035 |
| | 91,343 |
|
| | | | | | | | | | |
Product cost of goods sold | 40,580 |
| | 37,856 |
| | 78,587 |
| | 72,688 |
| 37,805 |
| | 38,007 |
|
Service costs | 4,474 |
| | 3,395 |
| | 8,887 |
| | 6,804 |
| 4,309 |
| | 4,413 |
|
Gross profit | 51,043 |
| | 49,131 |
| | 99,966 |
| | 95,349 |
| 48,921 |
| | 48,923 |
|
| | | | | | | | | | |
Operating expenses: | | | | | | | | | | |
Selling expenses | 21,867 |
| | 22,004 |
| | 43,609 |
| | 43,944 |
| 19,984 |
| | 21,742 |
|
General and administrative expenses | 27,553 |
| | 21,573 |
| | 49,190 |
| | 44,014 |
| 10,299 |
| | 21,637 |
|
Operating expenses | 49,420 |
| | 43,577 |
| | 92,799 |
| | 87,958 |
| 30,283 |
| | 43,379 |
|
| | | | | | | | |
Operating income | 1,623 |
| | 5,554 |
| | 7,167 |
| | 7,391 |
| 18,638 |
| | 5,544 |
|
| | | | | | | | | | |
Interest expense | (146 | ) | | (264 | ) | | (343 | ) | | (504 | ) | (115 | ) | | (197 | ) |
Other income (expense), net | 339 |
| | (777 | ) | | 811 |
| | (490 | ) | (1,111 | ) | | 472 |
|
| | | | | | | | | | |
Income before income taxes | 1,816 |
| | 4,513 |
| | 7,635 |
| | 6,397 |
| 17,412 |
| | 5,819 |
|
Income tax expense | 509 |
| | 1,319 |
| | 2,182 |
| | 1,967 |
| 4,879 |
| | 1,673 |
|
| | | | | | | | | | |
Net income | $ | 1,307 |
| | $ | 3,194 |
| | $ | 5,453 |
| | $ | 4,430 |
| $ | 12,533 |
| | $ | 4,146 |
|
| | | | | | | | | | |
Basic income per share of common stock | $ | 0.15 |
| | $ | 0.36 |
| | $ | 0.61 |
| | $ | 0.50 |
| $ | 1.39 |
| | $ | 0.46 |
|
| | | | | | | | | | |
Diluted income per share of common stock | $ | 0.14 |
| | $ | 0.35 |
| | $ | 0.58 |
| | $ | 0.48 |
| $ | 1.34 |
| | $ | 0.44 |
|
| | | | | | | | | | |
Weighted average shares outstanding: | | | | | | | | | | |
Basic weighted average shares outstanding | 8,976 |
| | 8,903 |
| | 8,969 |
| | 8,896 |
| 9,032 |
| | 8,962 |
|
Effect of dilutive securities outstanding | 405 |
| | 314 |
| | 379 |
| | 304 |
| 302 |
| | 355 |
|
Diluted weighted average shares outstanding | 9,381 |
| | 9,217 |
| | 9,348 |
| | 9,200 |
| 9,334 |
| | 9,317 |
|
| | | | | | | | | | |
Comprehensive income: | | | | | | | | | | |
Net income | $ | 1,307 |
| | $ | 3,194 |
| | $ | 5,453 |
| | $ | 4,430 |
| $ | 12,533 |
| | $ | 4,146 |
|
Other comprehensive income (loss), net of tax | | | | | | | | |
Other comprehensive income (expense), net of tax | | | | |
Adjustment for foreign currency translation | 717 |
| | 22 |
| | 1,392 |
| | (1,461 | ) | (2,494 | ) | | 675 |
|
Net comprehensive (loss) income | $ | 2,024 |
| | $ | 3,216 |
| | $ | 6,845 |
| | $ | 2,969 |
| |
Net comprehensive income | | $ | 10,039 |
| | $ | 4,821 |
|
See notes to condensed consolidated financial statements.
Lawson Products, Inc.
Condensed Consolidated Statements of Changes in Stockholders’ Equity - 2019
(Dollars in thousands)
(Unaudited)
| | | Common Stock | | Capital in Excess of Par Value | | | | | | Accumulated Other Comprehensive Income (Loss) | | Total Stockholders' Equity | Common Stock | | Capital in Excess of Par Value | | | | | | Accumulated Other Comprehensive Income (Loss) | | Total Stockholders' Equity |
| Outstanding Shares | | td Par Value | | Retained Earnings | | Treasury Stock | | Outstanding Shares | | td Par Value | | Retained Earnings | | Treasury Stock | |
Balance at January 1, 2019 | 8,955,930 |
| | $ | 9,006 |
| | $ | 15,623 |
| | $ | 77,338 |
| | $ | (1,234 | ) | | $ | (1,560 | ) | | $ | 99,173 |
| |
Change in accounting principle (1) | — |
| | — |
| | — |
| | 1,937 |
| | — |
| | — |
| | 1,937 |
| |
Balance at January 1, 2020 | | 9,043,771 |
| | $ | 9,190 |
| | $ | 18,077 |
| | $ | 86,496 |
| | $ | (5,761 | ) | | $ | (1 | ) | | $ | 108,001 |
|
Net income | — |
| | — |
| | — |
| | 4,146 |
| | — |
| | — |
| | 4,146 |
| — |
| | — |
| | — |
| | 12,533 |
| | — |
| | — |
| | 12,533 |
|
Treasury shares repurchased | | (47,504 | ) | | — |
| | — |
| | — |
| | (1,756 | ) | | — |
| | (1,756 | ) |
Adjustment for foreign currency translation | — |
| | — |
| | — |
| | — |
| | — |
| | 675 |
| | 675 |
| — |
| | — |
| | — |
| | — |
| | — |
| | (2,494 | ) | | (2,494 | ) |
Stock-based compensation | — |
| | — |
| | 666 |
| | — |
| | — |
| | — |
| | 666 |
| — |
| | — |
| | 451 |
| | — |
| | — |
| | — |
| | 451 |
|
Shares issued | 6,520 |
| | 6 |
| | (6 | ) | | — |
| | — |
| | — |
| | — |
| |
Balance at March 31, 2019 | 8,962,450 |
| | 9,012 |
| | 16,283 |
| | 83,421 |
| | (1,234 | ) | | (885 | ) | | 106,597 |
| |
| | | | | | | | | | | | | | |
Net income | — |
| | — |
| | — |
| | 1,307 |
| | — |
| | — |
| | 1,307 |
| |
Adjustment for foreign currency translation | — |
| | — |
| | — |
| | — |
| | — |
| | 717 |
| | 717 |
| |
Stock-based compensation | — |
| | — |
| | 711 |
| | — |
| | — |
| | — |
| | 711 |
| |
Shares issued | 20,712 |
| | 21 |
| | (21 | ) | | — |
| | — |
| | — |
| | — |
| |
Balance at June 30, 2019 | 8,983,162 |
| | $ | 9,033 |
| | $ | 16,973 |
| | $ | 84,728 |
| | $ | (1,234 | ) | | $ | (168 | ) | | $ | 109,332 |
| |
Balance at March 31, 2020 | | 8,996,267 |
| | $ | 9,190 |
| | $ | 18,528 |
| | $ | 99,029 |
| | $ | (7,517 | ) | | $ | (2,495 | ) | | $ | 116,735 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Capital in Excess of Par Value | | | | | | Accumulated Other Comprehensive Income (Loss) | | Total Stockholders' Equity |
| Outstanding Shares | | $1 Par Value | | | Retained Earnings | | Treasury Stock | | |
Balance at January 1, 2019 | 8,955,930 |
| | $ | 9,006 |
| | $ | 15,623 |
| | $ | 77,338 |
| | $ | (1,234 | ) | | $ | (1,560 | ) | | $ | 99,173 |
|
| | | | | | | | | | | | | |
Change in accounting principle (1) | — |
| | — |
| | — |
| | 1,937 |
| | — |
| | — |
| | 1,937 |
|
Net income | — |
| | — |
| | — |
| | 4,146 |
| | — |
| | — |
| | 4,146 |
|
Adjustment for foreign currency translation | — |
| | — |
| | — |
| | — |
| | — |
| | 675 |
| | 675 |
|
Stock-based compensation | — |
| | — |
| | 666 |
| | — |
| | — |
| | — |
| | 666 |
|
Shares issued | 6,520 |
| | 6 |
| | (6 | ) | | — |
| | — |
| | — |
| | — |
|
Balance at March 31, 2019 | 8,962,450 |
| | $ | 9,012 |
| | $ | 16,283 |
| | $ | 83,421 |
| | $ | (1,234 | ) | | $ | (885 | ) | | $ | 106,597 |
|
| |
(1) | The Company adopted the ASC No.842, Leases (ASC 842) on January 1, 2019 using the modified retrospective approach. See Note 2 - Leases for further details. |
See notes to condensed consolidated financial statements.
Lawson Products, Inc.
Condensed Consolidated Statements of Changes in Stockholders’ Equity - 2018
(Dollars in thousands)
(Unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Capital in Excess of Par Value | | | | | | Accumulated Other Comprehensive Income (Loss) | | Total Stockholders' Equity |
| Outstanding Shares | | $1 Par Value | | | Retained Earnings | | Treasury Stock | | |
Balance at January 1, 2018 | 8,888,028 |
| | $ | 8,921 |
| | $ | 13,005 |
| | $ | 71,453 |
| | $ | (711 | ) | | $ | 822 |
| | $ | 93,490 |
|
| | | | | | | | | | | | | |
Change in accounting principle (2) | — |
| | — |
| | — |
| | (329 | ) | | — |
| | — |
| | (329 | ) |
Net income | — |
| | — |
| | — |
| | 1,236 |
| | — |
| | — |
| | 1,236 |
|
Adjustment for foreign currency translation | — |
| | — |
| | — |
| | — |
| | — |
| | (1,483 | ) | | (1,483 | ) |
Stock-based compensation | — |
| | — |
| | 651 |
| | — |
| | — |
| | — |
| | 651 |
|
Shares issued | 307 |
| | 1 |
| | (1 | ) | | — |
| | — |
| | — |
| | — |
|
Balance at March 31, 2018 | 8,888,335 |
| | 8,922 |
| | 13,655 |
| | 72,360 |
| | (711 | ) | | (661 | ) | | 93,565 |
|
| | | | | | | | | | | | | |
Net income | — |
| | — |
| | — |
| | 3,194 |
| | — |
| | — |
| | 3,194 |
|
Adjustment for foreign currency translation | — |
| | — |
| | — |
| | — |
| | — |
| | 22 |
| | 22 |
|
Stock-based compensation | — |
| | — |
| | 673 |
| | — |
| | — |
| | — |
| | 673 |
|
Shares issued | 30,304 |
| | 30 |
| | (30 | ) | | — |
| | — |
| | — |
| | — |
|
Balance at June 30, 2018 | 8,918,639 |
| | $ | 8,952 |
| | $ | 14,298 |
| | $ | 75,554 |
| | $ | (711 | ) | | $ | (639 | ) | | $ | 97,454 |
|
| |
(2) | The Company adopted the ASC 606, Revenue from Contracts with Customers (ASC 606) on January 1, 2018 using the modified retrospective approach. |
See notes to condensed consolidated financial statements.
Lawson Products, Inc.
Condensed Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
| | | Six Months Ended June 30, | Three Months Ended March 31, |
| 2019 | | 2018 | 2020 | | 2019 |
| | | | | | |
Operating activities: | | | | | | |
Net income | $ | 5,453 |
| | $ | 4,430 |
| $ | 12,533 |
| | $ | 4,146 |
|
| | | | | | |
Adjustments to reconcile net income to net cash (used in) provided by operating activities: | | | | |
Adjustments to reconcile net income to net cash used in operating activities: | | | | |
Depreciation and amortization | 2,933 |
| | 3,365 |
| 1,509 |
| | 1,478 |
|
Stock-based compensation | 5,247 |
| | 1,057 |
| (10,700 | ) | | 408 |
|
Deferred income taxes | 1,591 |
| | 1,380 |
| 3,196 |
| | 1,427 |
|
Changes in operating assets and liabilities: | | | | | | |
Accounts receivable | (7,974 | ) | | (4,632 | ) | (3,528 | ) | | (6,273 | ) |
Inventories | (1,882 | ) | | (682 | ) | (1,500 | ) | | (643 | ) |
Prepaid expenses and other assets | (1,629 | ) | | (1,563 | ) | (223 | ) | | (2,314 | ) |
Accounts payable and other liabilities | (6,406 | ) | | (1,745 | ) | (8,486 | ) | | (8,863 | ) |
Other | 434 |
| | 238 |
| 311 |
| | 133 |
|
Net cash (used in) provided by operating activities | $ | (2,233 | ) | | $ | 1,848 |
| |
Net cash used in operating activities | | $ | (6,888 | ) | | $ | (10,501 | ) |
| | | | | | |
Investing activities: | | | | | | |
Purchases of property, plant and equipment | $ | (944 | ) | | $ | (1,428 | ) | $ | (551 | ) | | $ | (248 | ) |
Business acquisition | — |
| | (157 | ) | |
Net cash used in investing activities | $ | (944 | ) | | $ | (1,585 | ) | $ | (551 | ) | | $ | (248 | ) |
| | | | | | |
Financing activities: | | | | | | |
Net (payments on) proceeds from revolving lines of credit | $ | (2,000 | ) | | $ | 1,528 |
| |
Net proceeds from the revolving line of credit | | $ | 8,189 |
| | $ | 2,308 |
|
Repurchase treasury shares | | (1,756 | ) | | — |
|
Payment of financing lease principal | (123 | ) | | — |
| (67 | ) | | (52 | ) |
Proceeds from stock option exercises | 16 |
| | — |
| |
Net cash (used in) provided by financing activities | $ | (2,107 | ) | | $ | 1,528 |
| |
Net cash provided by financing activities | | $ | 6,366 |
| | $ | 2,256 |
|
| | | | | | |
Effect of exchange rate changes on cash and cash equivalents | $ | 316 |
| | $ | (215 | ) | $ | (327 | ) | | $ | 213 |
|
| | | | | | |
Increase (decrease) in cash, cash equivalents and restricted cash | (4,968 | ) | | 1,576 |
| |
Decrease in cash, cash equivalents and restricted cash | | (1,400 | ) | | (8,280 | ) |
| | | | | | |
Cash, cash equivalents and restricted cash at beginning of period | 12,683 |
| | 5,216 |
| 6,297 |
| | 12,683 |
|
| | | | | | |
Cash, cash equivalents and restricted cash at end of period | $ | 7,715 |
| | $ | 6,792 |
| $ | 4,897 |
| | $ | 4,403 |
|
| | | | | | |
Cash and cash equivalents | $ | 6,915 |
| | $ | 5,992 |
| $ | 4,095 |
| | $ | 3,603 |
|
Restricted cash | 800 |
| | 800 |
| 802 |
| | 800 |
|
Cash, cash equivalents and restricted cash | $ | 7,715 |
| | $ | 6,792 |
| $ | 4,897 |
| | $ | 4,403 |
|
| | | | | | |
| | | | |
Supplemental disclosure of cash flow information | | | | | | |
Net cash paid for income taxes | $ | 259 |
| | $ | 1,101 |
| $ | 198 |
| | $ | 99 |
|
Net cash paid for interest | | 147 |
| | 167 |
|
See notes to condensed consolidated financial statements.
Notes to Condensed Consolidated Financial Statements
Note 1 — Basis of Presentation and Summary of Significant Accounting Policies
The accompanying unaudited condensed consolidated financial statements of Lawson Products, Inc. (the “Company”) have been prepared in accordance with generally accepted accounting principles for interim financial information, the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not contain all disclosures required by generally accepted accounting principles. Reference should be made to the Company’s Annual Report on Form 10-K for the year ended December 31, 20182019. In the opinion of the Company, all normal recurring adjustments have been made that are necessary to present fairly the results of operations for the interim periods. Operating results for the three and six month periodsperiod ended June 30, 2019March 31, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019.2020.
The Company has two operating segments. The first segment, the Lawson operating segment, distributes maintenance, repair and operations ("MRO") products to customers primarily through a network of sales representatives offering vendor managed inventory ("VMI") service to customers throughout the United States and Canada. The second segment, The Bolt Supply House Ltd. ("Bolt Supply") operating segment, distributes MRO products primarily through its branches located in Western Canada. Bolt Supply had 14 branches in operation at the end of the secondfirst quarter 2019.2020.
Note 2 - Leases
In February 2016 the FASB established Topic ASC 842, Leases, by issuing Accounting Standards Update 2016-02. Lawson adopted ASC 842 as of January 1, 2019. The Company leases property used for distribution centers, office space, and Bolt branch locations throughout the US and Canada, along with various equipment located in distribution centers and corporate headquarters. The Company is also a lessor of its Decatur, Alabama property previously used in conjunction with a discontinued operation, and is a sublessor of a portion of its corporate headquarters.
Lawson Operating Leases
Lawson MRO primarily has two types of leases: leases for real estate and leases for equipment. Operating real estate leases that have a material impact on the operations of the Company are related to the Company's distribution network and headquarters. The Company possesses several additional property leases that are month to month basis and are not material in nature. Lawson MRO does not possess any leases that have residual value guarantees. Several property leases include renewal clauses which vary in length and may not include specific rent renewal amounts. The Company will revise the value of the right of use assets and associated lease liabilities when the Company is reasonably certain it will renew a lease.
The key change commencing on January 1, 2019 for the Company is the recognition of assets and liabilities of operating leases with lease terms longer than twelve months that were not previously capitalized on the balance sheet. The value of the Right Of Use ("ROU") assets and associated lease liabilities is calculated using the total cash payments over the course of the lease, discounted to the present value using the appropriate incremental borrowing rate. The right of use asset will be amortized over its useful life. Similar to deferred rent under ASC 840, the lease liability is reduced in conjunction with the lease payments made, with adjustments made to the lease liability in order to account for non-straight line cash payments through the life of the lease.
Bolt primarily leases the real estate for its branch locations as well as its distribution center in Calgary, Alberta. Bolt possesses additional property leases that are month to month and not material in nature. Bolt property leases include renewal clauses which vary in length and may not include specific rent renewal amounts. The Company will revise the value of the right of use asset and associated lease liability when the Company is reasonably certain it will renew a lease.
Lease of McCook Distribution Facility
Upon adoption of ASC 842, the previously capitalized financing asset and lease liability for the McCook distribution facility was removed from the balance sheet and re-established as a ROU asset and a lease liability as an operating lease. The Company did not include the lease renewal periods in its assessment of the McCook lease as it did not meet the reasonably certain threshold required under ASC 842. Changes in the value of the assets and liabilities associated with the property due to adoption of ASC 842 have been accounted for as an adjustment to beginning retained earnings of $1.9 million.
Accounting Policy Elections
As part of the transition to ASC 842, the Company elected the following practical expedients:
The transitional package of practical expedients as prescribed by ASC 842. Per the practical expedient for the transition to ASC 842, the Company did not reassess expired leases, existing lease classifications or initial indirect costs for existing leases in the calculation of the right to use asset and lease liability.
The Company elected the modified retrospective method of transition, which resulted in no restatement of prior period results with the adoption impact being recorded to opening retained earnings.
The Company did not capitalize short term leases, for all asset classes defined as leases with a term of shorter than twelve months, on the balance sheet. These leases have not been transitioned to ASC 842.
As a practical expedient, the Company did not reassess the accounting for initial direct costs of current leases.
The Company elected not to use the hindsight practical expedient in determining the lease term.
The Company recognizes certain lease components and non-lease components together and not as separate parts of a lease for real estate leases. The Company will exercise this practical expedient in the future by asset class.
Significant Assumptions
The Company is required to determine a discount rate for the present value of lease payments. If the rate is not included in the lease or cannot be readily determined, the Company must estimate the incremental borrowing rate to be used for the discount rate. The Company determined that Lawson MRO and Bolt have different discount rates for leases, as both reporting units have separate borrowing agreements. The Lawson MRO segment will discount the present value of the total payments for the operating and financing leases using the incremental borrowing rate of 5.5%, given the similarity of the lease terms amongst asset classes. The Bolt segment will discount the present value of the total payments of each operating and financing lease at its incremental borrowing rate of 4.2%. The discount rate of Lawson MRO and Bolt will be reviewed on a periodic basis and updated as needed.
The expenses and income generated by the leasing activity of Lawson as lessee for the three and six months ending June 30, 2019 are as follows (Dollars in thousands):
|
| | | | | | | | | | |
Lease Type | | Classification | | Three Months Ending June 30, 2019 | | Six Months Ending June 30, 2019 |
| | | | | | |
Consolidated Operating Lease Expense (1) | | Operating expenses | | $ | 1,227 |
| | $ | 2,502 |
|
| | | | | | |
Consolidated Financing Lease Amortization | | Operating expenses | | 51 |
| | 99 |
|
Consolidated Financing Lease Interest | | Interest expense | | 7 |
| | 13 |
|
Consolidated Financing Lease Expense | | | | 58 |
| | 112 |
|
| | | | | | |
Sublease Income (2) | | Operating expenses | | (80 | ) | | (160 | ) |
Net Lease Cost | | | | $ | 1,205 |
| | $ | 2,454 |
|
(1) Includes short term lease expense, which is immaterial
(2) Sublease income from sublease of a portion of the Company headquarters. The sublease was terminated in June 2019 and the Company has no other subleases.
The Company recorded $1.1 million of operating lease expense in the second quarter of 2018 and $2.2 million of operating lease expense in the first two quarters of 2018.
The value of the net assets and liabilities generated by the leasing activity of Lawson as lessee as of June 30, 2019 are as follows (Dollars in thousands):
|
| | | | |
Lease Type | | Amount |
| | |
Total ROU operating lease assets (1) | | $ | 11,142 |
|
Total ROU financing lease assets (2) | | 698 |
|
Total lease assets | | $ | 11,840 |
|
| | |
Total current operating lease obligation | | $ | 3,434 |
|
Total current financing lease obligation | | 274 |
|
Total current lease obligations | | $ | 3,708 |
|
| | |
Total long term operating lease obligation | | $ | 10,089 |
|
Total long term financing lease obligation | | 411 |
|
Total long term lease obligation | | $ | 10,500 |
|
(1) Operating lease assets are recorded net of accumulated amortization of $1.4 million as of June 30, 2019
(2) Financing lease assets are recorded net of accumulated amortization of $0.1 million as of June 30, 2019
The value of the lease liabilities generated by the leasing activities of Lawson as lessee as of June 30, 2019 were as follows (Dollars in thousands):
|
| | | | | | | | | | | | |
Maturity Date of Lease Liabilities | | Operating Leases | | Financing Leases | | Total |
| | | | | | |
Year one | | $ | 4,032 |
| | $ | 267 |
| | $ | 4,299 |
|
Year two | | 4,044 |
| | 240 |
| | 4,284 |
|
Year three | | 3,981 |
| | 126 |
| | 4,107 |
|
Year four | | 1,880 |
| | 79 |
| | 1,959 |
|
Year five | | 845 |
| | 25 |
| | 870 |
|
Subsequent years | | 55 |
| | — |
| | 55 |
|
Total lease payments | | 14,837 |
| | 737 |
| | 15,574 |
|
Less: Interest | | 1,314 |
| | 52 |
| | 1,366 |
|
Present value of lease liabilities | | $ | 13,523 |
| | $ | 685 |
| | $ | 14,208 |
|
The Company’s future minimum lease commitments as of December 31, 2018, were as follows (Dollars in thousands):
|
| | | | | | | | | | | | | |
Maturity Date of Lease Liabilities | Operating Leases (2)(3) | Financing Lease (3)(4) | Capital Leases (4) |
Year one | | $ | 2,574 | | | $ | 1,395 |
| | $ | 201 |
|
Year two | | 2,369 | | | 1,444 |
| | 155 |
|
Year three | | 2,349 | | | 1,493 |
| | 91 |
|
Year four | | 2,008 | | | 760 |
| | 11 |
|
Year five | | 1,130 | | | — |
| | — |
|
Subsequent years | | 374 | | | — |
| | — |
|
Total lease payments (1) | | $ | 10,804 | | | $ | 5,092 |
| | $ | 458 |
|
| |
(1) | Minimum lease payments exclude payments to landlord for real estate taxes and common area maintenance |
| |
(2) | On January 1, 2019, the Company elected the modified retrospective method of transition to adopt the new lease standard ASC 842, which resulted in no restatement of prior period results. At December 31, 2018, prior to adoption of the new lease standard, operating lease obligations were not included as a liability on the balance sheet. Therefore, the operating lease obligations are included in the table for comparative purposes only and the total lease liability is not included as it is not applicable
|
| |
(3) | The $5.1 million minimum lease obligation attributable to the McCook lease that was classified as a financing lease on December 31, 2018 was reclassified as an operating lease under the new accounting standard adopted on January 1, 2019 |
| |
(4) | Lease obligations classified as capital leases on December 31, 2018 were reclassified as financing leases under the new lease standard adopted on January 1, 2019 |
The weighted average lease terms and interest rates of the leases held by Lawson as of June 30, 2019 are as follows:
|
| | | | |
Lease Type | | Weighted Average Term in Years | | Weighted Average Interest Rate |
| | | | |
Operating Leases | | 3.8 | | 5.2% |
Financing Leases | | 3.2 | | 5.5% |
The cash outflows of the leasing activity of Lawson as lessee for the six months ending June 30, 2019 are as follows (Dollars in thousands):
|
| | | | | | |
Cash Flow Source | | Classification | | Amount |
| | | | |
Operating cash flows from operating leases | | Operating activities | | $ | 1,857 |
|
Operating cash flows from financing leases | | Operating activities | | 7 |
|
Financing cash flows from financing leases | | Financing activities | | 123 |
|
Lawson as Lessor
The Company is a lessor of its facility in Decatur, Alabama, which was previously used in conjunction with a discontinued operation. The lease expires in February, 2024. Both the lessor and lessee have a put option to each other upon the completion of the remediation of the environmental matter at a pre-negotiated price less 50% of the rent paid upon the put option being exercised. The net book value at June 30, 2019 is $0.4 million. The Company classifies this lease as an operating lease. The operating lease of the Decatur facility generated approximately $0.1 million of income to the Company for the six months ending June 30, 2019.
Annual lease income classified as operating expenses of $0.2 million is anticipated through the earlier of the put option exercise or February, 2024.
Note 32 - Revenue Recognition
Adoption of ASC 606
On January 1, 2018 the Company adopted Accounting Standards Codification 606-Revenue From Contracts With Customers (“ASC 606”). As part of the Company's adoption of ASC 606,revenue recognition analysis, it concluded that it has two separate performance obligations, and accordingly, two separate revenue streams: products and services. As a result, the Company reports two separate revenue streams and two separate costs of revenues.
Under the definition of a contract as defined by ASC 606, defines a five step process to recognize revenues at the time and in an amount that reflects the consideration expected to be received for the performance obligations that have been provided. ASC 606 defines contracts as written, oral and through customary business practice. Under this definition, the Company considers contracts to be created at the time an order to purchase product is agreed upon regardless of whether or not there is a written contract.
Performance Obligations
Lawson has two operating segments; the Lawson segment and the Bolt Supply segment. Customer contracts have the following performance obligations:
The Lawson segment has two distinct performance obligations offered to its customers: a product performance obligation and a service performance obligation. Although the Company has identified that it offers its customers both a product and a service obligation, the customer only receives one invoice per transaction with no price breakout between these obligations. The Company does not price its offerings based on any breakout between these obligations.
Lawson generates revenue primarily from the sale of MRO products to its customers. Revenue related to product sales is recognized at the time that control of the product has been transferred to the customer:customer; either at the time the product is shipped or the time the product has been received by the customer. The Company does not commit to long-term contracts to sell customers a certain minimum quantity of products.
The Lawson segment offers a VMIvendor 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. Revenue is recognized at the time that control of the product has been transferred to the customer which is either upon delivery or shipment depending on the terms of the contract.
Accounting Policy Elections
The Company has elected to treattreats shipping and handling costs after the control of the product has been transferred to the customer as a fulfillment cost.
Sales taxes that are imposed on our sales and collected from customers are excluded from revenues.
The Company expenses sales commissions when incurred as the amortization period is one year or less.
Significant
Certain Judgments
The Company employs certain significant judgments to estimate the dollar amount of revenue, and related expenses, allocated to the sale of product and service. These judgments include, among others, the percentage of customers that take advantage of the VMI services offered, the amount of revenue to be allocated to the VMI service based on the value of the service to its customers, and the amount of time after control of the product passes to the customer that the VMI service obligation is completed. It is assumed that any customer who averages placing orders at a frequency of longer than 30 days does not take advantage of the available VMI services offered. The estimate of the cost of sales is based on the estimated time spent on such activities applied to the expenses directly related to sales representatives that provide direct VMI services to the customer.
Financial Impact of ASC 606 Adoption
As a result of applying ASC 606 the Company recorded a liability of $0.7 million for deferred revenue on January 1, 2018. Expenses related to these revenues of $0.4 million were also deferred resulting in a net reduction to opening retained earnings of $0.3 million as of January 1, 2018. At June 30, 2019,March 31, 2020, the Company had a deferred revenue liability of $0.7 million and a deferred expense of $0.3 million for related expenses associated with the deferred service performance obligations, respectively. The deferral of revenue and expenses does not affect the amount, timing and any uncertainty of cash flows generated from operations.
Disaggregated revenue by geographic area follows:
| | | Three Months Ended June 30, | | Six Months Ended June 30, | (Dollars in thousands) |
(Dollars in thousands) | 2019 | | 2018 | | 2019 | | 2018 | |
| | Three Months Ended March 31, |
| | 2020 | | 2019 |
| | | | | | | | | | |
United States | $ | 76,119 |
| | $ | 71,626 |
| | $ | 150,167 |
| | $ | 139,944 |
| $ | 73,584 |
| | $ | 74,048 |
|
Canada | 19,978 |
| | 18,756 |
| | 37,273 |
| | 34,897 |
| 17,451 |
| | 17,295 |
|
Consolidated total | $ | 96,097 |
| | $ | 90,382 |
| | $ | 187,440 |
| | $ | 174,841 |
| $ | 91,035 |
| | $ | 91,343 |
|
Disaggregated revenue by product type follows:
| | | Three Months Ended June 30, | | Six Months Ended June 30, | Three Months Ended March 31, |
| 2019 | | 2018 | | 2019 | | 2018 | 2020 | | 2019 |
| | | | | | | | | | |
Fastening Systems | 24.3 | % | | 24.6 | % | | 23.9 | % | | 24.4 | % | 22.8 | % | | 23.5 | % |
Fluid Power | 15.2 | % | | 14.8 | % | | 15.2 | % | | 14.7 | % | 14.2 | % | | 15.2 | % |
Cutting Tools and Abrasives | 13.0 | % | | 13.4 | % | | 13.1 | % | | 12.3 | % | 13.3 | % | | 13.3 | % |
Specialty Chemicals | 11.7 | % | | 12.3 | % | | 11.5 | % | | 13.4 | % | 11.2 | % | | 11.3 | % |
Electrical | 10.7 | % | | 10.8 | % | | 11.1 | % | | 11.0 | % | 10.8 | % | | 11.5 | % |
Aftermarket Automotive Supplies | 7.6 | % | | 7.8 | % | | 8.0 | % | | 8.2 | % | 8.2 | % | | 8.4 | % |
Safety | 4.7 | % | | 4.7 | % | | 4.7 | % | | 4.7 | % | 6.3 | % | | 4.6 | % |
Welding and Metal Repair | 1.6 | % | | 2.1 | % | | 1.7 | % | | 2.0 | % | 1.4 | % | | 1.7 | % |
Other | 11.2 | % | | 9.5 | % | | 10.8 | % | | 9.3 | % | 11.8 | % | | 10.5 | % |
Consolidated Total | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | 100.0 | % | | 100.0 | % |
Note 43 — 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 54 — Inventories, Net
Inventories, net, consisting primarily of purchased goods which are offered for resale, were as follows:
| | | (Dollars in thousands) | (Dollars in thousands) |
| June 30, 2019 | | December 31, 2018 | March 31, 2020 | | December 31, 2019 |
Inventories, gross | $ | 60,144 |
| | $ | 58,215 |
| $ | 60,668 |
| | $ | 60,500 |
|
Reserve for obsolete and excess inventory | (4,784 | ) | | (5,328 | ) | (4,486 | ) | | (4,595 | ) |
Inventories, net | $ | 55,360 |
| | $ | 52,887 |
| $ | 56,182 |
| | $ | 55,905 |
|
Note 65 - Goodwill
Goodwill activity for the first sixthree months of 20192020 and 20182019 is included in the table below:
| | | (Dollars in thousands) | (Dollars in thousands) |
| Six Months Ended June 30, | Three Months Ended March 31, |
| 2019 | | 2018 | 2020 | | 2019 |
Beginning balance | $ | 20,079 |
| | $ | 19,614 |
| $ | 20,923 |
| | $ | 20,079 |
|
Adjustment to original acquisition allocation | 2 |
| | (17 | ) | |
Impact of foreign exchange | 713 |
| | (793 | ) | (1,368 | ) | | 372 |
|
Ending balance | $ | 20,794 |
| | $ | 18,804 |
| $ | 19,555 |
| | $ | 20,451 |
|
The Company identified an impairment "trigger event" for both the Lawson and Bolt reporting units as of March 31, 2020 due to adverse changes in the business climate related to COVID-19.
The quantitative impairment test determined that the Bolt reporting unit's fair value exceeded its carrying value by less than 10%. As of March 31, 2020 goodwill allocated to the Bolt reporting unit was $12.4 million.
Although the Company believes the projected future operating results and cash flows and related estimates regarding fair 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 76 - Intangible Assets
The gross carrying amount and accumulated amortization by intangible asset class were as follows:
| | | (Dollars in thousands) | (Dollars in thousands) |
| June 30, 2019 | | December 31, 2018 | March 31, 2020 | | December 31, 2019 |
| Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Value | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Value | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Value | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Value |
Trade names | $ | 8,367 |
| | $ | (1,741 | ) | | $ | 6,626 |
| | $ | 8,090 |
| | $ | (1,447 | ) | | $ | 6,643 |
| $ | 7,890 |
| | $ | (2,067 | ) | | $ | 5,823 |
| | $ | 8,422 |
| | $ | (2,020 | ) | | $ | 6,402 |
|
Customer relationships | 7,301 |
| | (1,032 | ) | | 6,269 |
| | 7,114 |
| | (645 | ) | | 6,469 |
| 6,980 |
| | (1,527 | ) | | 5,453 |
| | 7,337 |
| | (1,404 | ) | | 5,933 |
|
| $ | 15,668 |
| | $ | (2,773 | ) | | $ | 12,895 |
| | $ | 15,204 |
| | $ | (2,092 | ) | | $ | 13,112 |
| $ | 14,870 |
| | $ | (3,594 | ) | | $ | 11,276 |
| | $ | 15,759 |
| | $ | (3,424 | ) | | $ | 12,335 |
|
Amortization expense of $0.7 million and $0.4$0.3 million related to intangible assets was recorded in General and administrative expenses for the sixthree months ended June 30,March 31, 2020 and 2019, respectively.
The Company identified an impairment "trigger event" as of March 31, 2020 due to adverse changes in the business climate related to COVID-19. In accordance with ASC 350, the Company tested the definite life intangible assets and 2018, respectively.determined that the undiscounted future cash flows exceeded the net carrying value of the intangible assets.
Note 8 — Loan Agreement7 - Leases
The Company leases property used for distribution centers, office space, and Bolt branch locations throughout the US and Canada, along with various equipment located in distribution centers and corporate headquarters. The Company is also a lessor of its Decatur, Alabama property previously used in conjunction with a discontinued operation.
Lawson Loan AgreementOperating Leases
In 2012,Lawson MRO primarily has two types of leases: leases for real estate and leases for equipment. Operating real estate leases that have a material impact on the operations of the Company entered into a Loanare related to the Company's distribution network and Security Agreement (“Loan Agreement”).headquarters. The Loan Agreement consists of a $40.0 million revolving line of credit facility,Company possesses several additional property leases that are month to month basis and are not material in nature. Lawson MRO does not possess any leases that have residual value guarantees. Several property leases include renewal clauses which includes a $10.0 million sub-facility for letters of credit. Certain termsvary in length and may not include specific rent renewal amounts. The Company will revise the value of the original Loan Agreement have been revised by subsequent amendments.right of use assets and associated lease liabilities when the Company is reasonably certain it will renew a lease.
The Loan Agreement, as amended, expires in August 2020. Due to the lock box arrangement and a subjective acceleration clause contained in the Loan Agreement, any outstanding borrowings under the revolving line of credit are classified as a current liability.
Currently, credit available under the Loan Agreement, as amended, is based upon:
| |
a) | 85% of the face amount of the Company’s eligible accounts receivable, generally less than 60 days past due, and |
| |
b) | the lesser of 60% of the lower of cost or market value of the Company’s eligible inventory, generally inventory expected to be sold within 18 months, or $20.0 million. |
The value of the Right Of Use ("ROU") assets and associated lease liabilities is calculated using the total cash payments over the course of the lease, discounted to the present value using the appropriate incremental borrowing rate. The right of use asset will be amortized over its useful life. The lease liability is reduced in conjunction with the lease payments made, with adjustments made to the lease liability in order to account for non-straight line cash payments through the life of the lease.
Bolt primarily leases the real estate for its branch locations as well as its distribution center in Calgary, Alberta. Bolt possesses additional property leases that are month to month and not material in nature. Bolt property leases include renewal clauses which vary in length and may not include specific rent renewal amounts. The Company will revise the value of the right of use asset and associated lease liability when the Company is reasonably certain it will renew a lease.
Significant Assumptions
The Company is required to determine a discount rate for the present value of lease payments. If the rate is not included in the lease or cannot be readily determined, the Company must estimate the incremental borrowing rate to be used for the discount rate.The discount rate of Lawson MRO and Bolt will be reviewed on a periodic basis and updated as needed.
The expenses and income generated by the leasing activity of Lawson as lessee for the three months ending March 31, 2020 and 2019 are as follows (Dollars in thousands):
|
| | | | | | | | | | |
| | | | Three Months Ended March 31, |
Lease Type | | Classification | | 2020 | | 2019 |
| | | | | | |
Consolidated Operating Lease Expense (1) | | Operating expenses | | $ | 1,187 |
| | $ | 1,195 |
|
| | | | | | |
Consolidated Financing Lease Amortization | | Operating expenses | | 52 |
| | 48 |
|
Consolidated Financing Lease Interest | | Interest expense | | 7 |
| | 6 |
|
Consolidated Financing Lease Expense | | | | 59 |
| | 54 |
|
| | | | | | |
Sublease Income (2) | | Operating expenses | | — |
| | (80 | ) |
Net Lease Cost | | | | $ | 1,246 |
| | $ | 1,169 |
|
(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 March 31, 2020 and December 31, 2019 are as follows (Dollars in thousands):
|
| | | | | | | | |
| | March 31, | | December 31, |
Lease Type | | 2020 | | 2019 |
| | | | |
Total ROU operating lease assets (1) | | $ | 9,573 |
| | $ | 10,592 |
|
Total ROU financing lease assets (2) | | 605 |
| | 654 |
|
Total lease assets | | $ | 10,178 |
| | $ | 11,246 |
|
| | | | |
Total current operating lease obligation | | $ | 3,580 |
| | $ | 3,591 |
|
Total current financing lease obligation | | 245 |
| | 239 |
|
Total current lease obligations | | $ | 3,825 |
| | $ | 3,830 |
|
| | | | |
Total long term operating lease obligation | | $ | 8,021 |
| | $ | 9,133 |
|
Total long term financing lease obligation | | 310 |
| | 371 |
|
Total long term lease obligation | | $ | 8,331 |
| | $ | 9,504 |
|
(1) Operating lease assets are recorded net of accumulated amortization of $3.9 million and $2.8 million as of March 31, 2020 and December 31, 2019, respectively
(2) Financing lease assets are recorded net of accumulated amortization of $0.3 million and $0.2 million as of March 31, 2020 and December 31, 2019, respectively
The value of the lease liabilities generated by the leasing activities of Lawson as lessee as of March 31, 2020 were as follows (Dollars in thousands):
|
| | | | | | | | | | | | |
Maturity Date of Lease Liabilities | | Operating Leases | | Financing Leases | | Total |
| | | | | | |
Year one | | $ | 4,069 |
| | $ | 268 |
| | $ | 4,337 |
|
Year two | | 4,081 |
| | 174 |
| | 4,255 |
|
Year three | | 2,612 |
| | 110 |
| | 2,722 |
|
Year four | | 1,055 |
| | 43 |
| | 1,098 |
|
Year five | | 240 |
| | — |
| | 240 |
|
Subsequent years | | 517 |
| | — |
| | 517 |
|
Total lease payments | | 12,574 |
| | 595 |
| | 13,169 |
|
Less: Interest | | 973 |
| | 40 |
| | 1,013 |
|
Present value of lease liabilities | | $ | 11,601 |
| | $ | 555 |
| | $ | 12,156 |
|
| |
(1) | Minimum lease payments exclude payments to landlord for real estate taxes and common area maintenance of $0.2 million |
The weighted average lease terms and interest rates of the leases held by Lawson as of March 31, 2020 are as follows:
|
| | | | |
Lease Type | | Weighted Average Term in Years | | Weighted Average Interest Rate |
| | | | |
Operating Leases | | 3.5 | | 5.1% |
Financing Leases | | 2.7 | | 5.4% |
The cash outflows of the leasing activity of Lawson as lessee for the three months ending March 31, 2020 are as follows (Dollars in thousands):
|
| | | | | | |
Cash Flow Source | | Classification | | Amount |
| | | | |
Operating cash flows from operating leases | | Operating activities | | $ | 992 |
|
Operating cash flows from financing leases | | Operating activities | | 7 |
|
Financing cash flows from financing leases | | Financing activities | | 67 |
|
Note 8 — 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 rates for borrowings are atrate spread is determined by the Prime rate or, iftype of borrowing used and 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 assetsTotal Net Leverage Ratio as of the Company. Dividends are restricted to amounts not to exceed $7.0 million annually.most recent fiscal quarter as defined in the Credit Agreement.
At June 30, 2019,March 31, 2020, the Company had $6.0$10.5 million of borrowings under its revolving lineand had $87.5 million of credit facility and additional borrowing availability remaining, net of $30.7 million. The Company paid interestoutstanding letters of $0.4 million and $0.5 million for the six months ended June 30, 2019 and 2018, respectively.credit. The weighted average interest rate was 4.48% and 3.74%4.04% for the sixthree months ended June 30, 2019March 31, 2020.
The covenants associated with the Credit Agreement restrict the ability of the Company to, among other things: incur additional indebtedness and 2018, respectively.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 results of the financial covenants are provided below:
|
| | | | |
Quarterly Financial Covenants | | Requirement | | Actual |
EBITDA to fixed charges ratio | | 1.15 : 1.00 | | 7.13 : 1.00 |
Total net leverage ratio | | 3.25 : 1.00 | | 0.19 : 1.00 |
As of March 31, 2020, the Company was in compliance with its required debt covenants.
Note 9 - Stock Repurchase Program
In the second quarter of 2019, the Company's Board of Directors authorized a program in which the Company may repurchase up to $7.5 million of the Company’sCompany's common stock from time to time in open market transactions, privately negotiated transactions or by other methods.
In addition to other customary representations, warranties and covenants, if the excess borrowing capacity is below $10.0 millionfirst quarter of 2020 the Company is required to meet a minimum trailing twelve month EBITDA to fixed charges ratio, as defined inpurchased 47,504 shares of common stock at an average purchase price of $36.93 under the amended Loan Agreement. On June 30, 2019, the Company's borrowing capacity exceeded $10.0 million. Therefore, the Company was not subject to this financial covenant, however, for informational purposes the result of the financial covenant is provided below:
|
| | | | |
Quarterly Financial Covenant | | Requirement | | Actual |
EBITDA to fixed charges ratio | | 1.10 : 1.00 | | 7.55 : 1.00 |
Commitment Letter
Bolt Supply has a Commitment Letter with BMO Bank of Montreal ("BMO") dated March 30, 2017 which allows Bolt Supply to access up to $5.5 million Canadian dollars in the form of either an overdraft facility or as commercial letters of credit. The Commitment Letter is cancellable at any time at BMOs sole discretion and is secured by substantially all of Bolt Supply’s assets. It carries an interest rate of the bank's prime rate plus 0.25%. At June 30, 2019, Bolt Supply had $3.7 million Canadian dollars of outstanding borrowings and remaining borrowing availability of $1.8 million Canadian dollars. The Commitment Letter is subject to a working capital ratio of 1.35:1, a maximum ratio of debt to tangible net worth of 2.5:1 of the Bolt Supply assets and Debt Service Coverage Ratio 1.25:1 as defined in the Commitment Letter. At June 30, 2019, Bolt Supply was in compliance with all covenants which are subject to periodic review, at least annually, with the next review due by August 31, 2019.repurchase program.
Note 910 — Severance Reserve
Changes in the Company’s reserve for severance as of June 30, 2019March 31, 2020 and 20182019 were as follows:
| | | (Dollars in thousands) | (Dollars in thousands) |
| Six Months Ended June 30, | Three Months Ended March 31, |
| 2019 | | 2018 | 2020 | | 2019 |
Balance at beginning of period | $ | 359 |
| | $ | 483 |
| $ | 909 |
| | $ | 359 |
|
Charged to earnings | 1,512 |
| | 692 |
| 7 |
| | 27 |
|
Payments | (409 | ) | | (532 | ) | (365 | ) | | (123 | ) |
Balance at end of period | $ | 1,462 |
| | $ | 643 |
| $ | 551 |
| | $ | 263 |
|
Note 1011 — Stock-Based Compensation
The Company recorded a stock-based compensation benefit of $10.7 million and expense of $5.2 million and $1.1$0.4 million for the first sixthree months of 2020 and 2019, and 2018, respectively. A portionThe majority of the stock-based compensation benefit is related to the change in the market value of the Company's common stock.
The accrued liability for previously issued Stock Performance Rights ("SPRs") decreased from $14.9 million on December 31, 2019 to $3.7 million on March 31, 2020 primarily due to the change in the market value of the Company's common stock. A summary of stock-based awards issued during the sixthree months ended June 30, 2019March 31, 2020 follows:
Stock Performance Rights ("SPRs")
The Company issued 25,793 SPRs to key employees with an exercise price of $30.54 per share that cliff vest on December 31, 2021 and have a termination date of December 31, 2026. SPRs entitle the recipient to receive a cash payment equal to the excess of the market value of the Company's common stock over the SPR exercise price when the SPRs are surrendered.
Restricted Stock Units ("RSUs")
The Company issued 10,045 RSUs to certain members of the Company's Board of Directors with a vesting date of May 14, 2020. The Company issued 16,7816,847 RSUs to key employees that cliff vest on December 31, 2021.2022. The Company issued 2,500 RSUs to an executive that cliff vest on March 2, 2023 and 3,000 RSUs that cliff vest of March 9, 2023. Each RSU is exchangeable for one share of the Company's common stock at the end of the vesting period.
Market Stock Units ("MSUs")
The Company issued 39,94822,284 MSUs to key employees that cliff vest on December 31, 2021. MSU's2022. 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 zero to 59,922,33,426 shares, will be determined based upon the trailing sixty-day weighted average closing price of the Company's common stock on December 31, 2021.2022.
No stock options were excluded from the computation
Performance Awards ("PAs")
The Company issued 10,852 PAs to key employees that cliff vest on December 31, 2022. PAs are exchangeable for the three months ended June 30, 2019. For the three months ended June 30, 2018, stock options to purchase approximately 80,000 shares of the Company's common stock were excludedranging from zero to 16,278 shares, or the computationequivalent amount in cash, based upon the achievement of diluted earnings per share because they were anti-dilutive. For the six months ended June 30, 2019 and 2018, stock options to purchase approximately 9,524 and 63,210 shares of the Company's common stock were excluded from the computation of diluted earnings per share because they were anti-dilutive.certain financial performance metrics.
Note 1112 — Income Taxes
The Company recorded income tax expensesexpense of $2.2$4.9 million, a 28.6%28.0% effective tax rate, for the sixthree months ended June 30, 2019 and an income tax expense of $2.0 million, a 30.7%March 31, 2020. The effective tax rate for the six months ended June 30, 2018. The effective tax rates wereis higher than the U.S. statutory rate due primarily to state taxes and the recording of reserves for uncertain tax positions. Income tax expense of $1.7 million, a 28.8% effective tax rate, was recorded for the three months ended March 31, 2019, which also was higher than the U.S. Statutory rate due primarily to state taxes, income in higher tax jurisdictions and an inclusion for global intangible low taxed income. Cash paid for income taxes was $0.2 million and $0.1 million in the first three months of 2020 and 2019, respectively.
The Company and its subsidiaries are subject to U.S. Federal income tax, as well as income tax of multiple state and foreign jurisdictions. As of June 30, 2019,March 31, 2020, the Company is subject to U.S. Federal income tax examinations for the years 20152016 through 20172018 and income tax examinations from various other jurisdictions for the years 20112012 through 2018.
Earnings from the Company’s foreign subsidiaries are considered to be indefinitely reinvested. A distribution of these non-U.S. earnings in the form of dividends or otherwise may subject the Company to foreign withholding taxes and U.S. federal and state taxes.
Note 1213 — Contingent Liabilities
In 2012, the Company identified that a site it owns in Decatur, Alabama, contains hazardous substances in the soil and groundwater as a result of historical operations prior to the Company's ownership. The Company retained an environmental consulting firm to further investigate the contamination including the measurement and monitoring of the site and the site was enrolled in the Alabama Department of Environmental Management (“ADEM") voluntary cleanup program.
The remediation plan was approved by ADEM in 2018. The plan consists of chemical injections throughout the affected area, as well as subsequent monitoring of the area for three consecutive periods. The injection process was completed in the first quarter of 2019 and the environmental consulting firm is monitoring the affected area. The Company made payments of $1.3 million inbelieves the first two quarters of 2019 for services rendered by the environmental consulting firm. These payments were applied to the previously accrued environmental remediation liability. The Company believes theminimal remaining environmental remediation liability, of approximately $0.1 million, classified within Accrued expenses and other liabilities on the accompanying Consolidated Balance
Sheet, will be sufficient to cover the remaining cost of the plan. The Company does not expect to capitalize any amounts related to the remediation plan.
Note 13 — Acquisition
The Company completed the acquisition of Screw Products, Inc. in October 2018 for approximately $5.2 million. The purchase price was funded with cash on hand and utilization of the Company's existing credit facility. Screw Products, Inc. is a distributor of bulk industrial products to large manufacturers and job shops. The Company allocated $2.6 million of the purchase price to an intangible asset for customer relationships and $0.5 million for intangible asset for trade names. These amounts were determined by a third party valuation firm with estimated useful lives of 10 and 15 years, respectively. The excess of the purchase price over the fair values of the identifiable assets and liabilities was recorded as goodwill and represents the expected future benefit to the Company from the acquisition of Screw Products. The Company's Lawson operating segment includes revenues of approximately $0.7 million and $1.5 million from Screw Products in the three and six months ended June, 30 2019, respectively.
The following table contains unaudited pro forma revenue and net income for Lawson Products assuming the Screw Products acquisition closed on January 1, 2018.
|
| | | | | | | | | | | | | | | |
| (Dollars in thousands) |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Revenue | | | | | | | |
Actual | $ | 96,097 |
| | $ | 90,382 |
| | $ | 187,440 |
| | $ | 174,841 |
|
Pro forma | 96,097 |
| | 91,261 |
| | 187,440 |
| | 176,469 |
|
| | | | | | | |
Net income | | | | | | | |
Actual | $ | 1,307 |
| | $ | 3,194 |
| | $ | 5,453 |
| | $ | 4,430 |
|
Pro forma | 1,307 |
| | 3,308 |
| | 5,453 |
| | 4,632 |
|
The pro forma disclosures in the table above include adjustments for, amortization of intangible assets and acquisition costs to reflect results as if the acquisition of Screw Products had closed on January 1, 2018 rather than on the actual acquisition date. This pro forma information utilizes certain estimates, is presented for illustrative purposes only and is not intended to be indicative of the actual results of operation. In addition, future results may vary significantly from the results reflected in the pro forma information. The unaudited pro forma financial information does not reflect the impact of future positive or negative events that may occur after the acquisition, such as anticipated cost savings from operating synergies.
Note 14 – Segment Information
The Company operates in two reportable segments. The businesses have been determined to be separate reportable segments because of differences in their financial characteristics and the methods they employ to deliver product to customers. The operating segments are reviewed by the Company’s chief operating decision maker responsible for reviewing operating performance and allocating resources. The Lawson segment primarily relies on its large network of sales representatives to visit the customer at the customers' work location and provide VMI service and produce sales orders for product that is then shipped to the customer. The Bolt Supply segment primarily sells product to customers through its branch locations. Bolt Supply had 14 branches in operation at the end of the secondfirst quarter 2019.of 2020.
Financial information for the Company's reportable segments follows:
| | | (Dollars in thousands) | (Dollars in thousands) |
| Three Months Ended June 30, | | Six Months Ended June 30, | Three Months Ended March 31, |
| 2019 | | 2018 | | 2019 | | 2018 | 2020 | | 2019 |
Revenue | | | | | | | | | | |
Lawson product revenue | $ | 74,866 |
| | $ | 70,632 |
| | $ | 147,905 |
| | $ | 137,569 |
| $ | 71,791 |
| | $ | 73,039 |
|
Lawson service revenue | 10,101 |
| | 9,985 |
| | 19,529 |
| | 19,474 |
| 9,700 |
| | 9,428 |
|
Total Lawson revenue | 84,967 |
| | 80,617 |
| | 167,434 |
| | 157,043 |
| 81,491 |
| | 82,467 |
|
Bolt Supply | 11,130 |
| | 9,765 |
| | 20,006 |
| | 17,798 |
| 9,544 |
| | 8,876 |
|
Consolidated total | $ | 96,097 |
| | $ | 90,382 |
| | $ | 187,440 |
| | $ | 174,841 |
| $ | 91,035 |
| | $ | 91,343 |
|
| | | | | | | | | | |
Gross profit | | | | | | | | | | |
Lawson product gross profit | $ | 41,130 |
| | $ | 38,707 |
| | $ | 81,734 |
| | $ | 75,549 |
| $ | 39,729 |
| | $ | 40,604 |
|
Lawson service gross profit | 5,627 |
| | 6,590 |
| | 10,642 |
| | 12,670 |
| 5,391 |
| | 5,015 |
|
Total Lawson gross profit | 46,757 |
| | 45,297 |
| | 92,376 |
| | 88,219 |
| 45,120 |
| | 45,619 |
|
Bolt Supply | 4,286 |
| | 3,834 |
| | 7,590 |
| | 7,130 |
| 3,801 |
| | 3,304 |
|
Consolidated total | $ | 51,043 |
| | $ | 49,131 |
| | $ | 99,966 |
| | $ | 95,349 |
| $ | 48,921 |
| | $ | 48,923 |
|
| | | | | | | | | | |
Operating income | | | | | | | | | | |
Lawson | $ | 654 |
| | $ | 4,794 |
| | $ | 6,113 |
| | $ | 6,284 |
| $ | 18,094 |
| | $ | 5,458 |
|
Bolt Supply | 969 |
| | 760 |
| | 1,054 |
| | 1,107 |
| 544 |
| | 86 |
|
Consolidated total | 1,623 |
| | 5,554 |
| | 7,167 |
| | 7,391 |
| 18,638 |
| | 5,544 |
|
Interest expense | (146 | ) | | (264 | ) | | (343 | ) | | (504 | ) | (115 | ) | | (197 | ) |
Other income (expense), net | 339 |
| | (777 | ) | | 811 |
| | (490 | ) | (1,111 | ) | | 472 |
|
Income before income taxes | $ | 1,816 |
| | $ | 4,513 |
| | $ | 7,635 |
| | $ | 6,397 |
| $ | 17,412 |
| | $ | 5,819 |
|
Note 15 - COVID-19 Risks and Uncertainties
In March 2020, the World Health Organization classified the COVID-19 outbreak as a pandemic, based on the rapid increase in exposure globally. The full impact of the COVID-19 pandemic has yet to be realized as of the date of this report. There is substantial uncertainty as to the overall effect the pandemic will have on the results of the Company for the rest of 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 is currently evaluating how these provisions in the CARES Act will impact its financial position, results of operations and cash flows.
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 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 reps 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 our business.
The Company has taken several steps to mitigate the potential negative impacts of COVID-19. Lawson sales representatives continue to reach out to all customers with a portion via phone, fax and internet-based communications. Bolt branches remain open and are offering curbside pickup for customer orders to maintain social distancing. Our sales team and finance team continue to monitor our customers' liquidity and receivables balances, as well as monitor customers who have reduced hours of operation or have shut down temporarily. Management continues to be in contact with current suppliers and is reaching out to additional suppliers to ensure that orders for inventory are fulfilled in a timely manner.
The Company continues to monitor its balance sheet and liquidity position and is taking actions to protect cash flows from operations. At March 31, 2020, the Company had $4.1 million of cash and cash equivalents and an additional $87.5 million of borrowing capacity under its committed credit facility and a similar amount available as of the date of this report. During April 2020, the Company has taken numerous actions, including, but not limited to furloughing approximately 100 employees, reducing salaries, canceling travel and award trips, consolidating its Suwanee distribution center operations into the McCook facility, and eliminating non-critical capital expenditures.
The Company is closely monitoring the operating environment and will take all necessary actions to ensure safety for our 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
The Maintenance, Repair and Operations ("MRO") distribution industry is highly fragmented. We compete for business with several national distributors as well as a large number of regional and local distributors. The MRO business is significantly impacted by the overall strength of the manufacturing sector of the U.S. economy. One measure used to evaluate the strength of the industrial products market is the PMI index published by the Institute for Supply Management, which is considered by many economists to be a reliable near-term economic barometer of the manufacturing sector. A measure above 50 generally indicates expansion of the manufacturing sector while a measure below 50 generally represents contraction. The average monthly PMI was 52.250.0 in the secondfirst quarter of 20192020 compared to 58.955.4 in the secondfirst quarter of 2018,2019, indicating a flat rate of growth in the U.S. manufacturing economy continuesin the first quarter of 2020 compared to grow, but at a slower pace thanan expansion in the U.S. manufacturing economy a year ago.
Our sales are also affected by the number of sales representatives and their productivity. Our sales force increased to an average of 980998 sales representatives in the secondfirst quarter of 20192020 from 966991 sales representatives during the secondfirst quarter of 2018.2019. Our Lawson segment sales representative productivity, measured as sales per rep per day, increased 3.0%decreased 3.1% to $1,343$1,268 in the secondfirst quarter of 20192020 from $1,304$1,308 in the secondfirst quarter of 2018. Sales2019.
COVID-19 Pandemic
In March 2020, the World Health Organization declared a new strain of coronavirus (“COVID-19”) a pandemic. The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains and created significant volatility in 2019 also benefited fromfinancial markets. There is substantial uncertainty as to the acquisitionoverall effect the pandemic will have on the results of Screw Products, Inc. ("Screw Products")the Company for the rest of 2020 and beyond. Various events related to COVID-19 have resulted in the fourth quarter of 2018. We anticipate the size oflost revenue to our Company, limitations on our ability to source high demand products, limitations on our sales force to remain relatively stableperform 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.
In the remainderfirst quarter of 20192020, 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 we concentratereduced 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.
Our MRO business model relies upon customer interaction as well as a consistent schedule of onsite visits by our effortssales reps to customer locations in order to generate sales, provide vendor managed inventory services and maintain relationships with customers. Our Bolt Supply business model relies on providing trainingfoot traffic in its branch locations and supportthe ability of customers to visit these locations. The onset of the COVID-19 pandemic, as well as social distancing guidelines and government mandated shelter in place orders, have negatively impacted our business. It is unknown at this time how long these circumstances will exist, when the restrictions will be relaxed, and if these restrictions will be reintroduced at a future date. The pandemic is negatively impacting sales and operations currently and may negatively impact our future financial results, liquidity and overall operating performance.
We have undertaken a number of steps in order to mitigate the effects of COVID-19. Our MRO sales reps continue to increasereach out to all customers with a portion via phone, fax and internet-based communications. Some of the productivity ofnormal customer service provided by our existing sales representatives.reps has been affected by social distancing guidelines and shelter in place orders. Certain customers have also temporarily reduced business hours or shut down entirely. All 14 Bolt branches have remained open and have introduced curbside pickup for customers. Bolt also ships to customers who order product over the phone. We continue to keep in contact with our current suppliers and we have reached out to additional suppliers to ensure that orders for inventory are fulfilled in a timely manner and our supply chain will remain intact.
We are closely monitoring the Company's balance sheet and liquidity position and are taking actions to protect cash flows from operations. We remain in contact with our lending institutions to ensure that we will continue to have proper liquidity to fund working capital requirements. At March 31, 2020, the Company had $4.1 million of cash and cash equivalents and an additional $87.5 million of borrowing capacity under its committed credit facility and a similar amount available as of the date of this report. Sales reps and our finance group are working in concert to ensure that any customer liquidity issues are quickly identified and credit is carefully extended to customers who are able to pay.
The Company has taken various actions, including, but not limited to furloughing approximately 100 employees, reducing salaries, canceling of travel and award trips, consolidating its Suwanee distribution center operations into the McCook facility, and eliminating non-critical capital expenditures. Looking ahead, we will take all necessary actions that ensure safety for our employees, customers and suppliers to meet our working capital requirements and remain in compliance with our debt covenants.
Quarter ended June 30, 2019March 31, 2020 compared to quarter ended June 30, 2018March 31, 2019
| | | 2019 | | 2018 | 2020 | | 2019 |
(Dollars in thousands) | Amount | | % of Net Sales | | Amount | | % of Net Sales | Amount | | % of Net Sales | | Amount | | % of Net Sales |
| | | | | | | | | | | | | | |
Revenue | $ | 96,097 |
| | 100.0 | % | | $ | 90,382 |
| | 100.0 | % | $ | 91,035 |
| | 100.0 | % | | $ | 91,343 |
| | 100.0 | % |
Cost of goods sold | 45,054 |
| | 46.9 | % | | 41,251 |
| | 45.6 | % | 42,114 |
| | 46.3 | % | | 42,420 |
| | 46.4 | % |
Gross profit | 51,043 |
| | 53.1 | % | | 49,131 |
| | 54.4 | % | 48,921 |
| | 53.7 | % | | 48,923 |
| | 53.6 | % |
| | | | | | | | | | | | | | |
Operating expenses: | | | | | | | | | | | | | | |
Selling expenses | 21,867 |
| | 22.8 | % | | 22,004 |
| | 24.3 | % | 19,984 |
| | 22.0 | % | | 21,742 |
| | 23.8 | % |
General and administrative expenses | 27,553 |
| | 28.6 | % | | 21,573 |
| | 24.0 | % | 10,299 |
| | 11.3 | % | | 21,637 |
| | 23.7 | % |
Total operating expenses | 49,420 |
| | 51.4 | % | | 43,577 |
| | 48.3 | % | 30,283 |
| | 33.3 | % | | 43,379 |
| | 47.5 | % |
| | | | | | | | | | | | | | |
Operating income | 1,623 |
| | 1.7 | % | | 5,554 |
| | 6.1 | % | 18,638 |
| | 20.5 | % | | 5,544 |
| | 6.1 | % |
| | | | | | | | | | | | | | |
Interest expense | (146 | ) | | (0.2 | )% | | (264 | ) | | (0.2 | )% | (115 | ) | | (0.1 | )% | | (197 | ) | | (0.2 | )% |
Other income (expense), net | 339 |
| | 0.4 | % | | (777 | ) | | (0.9 | )% | |
Other (expense) income, net | | (1,111 | ) | | (1.3 | )% | | 472 |
| | 0.5 | % |
| | | | | | | | | | | | | | |
Income before income taxes | 1,816 |
| | 1.9 | % | | 4,513 |
| | 5.0 | % | 17,412 |
| | 19.1 | % | | 5,819 |
| | 6.4 | % |
| | | | | | | | | | | | | | |
Income tax expense | 509 |
| | 0.5 | % | | 1,319 |
| | 1.5 | % | 4,879 |
| | 5.3 | % | | 1,673 |
| | 1.9 | % |
| | | | | | | | | | | | | | |
Net income | $ | 1,307 |
| | 1.4 | % | | $ | 3,194 |
| | 3.5 | % | $ | 12,533 |
| | 13.8 | % | | $ | 4,146 |
| | 4.5 | % |
Non-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, and 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 and severance expense items in the period in which these items are incurred.
Operating income was $18.6 million for 2020 inclusive of a $10.7 million benefit from stock-based compensation compared to $5.5 million in 2019 which included $0.4 million of stock-based compensation expense. Excluding stock-based compensation and severance, adjusted operating income increased to $7.9 million in 2020 from $6.0 million in 2019 on improved sales margins and leveraging operating costs.
|
| | | | | | | | |
Reconciliation of GAAP Operating Income to Adjusted Non-GAAP Operating Income (Unaudited) |
| | | | |
| | Three Months Ended |
| | March 31, |
(Dollars in Thousands) | | 2020 | | 2019 |
| | | | |
Operating income as reported per GAAP | | $ | 18,638 |
| | $ | 5,544 |
|
| | | | |
Stock-based compensation (1) | | (10,700 | ) | | 408 |
|
Severance expense | | 7 |
| | 27 |
|
Adjusted non-GAAP operating Income | | $ | 7,945 |
| | $ | 5,979 |
|
(1) Expense for stock-based compensation, of which a portion varies with the Company's stock price
Revenue and Gross Profits
| | | Three Months Ended June 30, | | Increase | Three Months Ended March 31, | | Increase |
(Dollars in thousands) | 2019 | | 2018 | | Amount | | % | 2020 | | 2019 | | Amount | | % |
| | | | | | | | | | | | |
Revenue | | | | | | | | | | | | |
Lawson | $ | 84,967 |
| | $ | 80,617 |
| | $ | 4,350 |
| | 5.4% | $ | 81,491 |
| | $ | 82,467 |
| | $ | (976 | ) | | (1.2)% |
Bolt Supply | 11,130 |
| | 9,765 |
| | 1,365 |
| | 14.0% | 9,544 |
| | 8,876 |
| | 668 |
| | 7.5% |
Consolidated | $ | 96,097 |
| | $ | 90,382 |
| | $ | 5,715 |
| | 6.3% | $ | 91,035 |
| | $ | 91,343 |
| | $ | (308 | ) | | (0.3)% |
| | | | | | | | | | | | |
Gross profit | | | | | | | | | | | | |
Lawson | $ | 46,757 |
| | $ | 45,297 |
| | $ | 1,460 |
| | 3.2% | $ | 45,120 |
| | $ | 45,619 |
| | $ | (499 | ) | | (1.1)% |
Bolt Supply | 4,286 |
| | 3,834 |
| | 452 |
| | 11.8% | 3,801 |
| | 3,304 |
| | 497 |
| | 15.0% |
Consolidated | $ | 51,043 |
| | $ | 49,131 |
| | $ | 1,912 |
| | 3.9% | $ | 48,921 |
| | $ | 48,923 |
| | $ | (2 | ) | | —% |
| | | | | | | | | | | | |
Gross profit margin | | | | | | | | | | | | |
Lawson | 55.0 | % | | 56.2 | % | | | | 55.4 | % | | 55.3 | % | | | |
Bolt Supply | 38.5 | % | | 39.3 | % | | | | 39.8 | % | | 37.2 | % | | | |
Consolidated | 53.1 | % | | 54.4 | % | | | | 53.7 | % | | 53.6 | % | | | |
Total sales increased 6.3% to $96.1were $91.0 million in the secondfirst quarter of 20192020, which were essentially flat compared to $90.4 millionthe first quarter of 2019. Sales were negatively impacted by the overall effect of the onset of the COVID-19 pandemic in the second quartermiddle of 2018. March 2020 as well as decreases in sales to our Government customers during the quarter.
The Lawson segment total sales were positivelynegatively impacted by a 3.0% improvement3.1% decline in sales productivity of Lawson sales representatives, andwhich was partially offset by a solid MRO marketplace. A 14.0%7.5% improvement in Bolt Supply sales spread across multiple product categories and the inclusion of Screw Products sales of $0.7 million which was acquired in the fourth quarter of 2018, also contributed to the increase.sales. Average daily sales grewdeclined to $1.502$1.422 million in the secondfirst quarter of 20192020 compared to $1.412$1.450 million in the prior year quarter. The first quarter with 642020 had one more selling days in both quarters.day compared to the first quarter 2019. Excluding the impact of currency fluctuations, consolidated sales increased 7.1%0.2% for the quarter.
Gross Profit
Gross profit increased $1.9 million to $51.0was $48.9 million in the secondfirst quarter of 20192020, essentially flat compared to $49.1 million in the secondfirst quarter of 2018,2019. This was primarily driven by increaseddue to a slight decrease in sales, partially offset by an increase of service-related costs. Consolidated gross profit as a percent of sales was 53.1%53.7% compared to 54.4%53.6% a year ago. Lower gross margin profiles on both the Bolt Supply and Screw Products businesses also drove the lower consolidated percentage. The organic Lawson MRO segment gross margin, before reclassification of service-related costs, as a percent of sales of 60.5%60.8% in the secondfirst quarter 20192020, was essentially flat compared to a year ago quarter before giving effect to the prior year service-related costs.
.
Selling, General and Administrative Expenses
| | | Three Months Ended June 30, | | Increase (Decrease) | Three Months Ended March 31, | | Increase (Decrease) |
(Dollars in thousands) | 2019 | | 2018 | | Amount | | % | 2020 | | 2019 | | Amount | | % |
| | | | | | | | | | | | |
Selling expenses | | | | | | | | | | | | |
Lawson | $ | 20,979 |
| | $ | 21,199 |
| | $ | (220 | ) | | (1.0)% | $ | 19,187 |
| | $ | 20,953 |
| | $ | (1,766 | ) | | (8.4)% |
Bolt Supply | 888 |
| | 805 |
| | 83 |
| | 10.3% | 797 |
| | 789 |
| | 8 |
| | 1.0% |
Consolidated | $ | 21,867 |
| | $ | 22,004 |
| | $ | (137 | ) | | (0.6)% | $ | 19,984 |
| | $ | 21,742 |
| | $ | (1,758 | ) | | (8.1)% |
| | | | | | | | | | | | |
General and administrative expenses | | | | | | | | | | | | |
Lawson | $ | 25,124 |
| | $ | 19,304 |
| | $ | 5,820 |
| | 30.1% | $ | 7,839 |
| | $ | 19,208 |
| | $ | (11,369 | ) | | (59.2)% |
Bolt Supply | 2,429 |
| | 2,269 |
| | 160 |
| | 7.1% | 2,460 |
| | 2,429 |
| | 31 |
| | 1.3% |
Consolidated | $ | 27,553 |
| | $ | 21,573 |
| | $ | 5,980 |
|
| 27.7% | $ | 10,299 |
| | $ | 21,637 |
| | $ | (11,338 | ) |
| (52.4)% |
Selling expenses consist of compensation and support for our sales representatives. Selling expenses were $21.9$20.0 million in the secondfirst quarter of 2019, essentially flat2020 compared to $22.0$21.7 million in the prior year quarter and, as a percent of sales, decreased to 22.8%22.0% from 24.3%23.8% in the secondfirst quarter of 2018.2019. The decrease in selling expense as a percent of sales compared to the prior year quarter is primarily due to lower incentives, travel, and commission due to the impact of COVID-19 in the second half of March and better leveraging our fixed selling expenses over a higher sales base and an increase in service-related costs classified within gross profit.expenses.
General and administrative expenses consist of expenses to operate our distribution network and overhead expenses to manage the business. General and administrative expenses increaseddecreased to $27.6$10.3 million in the secondfirst quarter of 20192020 from $21.6 million in the prior year quarter. The increaselower general and administrative expense was primarily driven by the $4.8 million$10.7 of stock based compensation expense,benefit, of which a portion fluctuates with the Company's stock price, and an increasecompared to the prior year quarter.
Additionally, expenses decreased in severance expense of $1.4 million. During the secondfirst quarter of 2019 the Company incurred $1.5 million of severance expense primarily related2020 due to reduced accruals in response to the eliminationonset of certain positions to better align various operating areas within the Company.COVID-19, which were partially offset by higher bad debt expense and administrative costs.
Interest Expense
Interest expense decreased to $0.1 million compared to $0.3$0.2 million in the secondfirst quarter of 2020 and 2019 and 2018 due toprimarily, as a result of lower average debt balances.outstanding borrowing levels.
Other Income (Expense), Net
Other income (expense), net increased $1.1$1.6 million in the secondfirst quarter of 20192020 over the prior year quarter primarily due to the effect of changesa change in the Canadian currency exchange rate.
Income Tax Expense
Income tax expense was $0.5$4.9 million, resulting in a 28.0% effective tax rate for the three months ended June 30, 2019March 31, 2020 compared to income tax expense of $1.3$1.7 million and an effective tax rate of 29.2%28.8% for the three months ended June 30, 2018.March 31, 2019.
Six months ended June 30, 2019 compared to June 30, 2018
|
| | | | | | | | | | | | | |
| 2019 | | 2018 |
($ in thousands) | Amount | | % of Net Sales | | Amount | | % of Net Sales |
| | | | | | | |
Revenue | $ | 187,440 |
| | 100.0 | % | | $ | 174,841 |
| | 100.0 | % |
Cost of goods sold | 87,474 |
| | 46.7 | % | | 79,492 |
| | 45.5 | % |
Gross profit | 99,966 |
| | 53.3 | % | | 95,349 |
| | 54.5 | % |
| | | | | | | |
Operating expenses: | | | | | | | |
Selling expenses | 43,609 |
| | 23.3 | % | | 43,944 |
| | 25.1 | % |
General and administrative expenses | 49,190 |
| | 26.2 | % | | 44,014 |
| | 25.2 | % |
Total operating expenses | 92,799 |
| | 49.5 | % | | 87,958 |
| | 50.3 | % |
| | | | | | | |
Operating income | 7,167 |
| | 3.8 | % | | 7,391 |
| | 4.2 | % |
| | | | | | | |
Interest expense | (343 | ) | | (0.2 | )% | | (504 | ) | | (0.3 | )% |
Other income (expense), net | 811 |
| | 0.5 | % | | (490 | ) | | (0.2 | )% |
| | | | | | | |
Income before income taxes | 7,635 |
| | 4.1 | % | | 6,397 |
| | 3.7 | % |
| | | | | | | |
Income tax expense | 2,182 |
| | 1.2 | % | | 1,967 |
| | 1.2 | % |
| | | | | | | |
Net income | $ | 5,453 |
| | 2.9 | % | | $ | 4,430 |
| | 2.5 | % |
Revenue and Gross Profit
|
| | | | | | | | | | | | | |
| Six Months Ended June 30, | | Increase |
(Dollars in thousands) | 2019 | | 2018 | | Amount | | % |
| | | | | | | |
Revenue | | | | | | | |
Lawson | $ | 167,434 |
| | $ | 157,043 |
| | $ | 10,391 |
| | 6.6% |
Bolt Supply | 20,006 |
| | 17,798 |
| | 2,208 |
| | 12.4% |
Consolidated | $ | 187,440 |
| | $ | 174,841 |
| | $ | 12,599 |
| | 7.2% |
| | | | | | | |
Gross profit | | | | | | | |
Lawson | $ | 92,376 |
| | $ | 88,219 |
| | $ | 4,157 |
| | 4.7% |
Bolt Supply | 7,590 |
| | 7,130 |
| | 460 |
| | 6.5% |
Consolidated | $ | 99,966 |
| | $ | 95,349 |
| | $ | 4,617 |
| | 4.8% |
| | | | | | | |
Gross profit margin | | | | | | | |
Lawson | 55.2 | % | | 56.2 | % | | | | |
Bolt Supply | 37.9 | % | | 40.1 | % | | | | |
Consolidated | 53.3 | % | | 54.5 | % | | | | |
Revenue
Revenue for the six months ended June 30, 2019 increased 7.2% to $187.4 million from $174.8 million for the six months ended June 30, 2018. The Lawson segment total sales were positively impacted by a 3.7% improvement in sales productivity of Lawson sales representatives and a strong MRO marketplace. A 12.4% improvement in Bolt Supply sales spread across multiple product categories and the inclusion of Screw Products sales of $1.5 million which was acquired in the fourth quarter of 2018, also contributed to the increase. Average daily sales improved 7.2% to $1.476 million in the first six months of 2019 compared to $1.377 million in the prior year period with 127 selling days in both periods. Excluding the impact of currency fluctuations, consolidated sales increased 8.1% for the year to date.
Gross Profit
Gross profit increased to $100.0 million in the first six months of 2019 compared to $95.3 million in the first six months of 2018, primarily driven by increased sales. Consolidated gross profit as a percent of sales was 53.3% compared to 54.5% a year ago. Higher service-related costs and lower gross margin profiles on both the Bolt Supply and Screw Products businesses drove the lower consolidated percentage. Excluding these businesses, the core Lawson MRO segment gross margin as a percent of sales was 60.6% in the first half of 2019 compared to 60.5% a year ago before giving effect to the allocated service costs.
Selling, General and Administrative Expenses
|
| | | | | | | | | | | | | |
| Six Months Ended June 30, | | Increase (Decrease) |
(Dollars in thousands) | 2019 | | 2018 | | Amount | | % |
| | | | | | | |
Selling expenses | | | | | | | |
Lawson | $ | 41,932 |
| | $ | 42,498 |
| | $ | (566 | ) | | (1.3)% |
Bolt Supply | 1,677 |
| | 1,446 |
| | 231 |
| | 16.0% |
Consolidated | $ | 43,609 |
| | $ | 43,944 |
| | $ | (335 | ) | | (0.8)% |
| | | | | | | |
General and administrative expenses | | | | | | | |
Lawson | $ | 44,331 |
| | $ | 39,437 |
| | $ | 4,894 |
| | 12.4% |
Bolt Supply | 4,859 |
| | 4,577 |
| | 282 |
| | 6.2% |
Consolidated | $ | 49,190 |
| | $ | 44,014 |
| | $ | 5,176 |
| | 11.8% |
Selling expenses decreased to $43.6 million for the first six months of 2019 from $43.9 million in the first six months of 2018 and, as a percent of sales, decreased to 23.3% in the first six months of 2019 from 25.1% a year ago. The decrease in selling expense as a percent of sales is primarily due to leveraging selling expenses over a higher sales base and an increase of service-related costs within gross profit.
General and administrative expenses increased to $49.2 million in the first six months of 2019 from $44.0 million in the prior year period primarily driven by increased stock-based compensation expense of $4.2 million, a portion of which varies with the company stock price, and increased severance expense of $0.8 million. During the second quarter of 2019 the Company incurred $1.5 million of severance expense primarily related to the elimination of certain positions to better align various operating areas within the Company.
Interest Expense
Interest expenses decreased $0.2 million in the first six months of 2019, over the prior year, due primarily to lower average borrowings outstanding.
Other Income (Expense), Net
Other income (expense), net increased $1.3 million in the first six months of 2019, primarily due to the effect of changes in the Canadian currency exchange rate.
Income Tax Expense
Income tax expenses were $2.2 million resulting in a 28.6% effective tax rate for the first six months of 2019 compared to income tax expense of $2.0 million and a 30.7% effective tax rate for the first six months of 2018.
Liquidity and Capital Resources
Available cash and cash equivalents were $6.9$4.1 million on June 30, 2019March 31, 2020 compared to $11.9$5.5 million on December 31, 2018.2019. Net cash used inby operations were $6.9 million and $10.5 million for the sixthree months ended June 30,March 31, 2020 and 2019, was $2.2 million. Net cash generated by operations for the six months ended June 30, 2018 was $1.8 million.respectively. Cash generated byfrom operating earnings was partiallywere more than offset by an increase in accounts receivable, primarily to support the sequential increase in sales over the fourth quarter of 2019, and payments primarily for incentives environmental remediation and other accruals that existed at December 31, 2018.2019.
Capital expenditures, primarily for improvements to our distribution centers and information technology, were $0.9$0.6 million and $1.4$0.2 million for the sixthree month periods ended June 30,March 31, 2020 and 2019, and 2018, respectively.
The Company used $2.1generated $6.4 million inof cash from financing activities in the first sixthree months of 20192020 primarily through a net paydownborrowings on its revolving lines of credit.credit offset by the repurchase of its shares.
In the second quarter of 2019, our Board of Directors authorized a program in which we may repurchase up to $7.5 million of our common stock from time to time in open market transactions, privately negotiated transactions or by other methods. In the first quarter of 2020 the Company purchased 47,504 shares of its common stock at an average purchase price of $36.93 under the repurchase program. At March 31, 2020 the Company had $4.5 million remaining availability under the program to purchase its common stock in the future
Lawson Loan Agreements
On March 31, 2020, we had $10.5 million of borrowings under our Credit Agreement and we had $87.5 million of credit availability remaining, net of outstanding letters of credit. No dividends were paid to shareholders in the three months ended March 31, 2020 and 2019.
Along with certain standard terms and conditions of our Credit Agreement, we are able to borrow up to a maximum ratio of our EBITDA to net borrowings of 3.25 times, as defined, and a minimum fixed charge ratio, as defined, of 1.15. As of March 31, 2020, we were in compliance with all covenants.
We believe cash provided by operations and funds available under our Loan AgreementsCredit Agreement are sufficient to fund our operating requirements, strategic initiatives and capital improvements, forincluding the potential impact of COVID-19 on our operations over the next 12 months.months although we cannot assure you the events beyond our control will not have an adverse impact on our liquidity.
Lawson Loan Agreement
On June 30, 2019, we had $6.0 million of borrowings under our Lawson revolving line of credit facility and we had additional borrowing availability of $30.7 million. Dividends are currently restricted under the Lawson Loan Agreement to amounts not to exceed $7.0 million annually and no dividends were paid to shareholders in the six months ended June 30, 2019 and 2018.
In addition to other customary representations, warranties and covenants, if the excess borrowing capacity under our revolving line of credit facility is below $10.0 million, we are required to meet a minimum trailing twelve month EBITDA to fixed charges ratio, as defined in the amended Loan Agreement. On June 30, 2019, our borrowing capacity exceeded $10.0 million, therefore, we were not subject to this financial covenant. However, for informational purposes we have provided the result of the financial covenant below:
|
| | | | |
Quarterly Financial Covenant | | Requirement | | Actual |
EBITDA to fixed charges ratio | | 1.10 : 1.00 | | 7.55 : 1.00 |
. While we were in compliance with the financial covenant for the quarter ended June 30, 2019,March 31, 2020, failure to meet thisthe covenant requirementrequirements of the new 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.
Bolt Commitment Letter
At June 30, 2019, Bolt had $3.7 million Canadian dollars of outstanding borrowings and remaining borrowing availability of $1.8 million Canadian dollars under a Commitment Letter. The Commitment Letter is subject to a working capital ratio of 1.35:1, a maximum ratio of debt to tangible net worth of 2.5:1 of the Bolt assets and Debt Service Coverage Ratio 1.25:1 as defined in the Commitment Letter. At June 30, 2019, Bolt was in compliance with all covenants which are subject to periodic review, at least annually, with the next review due by August 31, 2019.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 3 of Part I is inapplicable and has been omitted from this report.
ITEM 4. CONTROLS AND PROCEDURES
Under the supervision and with the participation of our senior management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this report (the “Evaluation Date”). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded as of the Evaluation Date that our disclosure controls and procedures were effective such that the information relating to Lawson, including our consolidated subsidiaries, required to be disclosed in our SEC reports (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) includes, without limitation, controls and procedures designed to ensure that information required to be disclosed is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
There were no changes in our internal control over financial reporting during the quarter ended June 30, 2019March 31, 2020 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II
OTHER INFORMATION
ITEMS 1, 1A, 3, 4 and 5 of Part II are inapplicable and have been omitted from this report.
ITEM 1A. RISK FACTORS
Other than the risk factor related to COVID-19 as 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
In March 2020, the World Health Organization declared COVID-19 a pandemic. The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains and created significant volatility and disruption of financial markets. 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. 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, the government of the state of Illinois defined 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 could be negatively impacted by 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 would also reduce customer visits to our Bolt branch locations. Customers who have reduced operations or temporarily shut down in response to COVID-19 would also negatively impact sales and our ability to collect on existing credit balances. 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.
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 June 30, 2019. The shares that were purchased were purchased for the sole purpose of satisfying tax withholding obligations of certain individuals upon the vesting of restricted stock awards granted to them by the Company. No shares were purchased in the open market.March 31, 2020.
|
| | | | | | | | | | | | | | |
| | (a) | | (b) | | (c) | | (d) |
Period | | Total Number of Shares Purchased | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs |
January 1 to January 31, 2020 | | — |
| | $ | — |
| | — |
| | $ | 6,266,000 |
|
February 1 to February 29, 2020 | | — |
| | — |
| | — |
| | 6,266,000 |
|
March 1 to March 31, 2020 (1) | | 47,504 |
| | 36.93 |
| | 47,504 |
| | 4,512,000 |
|
Total | | 47,504 |
| | | | 47,504 |
| |
|
|
| | | | | | | | | | | | | | |
| | (a) | | (b) | | (c) | | (d) |
Period | | Total Number of Shares
Purchased(1)
| | Average Price
Paid per Share
| | Total NumberShares were purchased on the open market under the Company's stock repurchase program approved in the second quarter of
Shares Purchased
as Part 2019 which authorized the Company to purchase $7.5 million of Publicly
Announced Plans
or Programs
| | Maximum Number (or
Approximate Dollar
Value) of Shares that
May Yet Be Purchased
Under the Plans or
Programs
|
April 1 to April 30, 2019 | | — |
| | $ | — |
| | — |
| | $ | — |
|
May 1 to May 31, 2019 | | — |
| | — |
| | — |
| | 7,500,000 |
|
June 1 to June 30, 2019 | | — |
| | — |
| | — |
| | 7,500,000 |
|
Total | | — |
| | | | — |
| | Company's common stock. |
ITEM 6. EXHIBITS
|
| |
Exhibit # | |
| |
|
|
|
|
101.INS | XBRL Instance Document |
101.SCH | XBRL Taxonomy Extension Schema Document |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
| | | |
| | | LAWSON PRODUCTS, INC. |
| | | (Registrant) |
| | |
Dated: | July 25, 2019April 30, 2020 | | /s/ Michael G. DeCata |
| | | Michael G. DeCata President and Chief Executive Officer (principal executive officer) |
| | | |
| | |
Dated: | July 25, 2019April 30, 2020 | | /s/ Ronald J. Knutson |
| | | Ronald J. Knutson Executive Vice President, Chief Financial Officer, Treasurer and Controller (principal financial and accounting officer) |