Lawson Products, Inc (LAWS) Q4 2019 Earnings Conference Call February 27, 2020 9:00 AM ET Company Participants Michael DeCata - President and Chief Executive Officer Ron Knutson - Chief Financial Officer Conference Call Participants Kevin Steinke - Barrington Research Carl Schemm - KeyBanc Operator Good morning, ladies and gentlemen and welcome to the Lawson Products Fourth Quarter 2019 Earnings Call. This call will be hosted by Michael DeCata, Lawson Products’ President and Chief Executive Officer and Ron ...

[PART I](index=4&type=section&id=PART%20I) This section provides an overview of the company's business operations, identifies key risk factors, details its properties, and addresses legal proceedings and mine safety disclosures [ITEM 1. BUSINESS](index=4&type=section&id=Item%201.%20Business) Lawson Products, Inc. is an MRO market distributor operating in two segments: Lawson and Bolt, focusing on VMI services and branch sales respectively, with strategic goals for organic growth and operational improvements - Lawson Products, Inc. operates in the industrial, commercial, institutional, and government Maintenance, Repair and Operations (MRO) market[7](index=7&type=chunk) - The company operates in two reportable segments: Lawson and Bolt[11](index=11&type=chunk) - The Lawson segment provides Vendor Managed Inventory (VMI) services through sales representatives across the U.S. and Canada, focusing on product knowledge and application expertise[12](index=12&type=chunk) - The Bolt segment primarily delivers products through 14 branches in Western Canada, generating sales from walk-up business and a sales team, and generally does not offer VMI services[16](index=16&type=chunk) 2019 Sales Distribution by Geography and Segment Contribution | Metric | Value | | :----- | :---- | | U.S. Net Sales | ~80% | | Canada Net Sales | ~20% | | Bolt Segment Contribution to 2019 Sales | 11.2% | 2019 Product Category Sales Percentages | Product Category | Percentage | | :-------------------------------- | :--------- | | Fastening systems | 24% | | Fluid power | 15% | | Cutting tools and abrasives | 13% | | Specialty chemicals | 11% | | Electrical | 11% | | Aftermarket automotive supplies | 8% | | Safety | 5% | | Welding and metal repair | 2% | | Other | 11% | - As of December 31, 2019, the company had approximately **1,770 employees**, with **1,200 in sales and marketing**, **440 in operations and distribution**, and **130 in management and administration**[26](index=26&type=chunk) - The strategic focus for 2020 includes growing sales organically and through acquisitions, and improving operations using a Lean Six Sigma approach to enhance customer experience and efficiency[30](index=30&type=chunk)[35](index=35&type=chunk)[36](index=36&type=chunk) [ITEM 1A. RISK FACTORS](index=9&type=section&id=Item%201A.%20Risk%20Factors) The company faces various risks including economic downturns, inventory obsolescence, supply chain disruptions, margin pressures, cybersecurity threats, talent retention, acquisition integration, and regulatory changes - Economic downturns or uncertainty can decrease customer spending, lead to bankruptcies, and impact the ability to collect receivables, potentially increasing bad debt expense[47](index=47&type=chunk) - Failure to adequately fund operating and working capital needs through cash from operations or credit agreements could hinder business investment and capital structure maintenance[49](index=49&type=chunk)[50](index=50&type=chunk) - Non-compliance with Credit Agreement covenants could lead to higher financing costs, increased restrictions, or loss of borrowing ability[51](index=51&type=chunk)[52](index=52&type=chunk) - A significant portion of inventory may become obsolete if forecasting is inaccurate or customer demand decreases, leading to increased carrying costs and write-downs[54](index=54&type=chunk) - Work stoppages or disruptions at transportation centers or shipping ports could adversely affect inventory acquisition and timely customer deliveries[56](index=56&type=chunk)[57](index=57&type=chunk) - Changes in customer or product mix, pricing strategy, freight costs, or productivity levels could lead to a decline in gross margin percentage[58](index=58&type=chunk)[59](index=59&type=chunk) - Increases in energy costs, tariffs, and raw material costs could impact cost of goods and distribution expenses, reducing operating margins[60](index=60&type=chunk)[61](index=61&type=chunk) - Disruptions to information and communication systems, including cyber attacks, could materially affect operations, financial condition, and reputation[62](index=62&type=chunk)[63](index=63&type=chunk)[65](index=65&type=chunk) - The inability to successfully recruit, integrate, and retain productive sales representatives and other talented employees could negatively impact operating results[67](index=67&type=chunk)[68](index=68&type=chunk)[70](index=70&type=chunk) - Failure to successfully integrate acquisitions or manage changes in operating processes could disrupt operations and adversely affect results[72](index=72&type=chunk)[73](index=73&type=chunk) - Exposure to foreign currency changes, intense competition, and changes affecting governmental and tax-supported entities are also significant risks[74](index=74&type=chunk)[75](index=75&type=chunk)[76](index=76&type=chunk) - Violations of environmental regulations could lead to significant penalties, fines, or remediation costs, as exemplified by an ongoing environmental matter in Decatur, Alabama[78](index=78&type=chunk)[79](index=79&type=chunk)[80](index=80&type=chunk) - Changes in taxation, including tax rates, audits, or laws, could affect operating results and the ability to realize deferred tax assets[81](index=81&type=chunk) - Luther King Capital's significant influence (**47.6% beneficial ownership** as of December 31, 2019) could delay or deter changes in control or other business combinations[82](index=82&type=chunk)[83](index=83&type=chunk) [ITEM 1B. UNRESOLVED STAFF COMMENTS](index=13&type=section&id=Item%201B.%20Unresolved%20Staff%20Comments) The company reported no unresolved staff comments from the SEC - There are no unresolved staff comments[86](index=86&type=chunk) [ITEM 2. PROPERTIES](index=13&type=section&id=Item%202.%20Properties) As of December 31, 2019, Lawson Products, Inc. owned or leased various facilities, including its headquarters, packaging/distribution centers, and multiple distribution and branch locations across the U.S. and Canada Company Facilities as of December 31, 2019 | Location | Segment | Function | Square Footage | Own/Lease | Lease Expiration | | :-------------------------------- | :---------- | :--------------------- | :------------- | :-------- | :--------------- | | United States Chicago, Illinois | Lawson | Headquarters | 86,300 | Lease | March 2023 | | McCook, Illinois | Lawson | Packaging/Distribution | 306,800 | Lease | June 2022 | | Reno, Nevada | Lawson | Distribution | 105,200 | Lease | June 2024 | | Suwanee, Georgia | Lawson | Distribution | 91,200 | Own | | | (1) Decatur, Alabama | Lawson | Lease | 88,200 | Own | | | Dayton, OH | Lawson | Distribution | 4,500 | Lease | Monthly | | Canada Mississauga, Ontario | Lawson | Distribution | 78,000 | Own | | | (2) Calgary, Alberta | Lawson/Bolt | Distribution | 43,700 | Lease | December 2021 | | Calgary, Alberta (Foothills) | Bolt | Branch | 11,200 | Lease | April 2024 | | Calgary, Alberta (South) | Bolt | Branch | 10,300 | Lease | November 2023 | | Calgary, Alberta (North) | Bolt | Branch | 6,900 | Lease | January 2024 | | Edmonton, Alberta (North) | Bolt | Branch | 6,000 | Lease | February 2022 | | Edmonton, Alberta (South) | Bolt | Branch | 5,600 | Lease | September 2023 | | Fort McMurray, Alberta | Bolt | Branch | 7,500 | Lease | February 2024 | | Lethbridge, Alberta | Bolt | Branch | 3,400 | Own | | | Medicine Hat, Alberta | Bolt | Branch | 4,900 | Own | | | Port Kells, British Columbia | Bolt | Branch | 12,000 | Lease | August 2023 | | Prince Albert, Saskatchewan | Bolt | Branch | 4,300 | Lease | October 2020 | | Red Deer, Alberta | Bolt | Branch | 4,100 | Lease | July 2020 | | Regina, Saskatchewan | Bolt | Branch | 4,800 | Lease | December 2029 | | Saskatoon, Saskatchewan | Bolt | Branch | 10,800 | Lease | May 2021 | | Winnipeg, Manitoba | Bolt | Branch | 7,500 | Lease | September 2025 | [ITEM 3. LEGAL PROCEEDINGS](index=14&type=section&id=Item%203.%20Legal%20Proceedings) The company is involved in routine legal actions, but management believes that the resolution of any pending litigation will not materially impact its financial position, results of operations, or cash flows - Management believes that the resolution of any currently pending litigation will not have a material adverse effect on the Company's financial position, results of operations or cash flows[90](index=90&type=chunk) [ITEM 4. MINE SAFETY DISCLOSURES](index=14&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is not applicable to the company's operations - Mine Safety Disclosures are not applicable[91](index=91&type=chunk) [PART II](index=15&type=section&id=PART%20II) This section details the market for common equity, selected financial data, management's discussion and analysis, financial statements, and controls and procedures [ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES](index=15&type=section&id=Item%205.%20Market%20for%20Registrant's%20Common%20Equity,%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) Lawson Products' common stock trades on NASDAQ, with no dividends issued in 2018 or 2019, and Q4 2019 share repurchases primarily for tax withholding obligations - Lawson Products' Common Stock is traded on the NASDAQ Global Select Market under the symbol '**LAWS**'[93](index=93&type=chunk) - As of January 31, 2020, the closing sales price was **$47.22**, and there were **298 stockholders of record**[93](index=93&type=chunk) - No dividends were issued in 2019 or 2018, and there are no current plans to issue dividends, subject to Credit Agreement restrictions[93](index=93&type=chunk) Common Stock Repurchases for Q4 2019 | Period | Total Shares Purchased | Average Price Paid per Share | Shares Purchased under Publicly Announced Plans or Programs | Maximum Dollar Value Remaining under Plans or Programs | | :------------------------------- | :--------------------- | :--------------------------- | :---------------------------------------------------------- | :----------------------------------------------------- | | October 1 to October 31, 2019 | 333 | $41.08 | — | $6,266,000 | | November 1 to November 30, 2019 | — | — | — | $6,266,000 | | December 1 to December 31, 2019 | 60,451 | $52.10 | — | $6,266,000 | | Three months ended December 31, 2019 | 60,784 | | — | | - Shares repurchased in Q4 2019 were solely to satisfy tax withholding obligations of employees upon vesting of market stock units, not under the **$7.5 million repurchase program** authorized in Q2 2019[94](index=94&type=chunk) [ITEM 6. SELECTED FINANCIAL DATA](index=16&type=section&id=Item%206.%20Selected%20Financial%20Data) This section provides a five-year summary of selected financial data, highlighting net sales, net income (loss), diluted EPS, total assets, noncurrent liabilities, and stockholders' equity, with notes on key events Selected Financial Data (2015-2019) | Metric | 2019 | 2018 | 2017 | 2016 | 2015 | | :----------------------------------- | :--------- | :--------- | :--------- | :--------- | :--------- | | Net sales (in thousands) | $370,785 | $349,637 | $305,907 | $276,573 | $275,834 | | Net income (loss) (in thousands) | $7,221 | $6,214 | $29,688 | $(1,629) | $297 | | Diluted income (loss) per share | $0.77 | $0.67 | $3.25 | $(0.19) | $0.03 | | Total assets (in thousands) | $204,429 | $197,142 | $191,111 | $135,307 | $133,094 | | Noncurrent liabilities (in thousands) | $39,498 | $31,760 | $37,644 | $34,737 | $35,487 | | Stockholders' equity (in thousands) | $108,001 | $99,173 | $93,490 | $61,133 | $61,264 | - 2019 financial data includes Screw Products, Inc. for the full year[99](index=99&type=chunk) - 2018 financial data includes Bolt for the full year and a **$0.5 million increase** in estimated environmental remediation costs[100](index=100&type=chunk) - 2017 financial data includes a **$19.6 million income tax benefit**, primarily from releasing **$21.2 million in Deferred Tax Asset valuation reserves**, and a **$5.4 million gain** on the sale of the Fairfield, New Jersey distribution center[101](index=101&type=chunk) - 2015 financial data includes a **$0.9 million expense** related to an increase in estimated environmental remediation costs for the Decatur, Alabama land[102](index=102&type=chunk) [ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS](index=17&type=section&id=Item%207.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section provides an overview of Lawson Products' financial performance and condition, detailing results for 2019 compared to 2018, covering sales, gross profit, operating expenses, liquidity, and critical accounting policies - The North American MRO industry is highly fragmented and influenced by the U.S. manufacturing sector, as indicated by the PMI index (average monthly PMI was **51.2 in 2019** vs. **58.8 in 2018**, showing a reduction in growth rate)[105](index=105&type=chunk) - Average Daily Sales (ADS) improved to **$1.471 million in 2019** from **$1.393 million in 2018**, with a **2.0% increase** in average sales representatives[106](index=106&type=chunk)[120](index=120&type=chunk) - Key 2019 activities included signing a new credit agreement increasing borrowing capacity from **$40 million to $100 million**, authorizing a **$7.5 million share repurchase plan**, continuing Lean Six Sigma training for over **100 employees**, and improving operational performance and customer service levels[108](index=108&type=chunk)[109](index=109&type=chunk) [Results of Operations for 2019 as Compared to 2018](index=18&type=section&id=Results%20of%20Operations%20for%202019%20as%20Compared%20to%202018) In 2019, consolidated net sales increased by 6.0% to $370.8 million, driven by improved sales productivity and strong Bolt performance, while gross profit margin decreased and adjusted operating income significantly increased Consolidated Statements of Income (2019 vs. 2018) | Metric (in thousands) | 2019 Amount | 2019 % of Net Sales | 2018 Amount | 2018 % of Net Sales | Year-to-Year Change Amount | Year-to-Year Change % | | :-------------------------------- | :---------- | :------------------ | :---------- | :------------------ | :------------------------- | :-------------------- | | Net sales | $370,785 | 100.0% | $349,637 | 100.0% | $21,148 | 6.0% | | Cost of goods sold | $173,431 | 46.8% | $160,097 | 45.8% | $13,334 | 8.3% | | Gross profit | $197,354 | 53.2% | $189,540 | 54.2% | $7,814 | 4.1% | | Selling expenses | $85,342 | 23.0% | $87,642 | 25.1% | $(2,300) | (2.6)% | | General and administrative expenses | $102,946 | 27.8% | $92,688 | 26.5% | $10,258 | 11.1% | | Total operating expenses | $188,288 | 50.8% | $180,330 | 51.6% | $7,958 | 4.4% | | Operating income | $9,066 | 2.4% | $9,210 | 2.6% | $(144) | | | Interest expense | $(603) | (0.1)% | $(1,009) | (0.2)% | $406 | | | Other income (expense), net | $1,211 | 0.3% | $(1,338) | (0.4)% | $2,549 | | | Income before income taxes | $9,674 | 2.6% | $6,863 | 2.0% | $2,811 | | | Income tax expense | $2,453 | 0.7% | $649 | 0.2% | $1,804 | | | Net income | $7,221 | 1.9% | $6,214 | 1.8% | $1,007 | | Reconciliation of GAAP Operating Income to Adjusted Non-GAAP Operating Income (2019 vs. 2018) | Metric (in Thousands) | 2019 | 2018 | | :------------------------------------- | :----- | :----- | | Operating income as reported per GAAP | $9,066 | $9,210 | | Stock-based compensation | $17,788 | $7,508 | | Severance expense | $1,756 | $849 | | Building impairment | — | $231 | | Acquisition related costs | — | $230 | | Discontinued operations accrual | — | $529 | | Real estate gain | — | $(164) | | Adjusted non-GAAP operating Income | $28,610 | $18,393 | [Sales and Gross Profits](index=20&type=section&id=Sales%20and%20Gross%20Profits) Consolidated net sales increased 6.0% to $370.8 million in 2019, driven by improved sales productivity and acquisitions, but gross profit margin decreased due to higher service-related costs and lower margins from Bolt and Screw Products Sales and Gross Profit by Operating Segment (2019 vs. 2018) | Metric (in thousands) | 2019 Amount | 2018 Amount | Increase (Decrease) Amount | Increase (Decrease) % | | :-------------------- | :---------- | :---------- | :------------------------- | :-------------------- | | **Net sales** | | | | | | Lawson | $329,367 | $313,095 | $16,272 | 5.2% | | Bolt | $41,418 | $36,542 | $4,876 | 13.3% | | Consolidated | $370,785 | $349,637 | $21,148 | 6.0% | | **Gross profit** | | | | | | Lawson | $181,567 | $175,517 | $6,050 | 3.4% | | Bolt | $15,787 | $14,023 | $1,764 | 12.6% | | Consolidated | $197,354 | $189,540 | $7,814 | 4.1% | | **Gross profit margin** | | | | | | Lawson | 55.1% | 56.1% | | | | Bolt | 38.1% | 38.4% | | | - Consolidated sales increased **6.6% year over year**, excluding the impact of currency fluctuations of **$1.9 million**[120](index=120&type=chunk) - The decrease in consolidated gross profit margin was primarily due to higher service-related costs and lower gross margins from the Bolt Supply and Screw Products businesses[121](index=121&type=chunk) [Selling, General and Administrative Expenses](index=21&type=section&id=Selling,%20General%20and%20Administrative%20Expenses) Selling expenses decreased by 2.6% to $85.3 million in 2019 due to leveraging over higher sales, while general and administrative expenses increased by 11.1% to $102.9 million, primarily from higher stock-based compensation Selling, General and Administrative Expenses (2019 vs. 2018) | Metric (in thousands) | 2019 Amount | 2018 Amount | Increase (Decrease) Amount | Increase (Decrease) % | | :-------------------------------- | :---------- | :---------- | :------------------------- | :-------------------- | | **Selling expenses** | | | | | | Lawson | $81,999 | $84,536 | $(2,537) | (3.0)% | | Bolt | $3,343 | $3,106 | $237 | 7.6% | | Consolidated | $85,342 | $87,642 | $(2,300) | (2.6)% | | **General and administrative expenses** | | | | | | Lawson | $93,085 | $83,480 | $9,605 | 11.5% | | Bolt | $9,861 | $9,208 | $653 | 7.1% | | Consolidated | $102,946 | $92,688 | $10,258 | 11.1% | - The decrease in selling expense as a percent of sales was primarily due to leveraging selling expenses over a higher sales base and higher service-related costs included in gross margins[123](index=123&type=chunk) - General and administrative expenses increased primarily due to a **$10.3 million increase** in stock-based compensation expense and a **$0.9 million increase** in severance expense[124](index=124&type=chunk) [Interest Expense](index=21&type=section&id=Interest%20Expense) Interest expense decreased by $0.4 million in 2019 compared to the prior year, mainly due to lower average outstanding debt balances - Interest expenses decreased **$0.4 million in 2019** over the prior year, due primarily to lower average outstanding balances throughout the year[125](index=125&type=chunk) [Other Income (expense), Net](index=21&type=section&id=Other%20Income%20(expense),%20Net) Other income, net, was $1.2 million in 2019, a significant improvement from an other expense, net, of $1.3 million in 2018, with fluctuations primarily driven by Canadian currency exchange rates - Other income, net was **$1.2 million in 2019** compared to other expense, net of **$1.3 million in 2018**, driven by fluctuations in the Canadian currency exchange rate[126](index=126&type=chunk) [Income Tax Expense](index=21&type=section&id=Income%20Tax%20Expense) Income tax expense increased to $2.5 million in 2019, resulting in a 25.4% effective tax rate, up from $0.6 million and a 9.5% effective tax rate in 2018, with the prior year's lower rate due to tax reform finalization - Income tax expenses were **$2.5 million** with a **25.4% effective tax rate for 2019**, compared to **$0.6 million** and a **9.5% effective tax rate for 2018**[127](index=127&type=chunk) - The lower effective tax rate in 2018 was primarily due to the finalization of the calculation for previously untaxed foreign earnings and profits as a result of the 2017 Tax Cuts and Jobs Act[127](index=127&type=chunk) [Liquidity and Capital Resources](index=21&type=section&id=Liquidity%20and%20Capital%20Resources) Cash provided by operating activities decreased to $9.2 million in 2019, largely due to increased cash paid for stock-based compensation, while a new Credit Agreement enhanced revolving commitments to $100.0 million Cash Flow from Operating Activities (2019 vs. 2018) | Metric | 2019 (in millions) | 2018 (in millions) | | :----------------------------------- | :----------------- | :----------------- | | Cash provided by operating activities | $9.2 | $20.3 | | Cash paid for stock-based compensation | $13.4 | $0.1 | Capital Expenditures and Acquisitions (2019 vs. 2018) | Metric | 2019 (in millions) | 2018 (in millions) | | :------------------- | :----------------- | :----------------- | | Capital expenditures | $2.0 | $2.5 | | Screw Products acquisition | — | $5.3 | - In 2019, the company repurchased **32,362 shares** of common stock at an average price of **$38.13** under its **$7.5 million repurchase program**[130](index=130&type=chunk) - A new Credit Agreement was entered into in October 2019, providing **$100.0 million in revolving commitments** maturing October 11, 2024[132](index=132&type=chunk) Credit Agreement Status as of December 31, 2019 | Metric | Value | | :-------------------------------- | :---------- | | Borrowings under Credit Agreement | $2.3 million | | Borrowing availability | $96.7 million | | EBITDA to fixed charges ratio (Requirement: 1.15:1.00) | 10.76:1.00 | | Total net leverage ratio (Requirement: 3.25:1.00) | 0.00:1.00 | - The company was in compliance with all covenants of the Credit Agreement as of December 31, 2019[133](index=133&type=chunk) - The majority of operating leases were recognized as right-of-use assets and lease liabilities on the balance sheet upon adoption of ASU 2016-02 in Q1 2019[135](index=135&type=chunk) - Contractual commitments to purchase product from suppliers and contractors amounted to approximately **$10.9 million** as of December 31, 2019[135](index=135&type=chunk) [Critical Accounting Policies](index=22&type=section&id=Critical%20Accounting%20Policies) The company's critical accounting policies involve significant estimates for allowance for doubtful accounts, inventory reserves, income taxes, goodwill impairment, and revenue recognition, with hypothetical changes impacting financial results - Allowance for Doubtful Accounts: Evaluated based on specific customer inability and historical write-offs. A **1% hypothetical change** in the reserve would affect annual doubtful accounts expense by approximately **$0.4 million**[137](index=137&type=chunk) - Inventory Reserves: Recorded for slow-moving and obsolete inventory based on historical experience and monitoring. A **1% hypothetical change** in the reserve would affect cost of goods sold by **$0.6 million**[138](index=138&type=chunk)[140](index=140&type=chunk)[141](index=141&type=chunk) - Income Taxes: Deferred tax assets/liabilities reflect temporary differences, requiring significant judgment in determining provisions, valuation allowances, and uncertain tax positions[142](index=142&type=chunk) - Goodwill Impairment: Tested annually or when circumstances change, using qualitative factors to determine if fair value is below carrying value[143](index=143&type=chunk) - Revenue Recognition: Involves two performance obligations (products and VMI services), with revenue allocation based on estimated standalone selling prices and service costs requiring judgment[144](index=144&type=chunk) [ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA](index=24&type=section&id=Item%208.%20Financial%20Statements%20and%20Supplementary%20Data) This section presents the audited consolidated financial statements for Lawson Products, Inc. for 2019 and 2018, including balance sheets, income statements, cash flows, and notes, with a key accounting change being the adoption of ASC 842, Leases - The consolidated financial statements for 2019 and 2018 are presented in conformity with GAAP, as audited by BDO USA, LLP[149](index=149&type=chunk) - The company changed its method of accounting for leases during 2019 due to the adoption of Accounting Standards Codification Topic 842, Leases[151](index=151&type=chunk) Consolidated Balance Sheets (as of December 31, 2019 and 2018) | ASSETS (in thousands) | 2019 | 2018 | | :--------------------------------------------------------------------------------------------- | :------- | :------- | | Cash and cash equivalents | $5,495 | $11,883 | | Restricted cash | $802 | $800 | | Accounts receivable, less allowance for doubtful accounts | $38,843 | $37,682 | | Inventories, net | $55,905 | $52,887 | | Miscellaneous receivables and prepaid expenses | $5,377 | $3,653 | | Total current assets | $106,422 | $106,905 | | Property, plant and equipment, less accumulated depreciation and amortization | $16,546 | $23,548 | | Deferred income taxes | $21,711 | $20,592 | | Goodwill | $20,923 | $20,079 | | Cash value of life insurance | $14,969 | $12,599 | | Intangible assets, net | $12,335 | $13,112 | | Right of use assets | $11,246 | — | | Other assets | $277 | $307 | | Total assets | $204,429 | $197,142 | | **LIABILITIES AND STOCKHOLDERS' EQUITY (in thousands)** | | | | Revolving lines of credit | $— | $10,823 | | Accounts payable | $13,789 | $15,207 | | Lease obligation (current) | $3,830 | — | | Accrued expenses and other liabilities | $39,311 | $40,179 | | Total current liabilities | $56,930 | $66,209 | | Revolving line of credit (non-current) | $2,271 | — | | Security bonus plan | $11,840 | $12,413 | | Lease obligation (non-current) | $9,504 | $5,213 | | Deferred compensation | $6,370 | $5,304 | | Deferred tax liability | $6,188 | $2,761 | | Deferred rent liability | $— | $1,963 | | Other liabilities | $3,325 | $4,106 | | Total liabilities | $96,428 | $97,969 | | Total stockholders' equity | $108,001 | $99,173 | | Total liabilities and stockholders' equity | $204,429 | $197,142 | Consolidated Statements of Income and Comprehensive Income (Years Ended December 31, 2019 and 2018) | Metric (in thousands, except per share data) | 2019 | 2018 | | :------------------------------------------- | :------- | :------- | | Product revenue | $330,695 | $310,204 | | Service revenue | $40,090 | $39,433 | | Total revenue | $370,785 | $349,637 | | Product cost of goods sold | $155,304 | $145,493 | | Service cost | $18,127 | $14,604 | | Gross profit | $197,354 | $189,540 | | Selling expenses | $85,342 | $87,642 | | General and administrative expenses | $102,946 | $92,688 | | Operating expenses | $188,288 | $180,330 | | Operating income | $9,066 | $9,210 | | Interest expense | $(603) | $(1,009) | | Other income (expenses), net | $1,211 | $(1,338) | | Income before income taxes | $9,674 | $6,863 | | Income tax expense | $2,453 | $649 | | Net income | $7,221 | $6,214 | | Basic income per share of common stock | $0.81 | $0.70 | | Diluted income per share of common stock | $0.77 | $0.67 | | Basic weighted average shares outstanding | 8,968 | 8,909 | | Diluted weighted average shares outstanding | 9,376 | 9,273 | | Comprehensive income | $8,780 | $3,832 | Consolidated Statements of Cash Flows (Years Ended December 31, 2019 and 2018) | Cash Flow Activities (in thousands) | 2019 | 2018 | | :------------------------------------------ | :------- | :------- | | Net cash provided by operating activities | $9,196 | $20,299 | | Net cash used in investing activities | $(2,028) | $(7,831) | | Net cash used in financing activities | $(13,890) | $(4,490) | | Effect of exchange rate changes on cash | $336 | $(511) | | Increase (decrease) in cash and restricted cash | $(6,386) | $7,467 | | Cash, cash equivalents and restricted cash at end of year | $6,297 | $12,683 | [ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE](index=56&type=section&id=Item%209.%20Changes%20in%20and%20Disagreements%20with%20Accountants%20on%20Accounting%20and%20Financial%20Disclosure) The company reported no changes in or disagreements with accountants on accounting and financial disclosure - There are no changes in and disagreements with accountants on accounting and financial disclosure[309](index=309&type=chunk) [ITEM 9A. CONTROLS AND PROCEDURES](index=56&type=section&id=Item%209A.%20Controls%20and%20Procedures) Management concluded that the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2019, with an unqualified opinion from BDO USA, LLP - The company's disclosure controls and procedures were evaluated as effective as of December 31, 2019[310](index=310&type=chunk) - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2019, based on the COSO framework[315](index=315&type=chunk) - BDO USA, LLP, the independent registered public accounting firm, issued an unqualified opinion on the effectiveness of the company's internal control over financial reporting as of December 31, 2019[317](index=317&type=chunk) - There were no changes in internal control over financial reporting during the last fiscal quarter that materially affected, or are reasonably likely to materially affect, internal control over financial reporting[324](index=324&type=chunk) [ITEM 9B. OTHER INFORMATION](index=59&type=section&id=Item%209B.%20Other%20Information) The company reported no other information required to be disclosed under this item - There is no other information to report[325](index=325&type=chunk) [PART III](index=59&type=section&id=PART%20III) This section provides information on directors, executive officers, corporate governance, executive compensation, security ownership, related transactions, and principal accounting fees [ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE](index=59&type=section&id=Item%2010.%20Directors,%20Executive%20Officers%20and%20Corporate%20Governance) Information regarding directors, executive officers, corporate governance, and the Audit Committee is incorporated by reference from the company's definitive proxy statement, along with the Code of Business Conduct - Information on directors, executive officers, and corporate governance is incorporated by reference from the company's definitive proxy statement[326](index=326&type=chunk)[327](index=327&type=chunk) - Lee Hillman, a member of the Audit Committee, qualifies as an '**audit committee financial expert**' and is independent[328](index=328&type=chunk) - The company has a Code of Business Conduct applicable to all employees and senior financial executives, available on its website[329](index=329&type=chunk) [ITEM 11. EXECUTIVE COMPENSATION](index=59&type=section&id=Item%2011.%20Executive%20Compensation) Information regarding executive compensation is incorporated by reference from the company's definitive proxy statement - Information on executive compensation is incorporated by reference from the company's definitive proxy statement[330](index=330&type=chunk) [ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS](index=60&type=section&id=Item%2012.%20Security%20Ownership%20of%20Certain%20Beneficial%20Owners%20and%20Management%20and%20Related%20Stockholder%20Matters) Information on security ownership is incorporated by reference from the company's definitive proxy statement, detailing outstanding options, warrants, rights, and securities available for future issuance under equity compensation plans - Information on security ownership of certain beneficial owners and management is incorporated by reference from the company's definitive proxy statement[332](index=332&type=chunk) Equity Compensation Plan Information as of December 31, 2019 | Plan category | Number of securities to be issued upon exercise of outstanding options, warrants and rights (1) | Weighted-average exercise price of outstanding options, warrants and rights (1) (2) | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in the first column) | | :--------------------------------------------- | :------------------------------------------------------------------------------ | :---------------------------------------------------------------------------------- | :------------------------------------------------------------------------------------------------------------------------------------------------ | | Equity compensation plans approved by security holders | 349,027 | $27.70 | 279,407 | | Equity compensation plans not approved by security holders | — | — | — | | Total | 349,027 | $27.70 | 279,407 | - The securities to be issued include **90,909 from restricted stock awards**, **178,118 from market stock units**, and **80,000 from stock options**[335](index=335&type=chunk) [ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE](index=60&type=section&id=Item%2013.%20Certain%20Relationships%20and%20Related%20Transactions,%20and%20Director%20Independence) Information regarding certain relationships, related transactions, and director independence is incorporated by reference from the company's definitive proxy statement - Information on certain relationships and related transactions, and director independence is incorporated by reference from the company's definitive proxy statement[337](index=337&type=chunk) [ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES](index=60&type=section&id=Item%2014.%20Principal%20Accounting%20Fees%20and%20Services) Information regarding principal accounting fees and services is incorporated by reference from the company's definitive proxy statement - Information on principal accounting fees and services is incorporated by reference from the company's definitive proxy statement[338](index=338&type=chunk) [PART IV](index=61&type=section&id=PART%20IV) This section lists all exhibits and financial statement schedules filed as part of the Form 10-K, including certifications from the CEO and CFO [ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES](index=61&type=section&id=Item%2015.%20Exhibits,%20Financial%20Statement%20Schedules) This section lists all exhibits and financial statement schedules filed as part of the Form 10-K, including the Index to Financial Statements, Schedule II, and a comprehensive list of corporate and compensation documents, along with CEO and CFO certifications - The report includes an Index to Financial Statements (Item 8) and Schedule II – Valuation and Qualifying Accounts (Item 8)[343](index=343&type=chunk)[344](index=344&type=chunk) - Exhibits include corporate documents (Certificate of Incorporation, By-laws), compensation plans (Executive Deferral Plan, Stock Performance Plan, Equity Compensation Plan), employment agreements, and the Credit Agreement dated October 11, 2019[341](index=341&type=chunk)[347](index=347&type=chunk) - Certifications from the Chief Executive Officer and Chief Financial Officer are included pursuant to 18 U.S.C. Section 1350 and Section 302/906 of the Sarbanes-Oxley Act of 2002[350](index=350&type=chunk) [SIGNATURES](index=64&type=section&id=SIGNATURES) The Form 10-K report is duly signed on behalf of Lawson Products, Inc. by Michael G. DeCata, President, Chief Executive Officer and Director, and Ronald J. Knutson, Executive Vice President, Chief Financial Officer, Treasurer and Controller, as of February 27, 2020 - The report is signed by Michael G. DeCata (President, CEO, and Director) and Ronald J. Knutson (EVP, CFO, Treasurer, and Controller) on February 27, 2020[354](index=354&type=chunk) - Additional signatures from the Board of Directors are included[355](index=355&type=chunk)

Financial Data and Key Metrics Changes - Consolidated sales grew by 7.1% for the quarter, with average daily sales increasing by 5.4% [7][27] - Adjusted EBITDA was $10.3 million for the quarter, representing a 40.9% increase year-over-year [26][37] - Diluted earnings per share were $0.51, compared to a loss of $0.09 in the same quarter of 2018 [28][37] - Cash flows from operations were $10.3 million, resulting in a net cash position of $6.4 million [29][38] Business Line Data and Key Metrics Changes - MRO segment sales increased by 3.7%, while Bolt Supply saw a 15% increase in sales [7][30] - Government business sales rose by 27% compared to Q3 2018, following a 38% increase in Q2 [12] - Strategic accounts sales grew by 7.6% for the quarter [32] Market Data and Key Metrics Changes - Average daily sales for Lawson's organic segment in the U.S. were up 5.7%, while Canadian average daily sales (excluding Bolt Supply) increased by 5.4% in local currency [31] - The overall gross margin for the quarter was reported at 53.4%, with the organic Lawson MRO gross margin at 60.9% [27][33] Company Strategy and Development Direction - The company continues to focus on a three-part growth strategy: expanding the sales team, increasing productivity, and pursuing acquisitions [19][20] - A new $100 million multibank credit facility was announced to support acquisition opportunities and organic growth initiatives [24][20] - The company is well-positioned to drive growth through its value proposition and commitment to continuous improvement [21][22] Management's Comments on Operating Environment and Future Outlook - The management noted a slowing industrial economy but remains confident in the company's ability to drive growth through internal initiatives [22][62] - The company expects to maintain its previously communicated range of 25% to 30% MRO operating leverage for 2019 [21][40] - Management emphasized the increasing value of their services to customers, particularly in light of labor shortages [65][66] Other Important Information - The company integrated Screw Products into its McCook distribution center, enhancing its service offerings [18][52] - Selling, general, and administrative expenses decreased to $44.1 million, primarily due to lower stock-based compensation [35] Q&A Session Summary Question: Why has the company been able to outperform the 25% to 30% operating leverage target? - Management attributed the performance to a combination of sales growth, margin management, and prudent cost management [44] Question: When might the company consider raising its margin goals? - Management indicated that the 10% EBITDA margin is a milestone, not a destination, and they aim to drive it higher [46][47] Question: What are the growth prospects for the Screw Products business? - Management sees potential for growth through value-added services and integration into existing operations [49][52] Question: What does the acquisition pipeline look like? - The company is looking at larger acquisitions and feels confident in its ability to integrate them successfully [55][56] Question: How is the company responding to the slowing industrial economy? - Management believes internal initiatives will help mitigate the impact of economic slowdowns [62][63]

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q (Mark One) ý Quarterly Report under Section 13 OR 15(d) of the Securities Exchange Act of 1934 For quarterly period ended September 30, 2019 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 | --- | --- | |-----------------------------------------------------------------------------|----------------------------------------- ...

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q (Mark One) ý Quarterly Report under Section 13 OR 15(d) of the Securities Exchange Act of 1934 For quarterly period ended June 30, 2019 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 | --- | --- | |-----------------------------------------------------------------------------|------------------------------------------| | ...

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q (Mark One) ý Quarterly Report under Section 13 OR 15(d) of the Securities Exchange Act of 1934 For quarterly period ended March 31, 2019 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 LAWSON PRODUCTS, INC. (Exact name of registrant as specified in its charter) Delaware 36-2229304 (State or other jurisdiction of incorpora ...

PART I [ITEM 1. BUSINESS](index=4&type=section&id=Item%201.%20Business) Lawson Products, Inc. is a North American MRO distributor operating in two segments, Lawson and Bolt, with a strategic focus on VMI and recent acquisitions - Lawson Products, Inc. serves the industrial, commercial, institutional, and government MRO market, incorporated in Illinois in 1952 and reincorporated in Delaware in 1982[9](index=9&type=chunk) - The company operates in two segments: Lawson, offering value-added VMI services, and Bolt, with 14 branches in Western Canada for walk-up business[13](index=13&type=chunk)[14](index=14&type=chunk)[21](index=21&type=chunk) - In October 2018, Lawson acquired Screw Products, Inc. (SPI), a regional bulk industrial products distributor, integrated into the Lawson MRO segment[17](index=17&type=chunk) 2018 Sales Distribution by Segment and Geography | Category | Percentage | | :------- | :--------- | | Bolt Segment Sales (of total) | 10.5% | | Net Sales in United States | 80% | | Net Sales in Canada | 20% | 2018 Product Category Sales Percentages (Lawson Segment) | Product Category | Sales Percentage | | :---------------- | :--------------- | | Fastening systems | 24% | | Cutting tools and abrasives | 15% | | Fluid power | 14% | | Specialty chemicals | 12% | | Electrical | 11% | | Aftermarket automotive supplies | 8% | | Safety | 5% | | Welding and metal repair | 2% | | Other | 9% | | **Total** | **100%** | - As of December 31, 2018, the combined workforce was approximately **1,740 individuals**, with **1,610 in Lawson** and the remainder in Bolt, and approximately **9% covered by collective bargaining agreements**[33](index=33&type=chunk) - The 2019 strategic focus includes organic growth, acquisitions, and operational improvements via Lean Six Sigma to enhance customer experience and efficiency[37](index=37&type=chunk)[42](index=42&type=chunk)[43](index=43&type=chunk) [ITEM 1A. RISK FACTORS](index=9&type=section&id=Item%201A.%20Risk%20Factors) The company faces diverse risks including economic downturns, funding, loan compliance, inventory obsolescence, cyber attacks, and environmental liabilities - Economic downturns or uncertainty may decrease customer spending, increase bankruptcies, and impact receivables collection, potentially increasing bad debt expense[54](index=54&type=chunk) - Inadequate funding of operating and working capital needs through cash from operations or Loan Agreements could negatively impact business investment and capital structure[56](index=56&type=chunk)[57](index=57&type=chunk) - Non-compliance with Loan Agreement covenants could lead to higher financing costs, increased restrictions, or reduced borrowing capacity[58](index=58&type=chunk)[59](index=59&type=chunk) - Inaccurate forecasting or decreased customer demand could lead to significant inventory obsolescence, increasing carrying costs and write-downs[61](index=61&type=chunk) - Changes in customer/product mix, pricing, energy costs, tariffs, and raw material costs could reduce gross margin percentage and operating margins[65](index=65&type=chunk)[66](index=66&type=chunk)[67](index=67&type=chunk)[68](index=68&type=chunk) - Disruptions to information and communication systems, including cyber attacks, could adversely affect operations, financial condition, and reputation[69](index=69&type=chunk)[70](index=70&type=chunk)[71](index=71&type=chunk)[72](index=72&type=chunk) - Inability to recruit, integrate, and retain productive sales representatives and talented employees could negatively impact operating results[74](index=74&type=chunk)[75](index=75&type=chunk)[76](index=76&type=chunk)[77](index=77&type=chunk) - Exposure to foreign currency changes from Canadian subsidiaries could adversely affect financial position and operating results upon U.S. dollar translation[81](index=81&type=chunk) - A Decatur, Alabama facility contains hazardous substances requiring further remediation, with potential additional costs beyond the current **$1.4 million accrual**[87](index=87&type=chunk)[315](index=315&type=chunk) - Luther King Capital's **48% beneficial ownership** provides significant influence over stockholder votes, potentially delaying or deterring control changes[90](index=90&type=chunk) [ITEM 1B. UNRESOLVED STAFF COMMENTS](index=13&type=section&id=Item%201B.%20Unresolved%20Staff%20Comments) The company reported no unresolved staff comments from the SEC - There are no unresolved staff comments[93](index=93&type=chunk) [ITEM 2. PROPERTIES](index=13&type=section&id=Item%202.%20Properties) As of December 31, 2018, Lawson Products owned or leased various facilities across the US and Canada, including headquarters, distribution centers, and branch locations Company Facilities as of December 31, 2018 | Location | Segment | Function | Square Footage | Own/Lease | Lease Expiration | | :------- | :------ | :--------- | :------------- | :-------- | :--------------- | | Chicago, Illinois | Lawson | Headquarters | 86,300 | Lease | March 2023 | | McCook, Illinois | Lawson | Packaging/Distribution | 306,800 | Lease | June 2022 | | Reno, Nevada | Lawson | Distribution | 105,200 | Lease | June 2024 | | Suwanee, Georgia | Lawson | Distribution | 91,200 | Own | - | | Decatur, Alabama | Lawson | Lease | 88,200 | Own | - | | Mississauga, Ontario | Lawson | Distribution | 78,000 | Own | - | | Calgary, Alberta | Lawson/Bolt | Distribution | 43,700 | Lease | December 2021 | | Calgary, Alberta (Foothills) | Bolt | Branch | 11,200 | Lease | April 2024 | | Calgary, Alberta (South) | Bolt | Branch | 10,300 | Lease | November 2023 | | Calgary, Alberta (North) | Bolt | Branch | 6,900 | Lease | January 2024 | | Edmonton, Alberta (North) | Bolt | Branch | 6,000 | Lease | February 2022 | | Edmonton, Alberta (South) | Bolt | Branch | 5,600 | Lease | September 2023 | | Fort McMurray, Alberta | Bolt | Branch | 7,500 | Lease | March 2019 | | Lethbridge, Alberta | Bolt | Branch | 3,400 | Own | - | | Medicine Hat, Alberta | Bolt | Branch | 4,900 | Own | - | | Prince Albert, Saskatchewan | Bolt | Branch | 4,300 | Lease | October 2020 | | Red Deer, Alberta | Bolt | Branch | 4,100 | Lease | July 2020 | | Regina, Saskatchewan | Bolt | Branch | 4,800 | Lease | December 2019 | | Saskatoon, Saskatchewan | Bolt | Branch | 10,800 | Lease | May 2021 | | Winnipeg, Manitoba | Bolt | Branch | 7,500 | Lease | September 2025 | | Port Kells, British Columbia | Bolt | Branch | 12,000 | Lease | August 2023 | - The company sub-leased approximately **17,100 square feet** of its Chicago headquarters through June 2019[94](index=94&type=chunk) - Lawson and Bolt manage separate distribution operations from the same physical location in Calgary, Alberta[96](index=96&type=chunk) [ITEM 3. LEGAL PROCEEDINGS](index=14&type=section&id=Item%203.%20Legal%20Proceedings) Management believes the resolution of routine legal actions will not materially impact the company's financial position or operations - Management believes that the resolution of any currently pending litigation will not materially adversely affect the Company's financial position, results of operations, or cash flows[98](index=98&type=chunk) [ITEM 4. MINE SAFETY DISCLOSURES](index=14&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is not applicable to Lawson Products, Inc - This item is not applicable[99](index=99&type=chunk) PART II [ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES](index=15&type=section&id=Item%205.%20Market%20for%20Registrant%27s%20Common%20Equity%2C%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) Lawson Products' common stock trades on NASDAQ, with no dividends issued in 2017-2018 and limited share repurchases for tax obligations - The Company's Common Stock is traded on the NASDAQ Global Select Market under the symbol **"LAWS"**[101](index=101&type=chunk) Common Stock High and Low Sale Prices (2017-2018) | Quarter | 2018 High ($) | 2018 Low ($) | 2017 High ($) | 2017 Low ($) | | :-------- | :------------ | :----------- | :------------ | :----------- | | First Quarter | 28.00 | 22.25 | 28.10 | 21.40 | | Second Quarter | 26.85 | 21.00 | 24.00 | 18.70 | | Third Quarter | 36.90 | 23.19 | 25.65 | 19.30 | | Fourth Quarter | 34.89 | 28.00 | 26.44 | 22.80 | - As of January 31, 2019, the common stock closing sales price was **$29.60**, with **8,962,450 shares outstanding**[1](index=1&type=chunk)[102](index=102&type=chunk) - No dividends were issued in 2018 or 2017, with no current plans for issuance, restricted to **$7.0 million annually** under the Loan Agreement[102](index=102&type=chunk) Common Stock Repurchases for Q4 2018 | Period | Total Shares Purchased | Average Price Paid Per Share ($) | | :----------------------------- | :--------------------- | :----------------------------- | | October 1 to October 31, 2018 | 333 | 29.44 | | November 1 to November 30, 2018 | — | — | | December 1 to December 31, 2018 | 16,179 | 31.60 | | **Three months ended Dec 31, 2018** | **16,512** | **-** | - Share repurchases were solely for employee tax withholding obligations upon market stock unit vesting, with no open market repurchases[103](index=103&type=chunk) [ITEM 6. SELECTED FINANCIAL DATA](index=17&type=section&id=Item%206.%20Selected%20Financial%20Data) Selected financial data for 2014-2018 shows increased 2018 net sales but decreased net income, primarily due to a significant 2017 tax benefit Selected Financial Data (2014-2018) | Metric (in thousands, except per share) | 2018 | 2017 | 2016 | 2015 | 2014 | | :-------------------------------------- | :--- | :--- | :--- | :--- | :--- | | Net sales | $349,637 | $305,907 | $276,573 | $275,834 | $285,693 | | Income (loss) from continuing operations | $6,214 | $29,688 | $(1,629) | $297 | $(6,061) | | Income from discontinued operations | — | — | — | — | $1,692 | | Net income (loss) | $6,214 | $29,688 | $(1,629) | $297 | $(4,369) | | Diluted income (loss) per share: | | | | | | | Continuing operations | $0.67 | $3.25 | $(0.19) | $0.03 | $(0.70) | | Discontinued operations | — | — | — | — | $0.20 | | Net income (loss) | $0.67 | $3.25 | $(0.19) | $0.03 | $(0.50) | | Total assets | $197,142 | $191,111 | $135,307 | $133,094 | $137,840 | | Noncurrent liabilities | $31,760 | $37,644 | $34,737 | $35,487 | $37,257 | | Stockholders' equity | $99,173 | $93,490 | $61,133 | $61,264 | $61,855 | - 2018 results include the full-year impact of Bolt and a **$0.5 million increase** in environmental remediation costs[111](index=111&type=chunk) - 2017 results include a **$19.6 million income tax benefit** from releasing **$21.2 million** in Deferred Tax Asset valuation reserves and a **$5.4 million gain** on property sale[112](index=112&type=chunk) [ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS](index=18&type=section&id=Item%207.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Lawson Products' 2018 net sales increased, but net income decreased due to a 2017 tax benefit and accounting changes, while liquidity remained strong and loan covenants were met - The fragmented North American MRO industry is influenced by the U.S. manufacturing sector, with the average monthly PMI at **59.0 in 2018** indicating improvement[118](index=118&type=chunk) - Key 2018 activities included the acquisition of Screw Products, Inc., Bolt Supply House integration, and Lean Six Sigma training for over **100 employees**[121](index=121&type=chunk) Consolidated Results of Operations (2017 vs. 2018) | Metric (in thousands) | 2018 Amount | 2018 % of Net Sales | 2017 Amount | 2017 % of Net Sales | Change Amount | Change % | | :---------------------- | :---------- | :------------------ | :---------- | :------------------ | :------------ | :------- | | Net sales | $349,637 | 100.0% | $305,907 | 100.0% | $43,730 | 14.3% | | Cost of goods sold | $160,097 | 45.8% | $122,889 | 40.2% | $37,208 | 30.3% | | Gross profit | $189,540 | 54.2% | $183,018 | 59.8% | $6,522 | 3.6% | | Selling expenses | $87,642 | 25.1% | $98,025 | 32.0% | $(10,383) | (10.6)% | | General and administrative expenses | $92,688 | 26.5% | $80,479 | 26.4% | $12,209 | 15.2% | | Total SG&A | $180,330 | 51.6% | $178,504 | 58.4% | $1,826 | 1.0% | | Gain on sale of property | — | — | $(5,422) | (1.8)% | $5,422 | (100.0)% | | Operating income | $9,210 | 2.6% | $9,936 | 3.2% | $(726) | - | | Interest expense | $(1,009) | (0.2)% | $(622) | (0.2)% | $(387) | - | | Other (expense) income, net | $(1,338) | (0.4)% | $780 | 0.3% | $(2,118) | - | | Income before income taxes | $6,863 | 2.0% | $10,094 | 3.3% | $(3,231) | - | | Income tax (benefit) expense | $649 | 0.2% | $(19,594) | (6.4)% | $20,243 | - | | Net income | $6,214 | 1.8% | $29,688 | 9.7% | $(23,474) | - | [Sales and Gross Profits](index=20&type=section&id=Sales%20and%20Gross%20Profits) Net sales increased by **14.3%** in 2018 due to acquisitions, but gross margin percentage decreased to **54.2%** due to ASC 606 reclassification and lower-margin businesses Sales and Gross Profit by Segment (2017 vs. 2018) | Metric (in thousands) | 2018 Lawson | 2018 Bolt | 2018 Consolidated | 2017 Lawson | 2017 Bolt | 2017 Consolidated | Increase (Decrease) Amount | Increase (Decrease) % | | :-------------------- | :---------- | :-------- | :---------------- | :---------- | :-------- | :---------------- | :------------------------- | :-------------------- | | Net sales | $313,095 | $36,542 | $349,637 | $297,953 | $7,954 | $305,907 | $43,730 | 14.3% | | Gross profit | $175,517 | $14,023 | $189,540 | $179,578 | $3,440 | $183,018 | $6,522 | 3.6% | | Gross profit margin | 56.1% | 38.4% | 54.2% | 60.3% | 43.2% | 59.8% | - | - | - Lawson segment sales increased **5.1%** due to enhanced sales representative productivity, MRO market strength, and the Screw Products acquisition[127](index=127&type=chunk) - Average daily sales grew to **$1.393 million** in 2018 from **$1.214 million** in 2017[127](index=127&type=chunk) - Gross margin percentage decreased primarily due to ASC 606 adoption, reclassifying **$14.6 million** of service-related costs, and the inclusion of lower-margin Bolt and Screw Products sales[128](index=128&type=chunk) [Selling, General and Administrative Expenses](index=21&type=section&id=Selling%2C%20General%20and%20Administrative%20Expenses) Selling expenses decreased by **10.6%** due to ASC 606 reclassification, while general and administrative expenses increased by **15.2%** due to stock-based compensation and Bolt inclusion Selling, General and Administrative Expenses by Segment (2017 vs. 2018) | Metric (in thousands) | 2018 Lawson | 2018 Bolt | 2018 Consolidated | 2017 Lawson | 2017 Bolt | 2017 Consolidated | Increase (Decrease) Amount | Increase (Decrease) % | | :---------------------------------- | :---------- | :-------- | :---------------- | :---------- | :-------- | :---------------- | :------------------------- | :-------------------- | | Selling expenses | $84,536 | $3,106 | $87,642 | $97,376 | $649 | $98,025 | $(10,383) | (10.6)% | | General and administrative expenses | $84,103 | $8,585 | $92,688 | $78,460 | $2,019 | $80,479 | $12,209 | 15.2% | - Selling expenses decreased **$10.4 million**, primarily due to ASC 606 adoption reclassifying certain selling-related expenses to gross margin[130](index=130&type=chunk) - General and administrative expenses increased **$12.2 million**, mainly due to a **$7.5 million increase** in stock-based compensation and the full-year inclusion of Bolt[131](index=131&type=chunk) [Gain on sale of properties](index=21&type=section&id=Gain%20on%20sale%20of%20properties) In 2017, Lawson Products recognized a **$5.4 million gain** from the sale of its Fairfield, New Jersey distribution center, receiving **$6.2 million** in net cash proceeds - In 2017, the company received net cash proceeds of **$6.2 million** and recognized a gain of **$5.4 million** from the sale of its Fairfield, New Jersey distribution center[132](index=132&type=chunk) [Interest Expense](index=21&type=section&id=Interest%20Expense) Interest expense increased by **$0.4 million** in 2018, primarily due to higher average borrowings outstanding - Interest expenses increased **$0.4 million** in 2018 over the prior year, primarily due to higher average borrowings outstanding[133](index=133&type=chunk) [Other Income, Net](index=21&type=section&id=Other%20Income%2C%20Net) Other income, net, decreased by **$2.1 million** in 2018, mainly due to unfavorable exchange rate changes on Canadian U.S. dollar receivables - Other income, net decreased **$2.1 million** in 2018 compared to the prior year, primarily due to unfavorable exchange rate changes on U.S. dollar denominated receivables from Canada[134](index=134&type=chunk) [Income Tax (Benefit) Expense](index=21&type=section&id=Income%20Tax%20%28Benefit%29%20Expense) In 2017, Lawson Products recognized a **$19.6 million income tax benefit** from releasing deferred tax asset valuation reserves, shifting to a **$0.6 million expense** in 2018 - In 2017, the company released **$21.2 million** of U.S. valuation allowances on deferred tax assets, resulting in a net tax benefit of **$19.6 million** due to sustained pre-tax profits and net operating loss carryforward utilization[136](index=136&type=chunk)[137](index=137&type=chunk) [Liquidity and Capital Resources](index=22&type=section&id=Liquidity%20and%20Capital%20Resources) Cash from operating activities significantly increased to **$20.3 million** in 2018, funding acquisitions while maintaining a **$40.0 million** credit facility and covenant compliance Cash Provided by Operating Activities (2017 vs. 2018) | Year | Cash Provided by Operating Activities (in millions) | | :--- | :-------------------------------------------------- | | 2018 | $20.3 | | 2017 | $7.2 | - Acquisitions included Bolt Supply House Ltd. for **$32.3 million** in 2017 and Screw Products, Inc. for **$5.2 million** in 2018, funded by cash and existing credit facilities[140](index=140&type=chunk) - The company has a **$40.0 million** revolving credit facility, with **$9.0 million outstanding** and **$27.7 million available** for borrowing as of December 31, 2018[142](index=142&type=chunk)[143](index=143&type=chunk) - Lawson was in compliance with all financial covenants as of December 31, 2018, with an EBITDA to fixed charges ratio of **3.46:1.00** against a requirement of **1.10:1.00**[144](index=144&type=chunk)[148](index=148&type=chunk) - Bolt has a separate Commitment Letter for up to **$5.5 million Canadian dollars**, with **$2.4 million Canadian dollars outstanding** and **$3.1 million Canadian dollars available** as of December 31, 2018, and was in compliance with its covenants[146](index=146&type=chunk) [Off-Balance Sheet Arrangements](index=23&type=section&id=Off-Balance%20Sheet%20Arrangements) Lawson Products has **$10.8 million** in operating lease obligations and **$11.5 million** in product purchase commitments, with most leases to be recognized on-balance sheet in Q1 2019 - Operating lease obligations totaled **$10.8 million**, including **$4.0 million** for headquarters and **$2.7 million** for the Reno distribution center[149](index=149&type=chunk) - The majority of operating leases will be recognized as right-of-use assets and lease liabilities on the balance sheet upon adoption of ASU 2016-02 in Q1 2019[150](index=150&type=chunk) - Contractual commitments to purchase products from suppliers and contractors amounted to approximately **$11.5 million**[150](index=150&type=chunk) [Critical Accounting Policies](index=23&type=section&id=Critical%20Accounting%20Policies) Critical accounting policies involve significant estimates for doubtful accounts, inventory reserves, income taxes, and goodwill impairment, with potential material impacts from changing circumstances - Allowance for Doubtful Accounts: Reserves are based on specific customer inability to pay and historical write-off rates; at December 31, 2018, the reserve was **1.4% of gross accounts receivable**[152](index=152&type=chunk) - Inventory Reserves: A reserve for slow-moving and obsolete inventory is recorded based on historical experience and monitoring; at December 31, 2018, the reserve was **$5.3 million**, or **9.2% of gross inventory**[153](index=153&type=chunk)[154](index=154&type=chunk)[155](index=155&type=chunk) - Income Taxes: Deferred tax assets and liabilities reflect temporary differences, with a valuation allowance established if realization is not more likely than not; a large portion of U.S. valuation allowances was released in 2017[156](index=156&type=chunk)[159](index=159&type=chunk) - Goodwill Impairment: Tested annually or when circumstances change using qualitative factors; no impairment was deemed necessary in 2018[160](index=160&type=chunk) [ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK](index=24&type=section&id=Item%207A.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) As a smaller reporting company, Lawson Products, Inc. is not required to provide quantitative and qualitative disclosures about market risk - As the Company is a smaller reporting company, this item is not applicable[161](index=161&type=chunk) [ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA](index=25&type=section&id=Item%208.%20Financial%20Statements%20and%20Supplementary%20Data) This section presents Lawson Products' audited consolidated financial statements for 2018 and 2017, including auditor's report and detailed notes on accounting policies and financial accounts - The consolidated financial statements for the years ended December 31, 2018 and 2017, conform with U.S. GAAP[166](index=166&type=chunk) - BDO USA, LLP issued an unqualified opinion on the consolidated financial statements and the effectiveness of internal control over financial reporting as of December 31, 2018[166](index=166&type=chunk)[167](index=167&type=chunk) [Report of Independent Registered Public Accounting Firm](index=26&type=section&id=Report%20of%20Independent%20Registered%20Public%20Accounting%20Firm) BDO USA, LLP issued unqualified opinions on Lawson Products' 2018 and 2017 consolidated financial statements and internal control over financial reporting - BDO USA, LLP issued an unqualified opinion on the consolidated financial statements for the two years ended December 31, 2018, affirming fair presentation in conformity with GAAP[166](index=166&type=chunk) - BDO USA, LLP also expressed an unqualified opinion on the Company's internal control over financial reporting as of December 31, 2018, based on COSO criteria[167](index=167&type=chunk) [Consolidated Balance Sheets](index=27&type=section&id=Consolidated%20Balance%20Sheets) As of December 31, 2018, total assets increased to **$197.1 million**, liabilities remained stable, and stockholders' equity rose to **$99.2 million** Consolidated Balance Sheet Highlights (in thousands) | Asset/Liability/Equity | December 31, 2018 | December 31, 2017 | | :--------------------- | :---------------- | :---------------- | | Cash and cash equivalents | $11,883 | $4,416 | | Accounts receivable, net | $37,682 | $38,575 | | Inventories, net | $52,887 | $50,928 | | Total current assets | $106,905 | $98,447 | | Property, plant and equipment, net | $23,548 | $27,333 | | Deferred income taxes | $20,592 | $21,692 | | Goodwill | $20,079 | $19,614 | | Total assets | $197,142 | $191,111 | | Revolving lines of credit | $10,823 | $14,543 | | Accounts payable | $15,207 | $12,394 | | Accrued expenses and other liabilities | $40,179 | $33,040 | | Total current liabilities | $66,209 | $59,977 | | Total liabilities | $97,969 | $97,621 | | Stockholders' equity | $99,173 | $93,490 | [Consolidated Statements of Operations and Comprehensive Income](index=29&type=section&id=Consolidated%20Statements%20of%20Operations%20and%20Comprehensive%20Income) In 2018, total revenue reached **$349.6 million**, but net income significantly decreased to **$6.2 million** due to a 2017 tax benefit and ASC 606 reclassifications Consolidated Statements of Operations and Comprehensive Income (in thousands, except per share) | Metric | 2018 | 2017 | | :----------------------------------- | :--- | :--- | | Product revenue | $310,204 | $305,907 | | Service revenue | $39,433 | — | | Total revenue | $349,637 | $305,907 | | Product cost of goods sold | $145,493 | $122,889 | | Service cost | $14,604 | — | | Gross profit | $189,540 | $183,018 | | Operating income | $9,210 | $9,936 | | Income before income taxes | $6,863 | $10,094 | | Income tax (benefit) expense | $649 | $(19,594) | | Net income | $6,214 | $29,688 | | Basic income per share | $0.70 | $3.35 | | Diluted income per share | $0.67 | $3.25 | | Comprehensive income | $3,832 | $30,549 | - ASC 606 adoption in 2018 led to separate product and service revenue streams and reclassification of **$14.6 million** of service costs from selling expenses to cost of goods sold[176](index=176&type=chunk)[243](index=243&type=chunk) - The significant decrease in net income from 2017 to 2018 is largely attributable to the **$19.6 million income tax benefit** recognized in 2017[176](index=176&type=chunk) [Consolidated Statements of Changes in Stockholders' Equity](index=31&type=section&id=Consolidated%20Statements%20of%20Changes%20in%20Stockholders%27%20Equity) Stockholders' equity increased from **$93.5 million** in 2017 to **$99.2 million** in 2018, driven by net income and stock-based compensation, offset by currency and repurchases Consolidated Statements of Changes in Stockholders' Equity (in thousands) | Metric | Balance at Jan 1, 2017 | Net Income | Stock-based Compensation | Shares Issued | Share Repurchase | Foreign Currency Translation | Balance at Dec 31, 2017 | Change in Accounting Principle (2) | Net Income | Stock-based Compensation | Shares Issued | Share Repurchase | Foreign Currency Translation | Balance at Dec 31, 2018 | | :--------------------------------- | :--------------------- | :--------- | :----------------------- | :------------ | :--------------- | :--------------------------- | :---------------------- | :--------------------------------- | :--------- | :----------------------- | :------------ | :--------------- | :--------------------------- | :---------------------- | | Common Stock, $1 Par Value | $8,865 | — | — | $56 | — | — | $8,921 | — | — | — | $85 | — | — | $9,006 | | Capital in Excess of Par Value | $11,055 | — | $2,006 | $(56) | — | — | $13,005 | — | — | $2,703 | $(85) | — | — | $15,623 | | Retained Earnings | $41,943 | $29,688 | — | — | — | — | $71,453 | $(329) | $6,214 | — | — | — | — | $77,338 | | Treasury Stock | $(691) | — | — | — | $(20) | — | $(711) | — | — | — | — | $(523) | — | $(1,234) | | Accumulated Other Comprehensive Income (Loss) | $(39) | — | — | — | — | $861 | $822 | — | — | — | — | — | $(2,382) | $(1,560) | | **Total Stockholders' Equity** | **$61,133** | **$29,688** | **$2,006** | **—** | **$(20)** | **$861** | **$93,490** | **$(329)** | **$6,214** | **$2,703** | **—** | **$(523)** | **$(2,382)** | **$99,173** | - The company adopted ASU 2016-09 (Stock Compensation) on January 1, 2017, with a cumulative effect adjustment reducing retained earnings by **$178 thousand**[180](index=180&type=chunk)[224](index=224&type=chunk) - The company adopted ASU 2014-09 (Revenue from Contracts with Customers) on January 1, 2018, with a cumulative effect adjustment reducing retained earnings by **$329 thousand**[181](index=181&type=chunk)[243](index=243&type=chunk) [Consolidated Statements of Cash Flows](index=32&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) Net cash from operating activities significantly increased to **$20.3 million** in 2018, while investing and financing activities used **$7.8 million** and **$4.5 million**, respectively Consolidated Statements of Cash Flows (in thousands) | Activity | 2018 | 2017 | | :------------------------------------------------------- | :--- | :--- | | Net cash provided by operating activities | $20,299 | $7,204 | | Net cash used in investing activities | $(7,831) | $(27,365) | | Net cash (used in) provided by financing activities | $(4,490) | $13,381 | | Effect of exchange rate changes on cash | $(511) | $775 | | Increase (decrease) in cash and restricted cash | $7,467 | $(6,005) | | Cash, cash equivalents and restricted cash at end of year | $12,683 | $5,216 | - Operating cash flow increased due to operating results, net of depreciation and amortization, and favorable changes in working capital[139](index=139&type=chunk)[184](index=184&type=chunk) - Investing activities in 2018 included **$5.3 million** for business acquisitions and **$2.5 million** for property, plant, and equipment purchases[141](index=141&type=chunk)[184](index=184&type=chunk) - Financing activities in 2018 included net payments of **$3.7 million** on revolving lines of credit and **$0.5 million** for treasury share repurchases[184](index=184&type=chunk) [Notes to Consolidated Financial Statements](index=34&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) Notes provide detailed information on Lawson Products' business, accounting policies, and impact of recent pronouncements, covering revenue, leases, acquisitions, and financial accounts - Lawson Products operates two segments: Lawson (VMI services via sales reps) and Bolt (MRO products via 14 branches in Western Canada)[188](index=188&type=chunk) - The company acquired Screw Products, Inc. in October 2018 and Bolt Supply House, Ltd. in October 2017[188](index=188&type=chunk) - ASC 606, adopted January 1, 2018, distinguishes product sales and VMI services, reclassifying **$14.6 million** of service-related selling expenses to cost of sales[190](index=190&type=chunk)[243](index=243&type=chunk) - The company will adopt ASU 2016-02 (Leases) on January 1, 2019, expecting to recognize approximately **$6.8 million** in ROU assets and **$8.8 million** in lease liabilities for operating leases[242](index=242&type=chunk) [Note 1 - Description of Business](index=34&type=section&id=Note%201%20-%20Description%20of%20Business) Lawson Products, Inc. is a North American MRO distributor with two segments, Lawson and Bolt, expanded through 2017 and 2018 acquisitions - Lawson Products, Inc. is a North American distributor of products and services to the industrial, commercial, institutional, and government MRO marketplace[188](index=188&type=chunk) - The company has two operating segments: Lawson (MRO products via sales representatives and VMI services) and Bolt (MRO products via 14 branches in Western Canada)[188](index=188&type=chunk) - Acquired The Bolt Supply House, Ltd. in October 2017 and Screw Products, Inc. in October 2018[188](index=188&type=chunk) [Note 2 - Summary of Significant Accounting Policies](index=34&type=section&id=Note%202%20-%20Summary%20of%20Significant%20Accounting%20Policies) This note outlines key accounting policies including revenue recognition, inventory, goodwill, intangible assets, income taxes, leases, and the adoption of recent ASUs - Revenue is recognized from two streams: product sales (when title passes) and VMI services (when performed), with total revenue allocated based on estimated market value of services[190](index=190&type=chunk) - Inventories are stated at the lower of cost (FIFO method) or net realizable value, with reserves for slow-moving and obsolete items based on historical experience and demand forecasting[193](index=193&type=chunk) - Goodwill is tested annually for impairment using qualitative factors; no impairment was found in 2018[200](index=200&type=chunk)[201](index=201&type=chunk) - Intangible assets (trade names, customer relationships) are amortized over weighted average useful lives of **15 and 11 years**, respectively[202](index=202&type=chunk) - Income Taxes: Deferred tax assets and liabilities for temporary differences, with a valuation allowance established if realization is not more likely than not; a large portion of U.S. valuation allowances was released in 2017[204](index=204&type=chunk)[208](index=208&type=chunk) - The company adopted ASU 2016-09 (Stock Compensation) on January 1, 2017, changing accounting for excess tax benefits and forfeitures, resulting in a **$178 thousand reduction** to retained earnings[222](index=222&type=chunk)[224](index=224&type=chunk) - The company adopted ASU 2014-09 (Revenue from Contracts with Customers) on January 1, 2018, using the modified retrospective method, identifying product sales and VMI services as distinct performance obligations[234](index=234&type=chunk)[235](index=235&type=chunk) [Note 3 - Revenue Recognition](index=39&type=section&id=Note%203%20-%20Revenue%20Recognition) ASC 606 adoption on January 1, 2018, led to distinct product and VMI service obligations, reclassifying **$14.6 million** of service expenses and reducing retained earnings by **$0.3 million** - Adoption of ASC 606 on January 1, 2018, led to two separate performance obligations: product sales and VMI services, and a reclassification of **$14.6 million** of service-related selling expenses to cost of sales[243](index=243&type=chunk)[256](index=256&type=chunk) - A cumulative effect adjustment of **$0.3 million** was recorded as a net reduction to opening retained earnings due to ASC 606 adoption[243](index=243&type=chunk)[254](index=254&type=chunk) Disaggregated Revenue by Geographic Area (in thousands) | Geographic Area | 2018 | 2017 (Unaudited) | | :---------------- | :--- | :--------------- | | United States | $279,917 | $266,994 | | Canada | $69,720 | $38,913 | | **Consolidated Total** | **$349,637** | **$305,907** | Disaggregated Revenue by Product Type (2018 vs. 2017) | Product Type | 2018 (Unaudited) | 2017 (Unaudited) | | :-------------------------- | :--------------- | :--------------- | | Fastening Systems | 24% | 21% | | Cutting Tools and Abrasives | 15% | 14% | | Fluid Power | 14% | 15% | | Specialty Chemicals | 12% | 14% | | Electrical | 11% | 11% | | Aftermarket Automotive Supplies | 8% | 9% | | Safety | 5% | 4% | | Welding and Metal Repair | 2% | 2% | | Other | 9% | 10% | | **Consolidated Total** | **100%** | **100%** | [Note 4 - Leases](index=42&type=section&id=Note%204%20-%20Leases) Lawson Products will adopt ASC 842 on January 1, 2019, recognizing approximately **$6.8 million** in ROU assets and **$8.8 million** in lease liabilities, with a **$1.9 million increase** to retained earnings - The company will adopt ASC 842 (Leases) on January 1, 2019, using the modified retrospective method[262](index=262&type=chunk) - Upon adoption, the company anticipates recognizing approximately **$6.8 million** in ROU assets and **$8.8 million** in lease liabilities for operating leases, and a **$1.9 million increase** to beginning retained earnings[262](index=262&type=chunk) - The McCook distribution facility's financing lease will be derecognized and reassessed, with the associated land lease reclassified as a financing lease[262](index=262&type=chunk) [Note 5 - Acquisitions](index=43&type=section&id=Note%205%20-%20Acquisitions) In 2018, Screw Products, Inc. was acquired for **$5.2 million**, and in 2017, Bolt Supply House Ltd. for **$32.3 million**, impacting net sales and net income pro forma - In October 2018, Screw Products, Inc. was acquired for **$5.2 million**, with **$2.6 million** allocated to customer relationships, **$0.5 million** to trade names, and **$1.9 million** to goodwill[264](index=264&type=chunk)[268](index=268&type=chunk) - In October 2017, The Bolt Supply House Ltd. was acquired for **$32.3 million**, with **$7.2 million** allocated to trade names, **$4.2 million** to customer relationships, and **$14.2 million** to goodwill[265](index=265&type=chunk)[266](index=266&type=chunk)[268](index=268&type=chunk) Unaudited Pro Forma Net Sales and Net Income (in thousands) | Metric | 2018 Actual | 2018 Pro Forma | 2017 Actual | 2017 Pro Forma | | :--------- | :---------- | :------------- | :---------- | :------------- | | Net Sales | $349,637 | $351,916 | $305,907 | $334,554 | | Net Income | $6,214 | $6,674 | $29,688 | $31,111 | [Note 6 — Restricted Cash](index=45&type=section&id=Note%206%20%E2%80%94%20Restricted%20Cash) Lawson Products maintains **$0.8 million** in restricted cash as collateral for commercial card processing services, not withdrawable without prior consent - The company maintains **$0.8 million** in a money market account as restricted cash, serving as collateral for commercial card processing services[272](index=272&type=chunk) [Note 7 – Inventories, net](index=45&type=section&id=Note%207%20%E2%80%93%20Inventories%2C%20net) As of December 31, 2018, net inventories increased to **$52.9 million**, net of a **$5.3 million reserve** for obsolete and excess inventory Inventories, Net (in thousands) | Metric | December 31, 2018 | December 31, 2017 | | :---------------------------------- | :---------------- | :---------------- | | Inventories, gross | $58,215 | $56,492 | | Reserve for obsolete and excess inventory | $(5,328) | $(5,564) | | **Inventories, net** | **$52,887** | **$50,928** | [Note 8 - Property, Plant and Equipment](index=45&type=section&id=Note%208%20-%20Property%2C%20Plant%20and%20Equipment) Net property, plant, and equipment decreased to **$23.5 million** in 2018, reflecting depreciation and a **$0.2 million impairment charge** for a Decatur, Alabama building Components of Property, Plant and Equipment (in thousands) | Component | December 31, 2018 | December 31, 2017 | | :------------------------------------------ | :---------------- | :---------------- | | Land | $2,565 | $2,752 | | Buildings and improvements | $16,858 | $16,973 | | Machinery and equipment | $23,955 | $23,277 | | Capitalized software | $21,738 | $21,947 | | McCook facility | $12,961 | $12,961 | | Furniture and fixtures | $5,884 | $5,634 | | Capital leases | $684 | $806 | | Vehicles | $190 | $214 | | Construction in progress | $391 | $375 | | **Total Gross** | **$85,226** | **$84,939** | | Accumulated depreciation and amortization | $(61,678) | $(57,606) | | **Net Property, Plant and Equipment** | **$23,548** | **$27,333** | - In 2018, an impairment charge of **$0.2 million** was recognized for a building in Decatur, Alabama, as the company expects to exercise its put option[275](index=275&type=chunk) - In 2017, the company recognized a **$5.4 million gain** from the sale of its Fairfield, New Jersey distribution center[274](index=274&type=chunk) [Note 9 - Goodwill](index=46&type=section&id=Note%209%20-%20Goodwill) Goodwill increased to **$20.1 million** in 2018 due to the Screw Products acquisition; no impairment was deemed necessary after Q4 2018 testing Goodwill Activity (in thousands) | Metric | 2018 | 2017 | | :---------------------------------- | :--- | :--- | | Beginning balance | $19,614 | $5,520 | | Acquisition | $2,086 | $14,176 | | Impact of foreign exchange | $(1,452) | $(9) | | Adjustment to prior year allocation | $(169) | $(73) | | **Ending balance** | **$20,079** | **$19,614** | - Goodwill increased primarily due to the Screw Products acquisition in 2018[277](index=277&type=chunk) - Goodwill was tested for impairment in the fourth quarter of 2018, and no adjustment was deemed necessary[278](index=278&type=chunk) [Note 10 - Intangible assets](index=46&type=section&id=Note%2010%20-%20Intangible%20assets) Net intangible assets increased to **$13.1 million** in 2018, with amortization expense of **$0.9 million**, and projected aggregate amortization of **$1.35 million** in 2019 Intangible Assets (in thousands) | Intangible Asset | 2018 Gross Carrying Amount | 2018 Accumulated Amortization | 2018 Net Carrying Value | 2017 Gross Carrying Amount | 2017 Accumulated Amortization | 2017 Net Carrying Value | | :----------------- | :------------------------- | :---------------------------- | :---------------------- | :------------------------- | :---------------------------- | :---------------------- | | Trade names | $8,090 | $(1,447) | $6,643 | $8,182 | $(957) | $7,225 | | Customer relationships | $7,114 | $(645) | $6,469 | $4,911 | $(323) | $4,588 | | **Total** | **$15,204** | **$(2,092)** | **$13,112** | **$13,093** | **$(1,280)** | **$11,813** | - Amortization expense for intangible assets was **$0.9 million** in 2018 and **$0.4 million** in 2017[279](index=279&type=chunk) Estimated Aggregate Amortization Expense for Intangible Assets (in thousands) | Year | Amortization | | :--- | :----------- | | 2019 | $1,352 | | 2020 | $1,492 | | 2021 | $1,600 | | 2022 | $1,406 | | 2023 | $1,292 | | Thereafter | $5,970 | | **Total** | **$13,112** | [Note 11 – Income Taxes](index=47&type=section&id=Note%2011%20%E2%80%93%20Income%20Taxes) Income before taxes was **$6.9 million** in 2018, with a **$0.6 million tax expense**, a shift from a **$19.6 million benefit** in 2017 due to valuation allowance release and tax reform Income (Loss) from Operations Before Income Taxes by Geography (in thousands) | Geographic Area | 2018 | 2017 | | :---------------- | :--- | :--- | | United States | $6,839 | $10,159 | | Canada | $24 | $(65) | | **Total** | **$6,863** | **$10,094** | Provision (Benefit) for Income Taxes from Operations (in thousands) | Tax Type | 2018 | 2017 | | :--------------------------------- | :--- | :--- | | Current income tax expense (benefit): | | | | U.S. federal | — | $296 | | U.S. state | $165 | $129 | | Canada | $257 | $1,209 | | **Total Current** | **$422** | **$1,634** | | Deferred income tax expense (benefit): | | | | U.S. federal | $721 | $(17,971) | | U.S. state | $(464) | $(3,257) | | Canada | $(30) | — | | **Total Deferred** | **$227** | **$(21,228)** | | **Total Income Tax Expense (Benefit)** | **$649** | **$(19,594)** | - The 2017 income tax benefit of **$19.6 million** was primarily due to the release of **$21.2 million** in U.S. deferred tax asset valuation allowances[285](index=285&type=chunk)[288](index=288&type=chunk) - The Tax Cuts and Jobs Act of 2017 reduced the U.S. corporate income tax rate from **35% to 21%** and impacted foreign earnings calculations, leading to a 2018 tax benefit from lower final foreign earnings inclusion[288](index=288&type=chunk)[289](index=289&type=chunk)[290](index=290&type=chunk) - As of December 31, 2018, the company had **$20.2 million** in U.S. federal net operating loss carryforwards and **$20.5 million** in state net operating loss carryforwards[283](index=283&type=chunk) Net Deferred Tax Assets (in thousands) | Metric | December 31, 2018 | December 31, 2017 | | :------------------------------------------ | :---------------- | :---------------- | | Total deferred tax assets | $23,161 | $24,248 | | Total deferred liabilities | $2,761 | $3,559 | | Net deferred tax assets before valuation allowance | $20,400 | $20,689 | | Valuation allowance | $(2,569) | $(2,556) | | **Net deferred tax assets** | **$17,831** | **$18,133** | [Note 12 - Accrued Expenses and Other Liabilities](index=50&type=section&id=Note%2012%20-%20Accrued%20Expenses%20and%20Other%20Liabilities) Accrued expenses and other liabilities increased to **$40.2 million** in 2018, driven by higher stock-based compensation, accrued compensation, and environmental remediation accrual Accrued Expenses and Other Liabilities (in thousands) | Liability | December 31, 2018 | December 31, 2017 | | :------------------------------------------ | :---------------- | :---------------- | | Accrued compensation | $10,740 | $9,044 | | Accrued stock-based compensation (stock performance rights) | $13,458 | $8,712 | | Accrued and withheld taxes, other than income taxes | $1,674 | $1,136 | | Environmental remediation accrual | $1,376 | $968 | | Financing lease obligation | $1,207 | $1,123 | | Accrued profit sharing | $899 | $894 | | Deferred revenue | $693 | — | | Accrued health benefits | $614 | $657 | | Accrued severance | $304 | $483 | | Other | $9,214 | $10,023 | | **Total** | **$40,179** | **$33,040** | [Note 13 – Loan Agreements](index=51&type=section&id=Note%2013%20%E2%80%93%20Loan%20Agreements) Lawson Products has a **$40.0 million** revolving credit facility, with **$27.7 million available** and covenant compliance; Bolt has a separate **$5.5 million CAD** facility - Lawson Products has a **$40.0 million** revolving credit facility, expiring August 2020, with **$9.0 million outstanding** and **$27.7 million available** as of December 31, 2018[298](index=298&type=chunk)[301](index=301&type=chunk) - The company was in compliance with all financial covenants as of December 31, 2018, including an EBITDA to fixed charges ratio of **3.46:1.00** against a requirement of **1.10:1.00**[302](index=302&type=chunk) - Bolt has a Commitment Letter for up to **$5.5 million Canadian dollars**, with **$2.4 million Canadian dollars outstanding** and **$3.1 million Canadian dollars available** as of December 31, 2018, and was in compliance with its covenants[303](index=303&type=chunk) - Dividends are restricted to **$7.0 million annually** under the Loan Agreement[300](index=300&type=chunk) [Note 14 – Reserve for Severance](index=52&type=section&id=Note%2014%20%E2%80%93%20Reserve%20for%20Severance) Severance reserve decreased to **$0.36 million** in 2018, with most remaining liabilities expected to be paid by the end of 2019 Reserve for Severance Activity (in thousands) | Metric | 2018 | 2017 | | :-------------------- | :--- | :--- | | Beginning balance | $483 | $1,710 | | Charged to earnings | $848 | $738 | | Cash paid | $(972) | $(1,965) | | **Ending balance** | **$359** | **$483** | - The majority of remaining severance liabilities outstanding as of December 31, 2018, will be paid by the end of 2019[306](index=306&type=chunk) [Note 15 - Commitments and Contingencies](index=52&type=section&id=Note%2015%20-%20Commitments%20and%20Contingencies) Total rental expense was **$3.3 million** in 2018, with **$10.8 million** in operating lease commitments and a **$1.4 million** environmental remediation accrual for Decatur, Alabama Future Minimum Lease Commitments as of December 31, 2018 (in thousands) | Year Ended December 31, | Operating Leases | Financing Lease | Capital Leases | | :---------------------- | :--------------- | :-------------- | :------------- | | 2019 | $2,574 | $1,395 | $201 | | 2020 | $2,369 | $1,444 | $155 | | 2021 | $2,349 | $1,493 | $91 | | 2022 | $2,008 | $760 | $11 | | 2023 | $1,130 | — | — | | Thereafter | $374 | — | — | | **Total** | **$10,804** | **$5,092** | **$458** | - Total rental expense was **$3.3 million** in 2018, up from **$2.6 million** in 2017[307](index=307&type=chunk) - A **$0.2 million net gain** was recognized in 2018 from agreements to terminate the corporate headquarters lease and sub-lease in June 2019[311](index=311&type=chunk) - The environmental remediation accrual for the Decatur, Alabama site increased by an additional **$0.5 million** in 2018, bringing the total liability to **$1.4 million**, with the approved plan commencing in Q1 2019[315](index=315&type=chunk) [Note 16 - Retirement and Security Bonus Plans](index=53&type=section&id=Note%2016%20-%20Retirement%20and%20Security%20Bonus%20Plans) Lawson Products offers 401(k) and Canadian retirement plans, with 2018 contributions of **$3.0 million** and **$0.3 million**, respectively, plus profit-sharing and security bonus plans - 401(k) plan contributions were **$3.0 million** in 2018 and **$3.1 million** in 2017[316](index=316&type=chunk) - Canadian retirement plans (DPSP, RRSP) contributions were **$0.3 million** in both 2018 and 2017[317](index=317&type=chunk) - Profit sharing plan expenses were **$0.7 million** in both 2018 and 2017[318](index=318&type=chunk) - Security bonus plan expenses were **$0.6 million** in 2018 and **$0.5 million** in 2017, partially funded by a **$5.6 million investment** in life insurance cash surrender value[320](index=320&type=chunk) [Note 17 – Stock-Based Compensation Plans](index=54&type=section&id=Note%2017%20%E2%80%93%20Stock-Based%20Compensation%20Plans) Lawson Products operates Equity and SPR Plans, with 2018 compensation expenses of **$4.8 million** for SPRs, **$1.4 million** for RSAs, **$1.2 million** for MSUs, and **$0.1 million** for stock options - The Equity Plan allows grants of nonqualified and incentive stock options, stock awards, and stock units, with approximately **96,000 shares available** as of December 31, 2018[321](index=321&type=chunk) - The SPR Plan provides cash awards equal to common stock appreciation, with a liability of **$13.5 million** for estimated future pay-outs as of December 31, 2018[322](index=322&type=chunk)[325](index=325&type=chunk) Stock-Based Compensation Expenses (in millions) | Plan Type | 2018 Expense | 2017 Expense | | :-------------------- | :----------- | :----------- | | Stock Performance Rights (SPRs) | $4.8 | $1.2 | | Restricted Stock Awards (RSAs) | $1.4 | $0.9 | | Market Stock Units (MSUs) | $1.2 | $0.9 | | Stock Options | $0.1 | $0.2 | Outstanding Stock-Based Awards as of December 31, 2018 | Award Type | Number Outstanding | Weighted Average Exercise Price ($) | | :-------------------- | :----------------- | :-------------------------------- | | Stock Performance Rights (SPRs) | 958,521 | 19.75 | | Restricted Stock Awards (RSAs) | 119,256 | - | | Market Stock Units (MSUs) | 193,135 | - | | Stock Options | 83,471 | 27.14 | [Note 18 – Segment Information](index=57&type=section&id=Note%2018%20%E2%80%93%20Segment%20Information) Lawson Products operates two segments: Lawson, with **$313.1 million** net sales and **$7.5 million** operating income, and Bolt, with **$36.5 million** net sales and **$1.7 million** operating income - The company operates in two reportable segments: Lawson (sales representatives, VMI services) and Bolt (14 branch locations, point-of-sale product delivery)[336](index=336&type=chunk) Segment Financial Information (in thousands) | Metric | 2018 Lawson | 2018 Bolt | 2018 Consolidated | 2017 Lawson | 2017 Bolt | 2017 Consolidated | | :-------------------------- | :---------- | :-------- | :---------------- | :---------- | :-------- | :---------------- | | Net sales | $313,095 | $36,542 | $349,637 | $297,953 | $7,954 | $305,907 | | Gross profit | $175,517 | $14,023 | $189,540 | $179,578 | $3,440 | $183,018 | | Operating Income | $7,500 | $1,710 | $9,210 | $4,164 | $350 | $9,936 | | Capital expenditures | $1,907 | $617 | $2,524 | $1,251 | $5 | $1,256 | | Depreciation and amortization | $6,008 | $847 | $6,855 | $6,280 | $490 | $6,770 | | Total assets | $169,216 | $36,067 | $197,142 | $161,520 | $38,423 | $191,111 | Financial Information by Geographic Area (in thousands) | Metric | 2018 United States | 2018 Canada | 2018 Consolidated | 2017 United States | 2017 Canada | 2017 Consolidated | | :---------------- | :----------------- | :---------- | :---------------- | :----------------- | :---------- | :---------------- | | Net sales | $279,917 | $69,720 | $349,637 | $266,994 | $38,913 | $305,907 | | Long-lived assets | $25,539 | $31,507 | $57,046 | $24,686 | $34,322 | $59,008 | [Schedule II – Valuation and Qualifying Accounts](index=59&type=section&id=Schedule%20II%20%E2%80%93%20Valuation%20and%20Qualifying%20Accounts) Allowance for doubtful accounts increased to **$0.55 million** in 2018, while deferred tax asset valuation allowance remained stable at **$2.57 million** after a 2017 reduction Roll Forward of Valuation Accounts (in thousands) | Description | Balance at Beginning of Period | Charged to Costs and Expenses | Deductions | Balance at End of Period | | :----------------------------------- | :----------------------------- | :---------------------------- | :--------- | :----------------------- | | Allowance for doubtful accounts: | | | | | | Year ended December 31, 2018 | $476 | $695 | $(622) | $549 | | Year ended December 31, 2017 | $454 | $499 | $(477) | $476 | | Valuation allowance for deferred tax assets: | | | | | | Year ended December 31, 2018 | $2,556 | $13 | — | $2,569 | | Year ended December 31, 2017 | $35,416 | $(32,860) | — | $2,556 | - The valuation allowance for deferred tax assets saw a significant reduction of **$32.86 million** in 2017, reflecting the release of allowances[343](index=343&type=chunk) [ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE](index=60&type=section&id=Item%209.%20Changes%20in%20and%20Disagreements%20with%20Accountants%20on%20Accounting%20and%20Financial%20Disclosure) Lawson Products reported no changes in or disagreements with its accountants on accounting and financial disclosure matters - There were no changes in and disagreements with accountants on accounting and financial disclosure[346](index=346&type=chunk) [ITEM 9A. CONTROLS AND PROCEDURES](index=60&type=section&id=Item%209A.%20Controls%20and%20Procedures) Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2018, affirmed by BDO USA, LLP's unqualified opinion - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of December 31, 2018[346](index=346&type=chunk) - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2018, based on the COSO framework[351](index=351&type=chunk) - BDO USA, LLP issued an unqualified opinion on the effectiveness of the company's internal control over financial reporting as of December 31, 2018[353](index=353&type=chunk) - No material changes in internal control over financial reporting occurred during the last fiscal quarter[360](index=360&type=chunk) [ITEM 9B. OTHER INFORMATION](index=63&type=section&id=Item%209B.%20Other%20Information) Lawson Products reported no other information required under this item - No other information is reported under this item[361](index=361&type=chunk) PART III [ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE](index=63&type=section&id=Item%2010.%20Directors%2C%20Executive%20Officers%20and%20Corporate%20Governance) Information on directors, executive officers, and corporate governance is incorporated by reference from the definitive proxy statement for the May 14, 2019 Annual Meeting - Information on directors, executive officers, and corporate governance is incorporated by reference from the definitive proxy statement for the Annual Meeting of Stockholders on May 14, 2019[362](index=362&type=chunk)[363](index=363&type=chunk) - Thomas Postek, an Audit Committee member, qualifies as an independent 'audit committee financial expert'[364](index=364&type=chunk) - The company has a Code of Business Conduct applicable to all employees and sales representatives, including senior financial executives, available on its website[365](index=365&type=chunk) [ITEM 11. EXECUTIVE COMPENSATION](index=63&type=section&id=Item%2011.%20Executive%20Compensation) Information on executive compensation is incorporated by reference from the definitive proxy statement for the May 14, 2019 Annual Meeting - Information on executive compensation is incorporated by reference from the definitive proxy statement for the Annual Meeting of Stockholders on May 14, 2019[366](index=366&type=chunk) [ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS](index=64&type=section&id=Item%2012.%20Security%20Ownership%20of%20Certain%20Beneficial%20Owners%20and%20Management%20and%20Related%20Stockholder%20Matters) Security ownership information is incorporated by reference, with **482,269 securities** to be issued and **95,862 available** for future issuance under equity plans - Information on security ownership of certain beneficial owners and management is incorporated by reference from the definitive proxy statement for the Annual Meeting of Stockholders on May 14, 2019[368](index=368&type=chunk) Equity Compensation Plan Information as of December 31, 2018 | Plan Category | Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights (1) | Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights (1) (2) | Number of Securities Remaining Available for Future Issuance | | :------------------------------------------ | :-------------------------------------------------------------------------------- | :-------------------------------------------------------------------------- | :----------------------------------------------------------- | | Equity compensation plans approved by security holders | 482,269 | $27.14 | 95,862 | | Equity compensation plans not approved by security holders | — | — | — | | **Total** | **482,269** | **$27.14** | **95,862** | - The **482,269 securities** include potential common stock issuance from **119,256 restricted stock awards**, **279,542 market stock units**, and **83,471 stock options**[371](index=371&type=chunk) [ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE](index=64&type=section&id=Item%2013.%20Certain%20Relationships%20and%20Related%20Transactions%2C%20and%20Director%20Independence) Information on certain relationships, related transactions, and director independence is incorporated by reference from the definitive proxy statement - Information on certain relationships and related transactions, and director independence, is incorporated by reference from the definitive proxy statement for the Annual Meeting of Stockholders on May 14, 2019[373](index=373&type=chunk) [ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES](index=64&type=section&id=Item%2014.%20Principal%20Accounting%20Fees%20and%20Services) Information on principal accounting fees and services is incorporated by reference from the definitive proxy statement for the May 14, 2019 Annual Meeting - Information on principal accounting fees and services is incorporated by reference from the definitive proxy statement for the Annual Meeting of Stockholders on May 14, 2019[374](index=374&type=chunk) PART IV [ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES](index=65&type=section&id=Item%2015.%20Exhibits%2C%20Financial%20Statement%20Schedules) This section lists all exhibits and financial statement schedules filed as part of the Form 10-K, including the index, Schedule II, and various agreements - This item includes the Index to Financial Statements (Item 8, page 24) and Schedule II (Item 8, page 55)[387](index=387&type=chunk)[388](index=388&type=chunk) - A comprehensive list of exhibits details various agreements and corporate documents, including the Share Purchase Agreement for Bolt, Certificate of Incorporation, By-laws, and amendments to the Loan and Security Agreement[377](index=377&type=chunk)[378](index=378&type=chunk)[379](index=379&type=chunk)[380](index=380&type=chunk)[381](index=381&type=chunk)[382](index=382&type=chunk)[383](index=383&type=chunk)[384](index=384&type=chunk)[385](index=385&type=chunk)[386](index=386&type=chunk)[391](index=391&type=chunk)[394](index=394&type=chunk) [Signatures](index=69&type=section&id=Signatures) The Form 10-K report was signed on March 4, 2019, by the President, CEO, CFO, and company directors - The report was signed on March 4, 2019, by Michael G. DeCata (President, CEO, and Director) and Ronald J. Knutson (EVP, CFO, Treasurer, and Controller)[398](index=398&type=chunk) - The report was also signed by the company's directors: Andrew B. Albert, I. Steven Edelson, Lee S. Hillman, J. Bryan King, Thomas S. Postek, and Wilma J. Smelcer[399](index=399&type=chunk)