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)