UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-K (Mark One) þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2021 or o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number: 0-10546 (Exact Name of Registrant as Specified in Charter) LAWSON PRODUCTS, INC. Delaware 36-2229304 (State or other jurisdiction of (I. ...

Lawson Products, Inc. (LAWS) Q3 2021 Earnings Conference Call October 28, 2021 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 Associates Operator Good morning, ladies and gentlemen, and welcome to the Lawson Products Third Quarter 2021 Earnings Call. This call will be hosted by Michael DeCata, Lawson Products' President and Chief Executive Officer; and Ron Knutson, L ...

Financial Performance - Total sales increased by 16.9% to $105.6 million in Q3 2021 compared to $90.3 million in Q3 2020, driven by improved business conditions and Partsmaster sales [117]. - Revenue for the nine months ended September 30, 2021, increased by 24.5% to $315.7 million from $253.5 million in the same period in 2020 [127]. - Partsmaster contributed $44.6 million in sales in the first nine months of 2021, compared to $5.4 million in the same period in 2020 [127]. - Operating income for Q3 2021 was $4.6 million, compared to $2.0 million in Q3 2020, reflecting improved operational performance [110]. - Net income for the nine months ended September 30, 2021, was $10.2 million, down from $14.9 million in the same period in 2020 [126]. Cost and Expenses - Adjusted non-GAAP operating income was $7.3 million in Q3 2021, down from $7.7 million in Q3 2020, primarily due to increased supplier costs [110]. - Selling expenses increased to $72.9 million for the first nine months of 2021, up from $55.4 million in the same period a year ago, representing a 31.6% increase [130]. - General and administrative expenses rose to $79.5 million in the first nine months of 2021 from $57.8 million in the prior year, a 37.5% increase [131]. Profitability Metrics - Gross profit margin improved to 53.1% in Q3 2021 from 52.3% in Q3 2020 [115]. - Gross profit increased by $8.8 million to $56.0 million in Q3 2021, compared to $47.2 million in Q3 2020, primarily due to increased sales [118]. - Consolidated gross profit as a percentage of sales was 53.1% in Q3 2021, up from 52.3% in Q3 2020 [118]. Cash Flow and Liquidity - Available cash and cash equivalents decreased to $7.5 million on September 30, 2021, from $28.4 million on December 31, 2020, primarily due to the payment of the acquisition liability related to Partsmaster [136]. - The company believes cash from operations and available funds under the Credit Agreement are sufficient for operating requirements and strategic initiatives [143]. Acquisition Impact - The acquisition of Partsmaster for $35.3 million contributed $13.6 million in revenue and an operating loss of $0.8 million in Q3 2021 [97]. - The company deferred $3.5 million in employer-side social security payments under the CARES Act, with $1.7 million expected to be paid in 2021 [101]. Operational Metrics - Average monthly PMI was 60.2 in Q3 2021, indicating expansion compared to 55.2 in Q3 2020 [106]. - Average sales per representative per day increased by 8.2% to $1.352 in Q3 2021 compared to $1.249 in Q3 2020 [107]. - Bolt Supply sales improved by 13.5% compared to the prior year quarter, contributing to overall sales growth [117]. Financial Position and Compliance - As of September 30, 2021, the company had $10.9 million in outstanding borrowings and $87.4 million of borrowing availability under its Revolving Credit Facility [140]. - The company can borrow up to 3.25 times its EBITDA and maintains a minimum fixed charge ratio of 1.15, remaining compliant with all financial covenants as of September 30, 2021 [141]. - Non-compliance with financial covenants in future quarters could lead to higher financing costs and restrictions on borrowing, adversely affecting the company's financial condition [142]. Challenges - Supply chain disruptions and inflation continue to pose challenges, impacting inventory acquisition and customer order fulfillment [108]. - Capital expenditures were $5.7 million for the nine months ended September 30, 2021, compared to $1.3 million in the same period in 2020 [137]. - The company has a stock repurchase program authorized for up to $7.5 million, but did not repurchase any shares in the first nine months of 2021 [139].

Financial Data and Key Metrics Changes - The company achieved consolidated sales of $106.5 million, reflecting a 47.7% increase compared to Q2 2020 and a 2.9% increase from Q1 2021 [7][20] - Adjusted EBITDA for the quarter was $8.8 million, representing 8.3% of sales [20][25] - The company ended the quarter with a net cash position of $0.9 million after making the final $33 million payment for the Partsmaster acquisition [20][27] Business Line Data and Key Metrics Changes - Partsmaster generated sales of $15.3 million in the quarter, although sales were slightly down from Q1 due to timing on military sales [7][11] - The Bolt Supply business achieved an 11.5% EBITDA for the quarter, with sales growing over 30% year-over-year and 12% over Q1 2021 [11] - Strategic accounts grew by 6.5% compared to Q1 and 50% compared to Q2 2020, while the Kent business grew by 4.7% versus Q1 and 53% year-over-year [12] Market Data and Key Metrics Changes - Sales in the government civilian segment were flat between Q1 and Q2 but up 6.6% compared to Q2 2020, with the SLED segment performing particularly well [13] - The company is focusing on underserved markets and has made progress in developing additional channels to market [14] Company Strategy and Development Direction - The company’s three-part growth strategy remains unchanged, focusing on sales rep productivity and the integration of Partsmaster [15] - Investments are being made in distribution capabilities and expanding the Calgary location to support future growth [11][26] - The company is optimistic about future growth driven by labor challenges faced by customers, which may lead to increased outsourcing of inventory management [39] Management's Comments on Operating Environment and Future Outlook - The management acknowledged challenges from supply chain disruptions and labor shortages but expressed confidence in the company's ability to navigate these issues [6][16] - There is optimism regarding the future, with management highlighting the importance of operational excellence and customer relationships [17][39] Other Important Information - The integration of Partsmaster is progressing as planned, with all sales reps now utilizing Lawson's technology systems [28] - The company is actively managing supply chain challenges and has implemented price increases to offset inflationary pressures [9][31] Q&A Session Summary Question: About the price increases and their impact on margins - Management confirmed that price increases implemented late in Q2 are expected to benefit margins in Q3 and beyond, as customers recognize the necessity of these increases [31] Question: Clarification on the reduced cost structure - The CFO explained that the cost structure has improved due to actions taken in 2020, and the company is managing costs effectively while growing sales [32][33] Question: Monthly trend in average daily sales - Average daily sales showed a sequential increase from March to April, remained flat in May, and slightly decreased in June, with July sales expected to be similar to June [35] Question: Variations among suppliers - Management noted that some suppliers are performing better than others, particularly in the chemical supply sector, and the company is adapting by shifting to functional equivalent products when necessary [36] Question: Long-term growth outlook amid labor challenges - Management indicated that labor challenges faced by customers are creating opportunities for the company to provide more value through outsourcing inventory management [39] Question: Gross margin expectations - Management reiterated that they expect gross margins to return to the 59%-61% range over time, despite current headwinds from supply chain disruptions [41] Question: M&A strategy moving forward - The company remains committed to pursuing larger acquisitions and is confident in its ability to integrate them successfully, without being hindered by the potential Luther King transaction [52][53]

[PART I - FINANCIAL INFORMATION](index=4&type=section&id=PART%20I%20-%20FINANCIAL%20INFORMATION) This section provides the company's unaudited condensed consolidated financial statements and management's discussion and analysis for the period [Financial Statements](index=4&type=section&id=Item%201.%20Financial%20Statements) Presents unaudited condensed consolidated financial statements, including balance sheets, income statements, equity changes, and cash flows, with explanatory notes [Condensed Consolidated Balance Sheets](index=4&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) As of June 30, 2021, total assets decreased to $244.5 million from $256.3 million at year-end 2020, primarily due to a significant reduction in cash and cash equivalents used for an acquisition payment Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2021 | December 31, 2020 | | :--- | :--- | :--- | | **Total Current Assets** | $123,660 | $143,062 | | Cash and cash equivalents | $5,855 | $28,393 | | **Total Assets** | **$244,528** | **$256,304** | | **Total Current Liabilities** | $66,228 | $97,995 | | Accrued acquisition liability | $0 | $32,673 | | **Total Liabilities** | **$113,630** | **$133,882** | | **Total Stockholders' Equity** | **$130,898** | **$122,422** | [Condensed Consolidated Statements of Income and Comprehensive Income](index=5&type=section&id=Condensed%20Consolidated%20Statements%20of%20Income%20and%20Comprehensive%20Income) For the second quarter of 2021, revenue increased significantly to $106.5 million from $72.1 million in Q2 2020, driving net income up to $2.9 million from $0.6 million Q2 Performance Comparison (in thousands, except per share data) | Metric | Q2 2021 | Q2 2020 | | :--- | :--- | :--- | | Revenue | $106,540 | $72,146 | | Gross Profit | $54,620 | $38,313 | | Operating Income | $3,382 | $569 | | Net Income | $2,935 | $619 | | Diluted EPS | $0.31 | $0.07 | Six-Month Performance Comparison (in thousands, except per share data) | Metric | Six Months 2021 | Six Months 2020 | | :--- | :--- | :--- | | Revenue | $210,096 | $163,181 | | Gross Profit | $109,180 | $87,234 | | Operating Income | $8,192 | $19,207 | | Net Income | $6,531 | $13,152 | | Diluted EPS | $0.70 | $1.41 | [Condensed Consolidated Statements of Changes in Stockholders' Equity](index=6&type=section&id=Condensed%20Consolidated%20Statements%20of%20Changes%20in%20Stockholders'%20Equity) Stockholders' equity increased from $122.4 million at the end of 2020 to $130.9 million at June 30, 2021, primarily driven by net income and foreign currency translation adjustments - Total stockholders' equity grew by **$8.5 million** in the first six months of 2021, reaching **$130.9 million**[24](index=24&type=chunk) - Key drivers for the increase in equity were net income of **$6.5 million** (sum of $3.6M in Q1 and $2.9M in Q2) and stock-based compensation of **$1.0 million** (sum of $422k in Q1 and $551k in Q2)[24](index=24&type=chunk) [Condensed Consolidated Statements of Cash Flows](index=8&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) For the six months ended June 30, 2021, net cash provided by operating activities was $9.3 million, while net cash used in investing activities was $36.9 million, resulting in a net decrease in cash of $22.5 million Six-Month Cash Flow Summary (in thousands) | Activity | Six Months 2021 | Six Months 2020 | | :--- | :--- | :--- | | Net cash provided by operating activities | $9,292 | $7,837 | | Net cash used in investing activities | ($36,874) | ($720) | | Net cash provided by (used in) financing activities | $4,852 | ($2,435) | | **Decrease in cash** | **($22,533)** | **$4,517** | - A business acquisition payment of **$33.0 million** was the primary use of cash in investing activities[29](index=29&type=chunk) [Notes to Condensed Consolidated Financial Statements](index=9&type=section&id=Notes%20to%20Condensed%20Consolidated%20Financial%20Statements) Provides critical context to financial statements, detailing the Partsmaster acquisition, segment performance, revenue disaggregation, and COVID-19 related impacts - The company acquired Partsmaster on August 31, 2020, for **$35.3 million**, with the final **$33.0 million** payment made in May 2021, and Partsmaster contributed **$15.3 million** in revenue and **$0.5 million** in operating income in Q2 2021[35](index=35&type=chunk)[36](index=36&type=chunk)[38](index=38&type=chunk) Revenue by Geography (Six Months Ended June 30, in thousands) | Region | 2021 | 2020 | | :--- | :--- | :--- | | United States | $171,234 | $130,679 | | Canada | $38,862 | $32,502 | | **Consolidated Total** | **$210,096** | **$163,181** | - The company has two operating segments: Lawson (VMI service model) and Bolt Supply (branch-based sales), generating **$188.2 million** and **$21.9 million** in revenue respectively for the first six months of 2021[90](index=90&type=chunk)[91](index=91&type=chunk) - Under the CARES Act, the company deferred **$3.5 million** in employer social security payments, with half due in 2021 and the remainder in 2022[94](index=94&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=20&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses financial performance, highlighting the Partsmaster acquisition's impact, sales drivers, and liquidity, with detailed comparisons of operating results - The Partsmaster acquisition contributed **$15.3 million** in revenue for Q2 2021 and **$31.0 million** for the first six months of 2021[99](index=99&type=chunk) - The business climate improved significantly in H1 2021 as pandemic-related restrictions were relaxed compared to 2020, leading to increased business activity and improved operating results[104](index=104&type=chunk) - Average sales rep headcount increased to **1,081** in Q2 2021 from 957 in Q2 2020, with sales per rep per day increasing **33.0%** to **$1,361**[109](index=109&type=chunk) Adjusted Non-GAAP Operating Income Reconciliation (in thousands) | Description | Q2 2021 | Q2 2020 | Six Months 2021 | Six Months 2020 | | :--- | :--- | :--- | :--- | :--- | | GAAP Operating Income | $3,382 | $569 | $8,192 | $19,207 | | Adjustments | $3,457 | $4,212 | $5,858 | ($6,484) | | **Adjusted non-GAAP Operating Income** | **$6,839** | **$4,781** | **$14,050** | **$12,723** | [Results of Operations: Q2 2021 vs. Q2 2020](index=22&type=section&id=Three%20months%20ended%20June%2030%2C%202021%20compared%20to%20quarter%20ended%20June%2030%2C%202020) Total revenue for Q2 2021 increased by 47.7% to $106.5 million, driven by improved business conditions and a $15.3 million contribution from the Partsmaster acquisition Q2 Revenue by Segment (in thousands) | Segment | Q2 2021 | Q2 2020 | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Lawson | $94,861 | $63,214 | $31,647 | 50.1% | | Bolt Supply | $11,679 | $8,932 | $2,747 | 30.8% | | **Consolidated** | **$106,540** | **$72,146** | **$34,394** | **47.7%** | - Consolidated gross profit margin decreased to **51.3%** in Q2 2021 from 53.1% in Q2 2020, primarily due to increased freight costs, supply chain disruptions, and inventory reserves for Partsmaster integration[117](index=117&type=chunk)[118](index=118&type=chunk) - General and administrative expenses increased by **$5.6 million**, driven by Partsmaster operating expenses (**$3.3 million**) and costs to evaluate the LKCM proposal (**$1.4 million**), partially offset by a **$1.6 million** decrease in stock-based compensation[120](index=120&type=chunk) [Results of Operations: 6M 2021 vs. 6M 2020](index=25&type=section&id=Six%20months%20ended%20June%2030%2C%202021%20compared%20to%20June%2030%2C%202020) For the first six months of 2021, revenue increased 28.8% to $210.1 million, including a $31.0 million contribution from Partsmaster, though operating income fell due to stock-based compensation adjustments Six-Month Revenue by Segment (in thousands) | Segment | 6M 2021 | 6M 2020 | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Lawson | $188,191 | $144,705 | $43,486 | 30.1% | | Bolt Supply | $21,905 | $18,476 | $3,429 | 18.6% | | **Consolidated** | **$210,096** | **$163,181** | **$46,915** | **28.8%** | - General and administrative expenses increased by **$21.2 million** (**66.8%**), driven by a **$10.1 million** increase in stock-based compensation expense, **$7.2 million** from the Partsmaster acquisition, and **$1.4 million** in costs related to the LKCM proposal evaluation[131](index=131&type=chunk) [Liquidity and Capital Resources](index=27&type=section&id=Liquidity%20and%20Capital%20Resources) The company's cash position decreased to $5.9 million due to the Partsmaster acquisition payment, but it maintains sufficient liquidity with $91.9 million available under its revolving credit facility - Cash and cash equivalents decreased by **$22.5 million**, primarily due to the **$33.0 million** payment for the Partsmaster acquisition[135](index=135&type=chunk) - As of June 30, 2021, the company had **$5.0 million** in outstanding borrowings and **$91.9 million** of availability under its Revolving Credit Facility[139](index=139&type=chunk) - The company was in compliance with all financial covenants as of June 30, 2021[140](index=140&type=chunk) [Quantitative and Qualitative Disclosure About Market Risk](index=28&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosure%20About%20Market%20Risk) This section is inapplicable and has been omitted from the report - Item 3 of Part I is inapplicable and has been omitted from this report[144](index=144&type=chunk) [Controls and Procedures](index=28&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded that disclosure controls and procedures were effective as of June 30, 2021, with ongoing integration of Partsmaster's internal control procedures - The CEO and CFO concluded that disclosure controls and procedures were effective as of the evaluation date[145](index=145&type=chunk) - The company is in the process of integrating the internal control procedures of Partsmaster, which constituted approximately **15%** of total assets as of June 30, 2021[146](index=146&type=chunk) [PART II - OTHER INFORMATION](index=28&type=section&id=PART%20II%20-%20OTHER%20INFORMATION) This section covers other required information, including unregistered sales of equity securities and a list of exhibits [Unregistered Sales of Equity Securities and Use of Proceeds](index=28&type=section&id=Item%202.%20Unregistered%20Shares%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) There were no unregistered sales of equity securities or use of proceeds to report for the period - None[149](index=149&type=chunk) [Exhibits](index=28&type=section&id=Item%206.%20Exhibits) This section lists all exhibits filed with the Form 10-Q, including corporate governance documents, credit agreements, and compensation plans - The exhibits include key corporate governance documents, credit agreements, and executive compensation plans[149](index=149&type=chunk)[151](index=151&type=chunk)

Financial Data and Key Metrics Changes - The company achieved consolidated sales growth of 13.8% compared to Q1 2020, and 5.6% compared to Q4 2020, with Partsmaster contributing $15.7 million in sales [5][16] - Adjusted EBITDA for the quarter was $9.1 million, representing 8.8% of sales, with a sequential improvement in organic earnings [16][22] - Gross margin for the quarter was 52.7%, down from 53.7% a year ago, impacted by inventory rationalization and increased freight costs [20][26] Business Line Data and Key Metrics Changes - The Bolt Supply business achieved a 9.1% EBITDA for the quarter, with significant expansions in Calgary and Saskatoon [10] - Strategic accounts saw a 4% sales increase compared to Q4, with strong growth driven by integrated supply partners and new strategic accounts [11][12] - The Kent Automotive business was up 7% sequentially, indicating a recovery in demand as miles driven increase [54] Market Data and Key Metrics Changes - Sales in the government segment increased by 3.7% compared to Q4, driven by state, local, and educational sectors [12] - The company faced supply chain challenges, including labor shortages and raw material increases, which could impact gross margins [13][26] Company Strategy and Development Direction - The company is focused on integrating Partsmaster and expanding into underserved markets, with a three-part growth strategy emphasizing adding sales reps, improving productivity, and growth through acquisitions [14][36] - Investments are being made in distribution center modernization to enhance capacity and efficiency [9][62] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in achieving sequential monthly sales growth throughout 2021, supported by pent-up demand and operational excellence [45][47] - The integration of Partsmaster is progressing well, with no significant issues reported, and is expected to enhance the product offering [50][51] Other Important Information - The company ended the quarter with $26.3 million in cash and equivalents, and $65 million available under its credit facility, positioning it well for future growth initiatives [16][24] - Capital expenditures for the quarter were approximately $800,000, with expectations of $5 million to $6 million for the year, focusing on infrastructure upgrades [23] Q&A Session Summary Question: What was the sales cadence through the quarter? - Management noted strong sales in January, a dip in February due to weather, followed by recovery in March and April, with overall positive trends [28][29] Question: What cost increases have been seen, and how are pricing actions being handled? - The company has experienced supplier price increases but maintains confidence in passing modest increases to customers due to the critical nature of their service [31][32] Question: What is the outlook for MRO gross margins for the rest of the year? - Management expects to maintain gross margins in the high 50% range, despite a dip in Q1 due to inventory reserves [34] Question: Where are the opportunities for adding sales reps? - The company sees opportunities in both densely populated and geographically remote areas, with a focus on increasing sales rep productivity [39][40] Question: How confident is the company in achieving monthly sequential sales growth? - Management is confident due to various factors, including new product offerings and structural cost savings, which support their growth initiatives [46][48] Question: What is the status of the Partsmaster integration? - The integration is progressing smoothly, with inventory positioning largely completed and no significant issues reported [50][51] Question: How is the Kent Automotive business performing? - The Kent Automotive segment is experiencing a positive trend, driven by increased miles driven and gaining market share [54] Question: What is the outlook for selling expenses? - Selling expenses are expected to stabilize, with some increases due to resumed activities, but overall savings from previous years are anticipated to continue [56][58] Question: Is the company still confident in achieving the 25% to 30% incremental adjusted EBITDA margin goal? - Management reaffirmed confidence in achieving this margin goal through top-line sales growth [60]

Acquisition and Revenue - The company acquired Partsmaster for $35.3 million, contributing $15.7 million in revenue and $0.7 million in operating income in Q1 2021[93] - Total sales increased by 13.8% to $103.6 million in Q1 2021 compared to $91.0 million in Q1 2020, with Partsmaster accounting for $15.7 million of this increase[109] - Average daily sales rose by 15.6% to $1.644 million in Q1 2021, with Partsmaster contributing $0.250 million[109] Profitability and Margins - Gross profit increased by $5.6 million to $54.6 million in Q1 2021, with a gross profit margin of 52.7% compared to 53.7% in the prior year[111] - Adjusted non-GAAP operating income was $7.2 million in Q1 2021, down from $7.9 million in Q1 2020, primarily due to lower organic sales[105] - The organic Lawson MRO segment gross margin declined to 58.2% in Q1 2021 from 60.8% in the prior year, impacted by a shift to lower margin products[111] Expenses - Selling expenses increased to $23.8 million in Q1 2021 from $20.0 million in Q1 2020, driven by $5.5 million from the Partsmaster acquisition[1] - General and administrative expenses rose to $25.9 million in Q1 2021 from $10.3 million in Q1 2020, primarily due to an $11.7 million increase in stock-based compensation[2] - Interest expense was $0.3 million in Q1 2021, an increase of $0.2 million compared to Q1 2020, mainly due to interest on the accrued acquisition liability[3] Tax and Other Income - Income tax expense was $1.3 million in Q1 2021, with a 26.0% effective tax rate, compared to $4.9 million and 28.0% in Q1 2020[5] - Other income, net increased by $1.5 million in Q1 2021, primarily due to Canadian currency exchange rate effects[4] Cash and Capital Expenditures - Available cash and cash equivalents were $26.3 million on March 31, 2021, down from $28.4 million on December 31, 2020[6] - Capital expenditures for Q1 2021 were $0.8 million, up from $0.6 million in Q1 2020, primarily for distribution center improvements[7] - The company had $64.4 million of borrowing availability remaining under its Revolving Credit Facility as of March 31, 2021[8] Future Obligations and Strategic Focus - A payment of $33.0 million is due to the sellers of Partsmaster in May 2021, guaranteed under the Purchase Agreement[9] - The company believes cash from operations and available funds under the Credit Agreement are sufficient to meet operating requirements and strategic initiatives[10] Sales and Productivity - The average sales representative headcount increased to 1,083 in Q1 2021 from 998 in Q1 2020, with productivity rising 7.3% to $1,360 per rep per day[103] - The company plans to continue focusing on increasing the productivity of its sales representatives[103] Market Indicators - The PMI index averaged 61.4 in Q1 2021, indicating expansion in the manufacturing sector compared to 50.0 in Q1 2020[102] - The company deferred $3.5 million in employer-side social security payments under the CARES Act, with $1.7 million expected to be paid in 2021[97]

Financial Performance - Revenue for 2020 was $351.6 million, a decrease of 5.2% from $370.8 million in 2019[147] - Gross profit for 2020 was $186.5 million, representing 53.1% of net sales, down from 53.2% in 2019[147] - Operating income increased to $20.6 million in 2020 from $9.1 million in 2019, reflecting improved cost control measures[151] - Net income for 2020 was $15.1 million, a significant increase from $7.2 million in 2019[147] - Adjusted non-GAAP operating income decreased to $27.4 million in 2020 from $28.6 million in 2019, impacted by lower sales[151] - Consolidated revenue decreased by 5.2% to $351.6 million in 2020 from $370.8 million in 2019, primarily due to the COVID-19 pandemic and lower sales to oil and gas customers[154] - Gross profit decreased to $186.5 million in 2020 from $197.4 million in 2019, with a gross profit margin of 53.1%, down from 53.2% in the previous year[155] - Average daily sales decreased to $1.390 million in 2020 compared to $1.471 million in 2019, despite having one more selling day in 2020[154] - Basic income per share rose to $1.68 in 2020 from $0.81 in 2019, marking a substantial increase of 107.4%[202] - Income from operations before income taxes was $20.785 million for the year ended December 31, 2020, compared to $9.674 million in 2019[275] Cash Flow and Liquidity - The company had $28.4 million in unrestricted cash and $66.0 million in borrowing capacity as of December 31, 2020[137] - Cash provided by operating activities was $32.5 million in 2020, significantly higher than $9.2 million in 2019, reflecting stronger operating results[164] - Total cash, cash equivalents, and restricted cash at the end of 2020 amounted to $29,391,000, up from $6,297,000 at the end of 2019[209] - As of December 31, 2020, the company had no borrowings under its Credit Agreement and had borrowing availability of $66.0 million[167] - The company continues to monitor its liquidity and cash flows while managing operating expenses in response to COVID-19[138] Acquisitions - The acquisition of Partsmaster in August 2020 cost $35.3 million, with $2.3 million paid at acquisition and $33.0 million due in May 2021[143] - The Company completed the acquisition of Partsmaster on August 31, 2020, for $35.3 million in cash, resulting in $7.7 million of intangible assets[193] - Partsmaster contributed $22.6 million in sales and $13.2 million in gross profit since its inclusion on August 31, 2020[154][155] - The Company acquired Partsmaster for a purchase price of $35.3 million in cash, with $2.3 million paid at closing and the remaining $33.0 million due in May 2021[247][248] Expenses and Cost Management - Selling expenses decreased to $76.8 million in 2020 from $85.3 million in 2019, representing 21.8% of sales compared to 23.0% in 2019[157] - General and administrative expenses decreased to $89.2 million in 2020 from $102.9 million in 2019, primarily due to a reduction in stock-based compensation and other cost control measures[158] - The Company recorded severance costs of $2.077 million in 2020, resulting in an ending balance of $1.251 million in the reserve for severance[303] Assets and Liabilities - Total current assets increased to $143.1 million as of December 31, 2020, compared to $106.4 million as of December 31, 2019[199] - Accounts receivable increased to $44.5 million in 2020, up from $38.8 million in 2019, reflecting a growth of approximately 14.3%[199] - Total liabilities increased to $133.9 million in 2020 from $96.4 million in 2019, indicating a rise of approximately 38.9%[199] - The Company has a current liability for accrued acquisition liability of $32.7 million as of December 31, 2020[199] Goodwill and Intangible Assets - The Company recorded a goodwill impairment charge of $1.9 million related to the Screw Products reporting unit[159] - The Company's consolidated goodwill balance as of December 31, 2020, was $35.2 million, with the Bolt reporting unit's goodwill at $13.8 million[190] - Goodwill increased from $20.9 million in 2019 to $35.2 million in 2020, reflecting the cost of business acquisitions exceeding the fair value of identifiable net assets[226] - The gross carrying amount of intangible assets was $23.638 million as of December 31, 2020, with a net carrying value of $18.503 million[273] Taxation - Total income tax expense for the year ended December 31, 2020, was $5.672 million, compared to $2.453 million for the year ended December 31, 2019, representing an increase of 131.0%[277] - The effective income tax rate for 2020 was 27.3%, up from 25.4% in 2019[277] - The Company recorded $35.2 million of tax-deductible goodwill from recent acquisitions, which may provide future tax benefits[281] - As of December 31, 2020, the company had $7.2 million of U.S. federal net operating loss carryforwards, expiring beginning in 2030, and $7.7 million of state net operating loss carryforwards, expiring through 2034[277] Stock and Compensation - The Company repurchased 47,504 shares of its common stock in 2020 at a cost of $3.3 million[241][242] - The Company contributed $2.9 million to its 401(k) plan in 2020, down from $3.2 million in 2019[307] - As of December 31, 2020, the outstanding Stock Performance Rights (SPRs) were 581,000, with an intrinsic value of $14.6 million[320] - Compensation expenses related to Restricted Stock Awards (RSAs) were $1.2 million in 2020, down from $1.3 million in 2019[322]

Lawson Products, Inc. (LAWS) Q3 2020 Earnings Conference Call October 29, 2020 9:00 AM ET Company Participants Michael DeCata - President and Chief Executive Officer Ron Knutson - Chief Financial Officer Conference Call Participants Carl Schemm - KeyBanc Capital Markets Kevin Steinke - Barrington Research Operator Good morning, ladies and gentlemen, and welcome to the Lawson Products Third Quarter 2020 Earnings Call. This call will be hosted by Michael DeCata, Lawson Products’ President and Chief Executive ...

PART I - FINANCIAL INFORMATION This section provides the company's unaudited condensed consolidated financial statements and management's discussion and analysis for the period ended September 30, 2020 [Financial Statements](index=4&type=section&id=Item%201.%20Financial%20Statements) This section presents the unaudited condensed consolidated financial statements, including balance sheets, income statements, and cash flows, reflecting the Partsmaster acquisition and COVID-19 impacts [Condensed Consolidated Balance Sheets](index=4&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) The balance sheet shows total assets increased to **$251.3 million** and liabilities to **$130.0 million** by September 30, 2020, largely due to the Partsmaster acquisition Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | Sep 30, 2020 (Unaudited) | Dec 31, 2019 | | :--- | :--- | :--- | | **Total Assets** | **$251,269** | **$204,429** | | Cash and cash equivalents | $17,193 | $5,495 | | Inventories, net | $62,218 | $55,905 | | Goodwill | $36,428 | $20,923 | | Intangible assets, net | $18,727 | $12,335 | | **Total Liabilities** | **$130,015** | **$96,428** | | Accrued acquisition liability | $32,476 | $— | | Accounts payable | $22,466 | $13,789 | | **Total Stockholders' Equity** | **$121,254** | **$108,001** | [Condensed Consolidated Statements of Income and Comprehensive Income](index=5&type=section&id=Condensed%20Consolidated%20Statements%20of%20Income%20and%20Comprehensive%20Income) Q3 2020 revenue decreased to **$90.3 million** with net income at **$1.7 million**, while nine-month net income increased to **$14.9 million** despite lower revenue Q3 2020 vs Q3 2019 Performance (in thousands, except per share data) | Metric | Q3 2020 | Q3 2019 | | :--- | :--- | :--- | | Total revenue | $90,277 | $94,779 | | Gross profit | $47,225 | $50,574 | | Operating income | $2,001 | $6,446 | | Net income | $1,738 | $4,774 | | Diluted EPS | $0.19 | $0.51 | Nine Months 2020 vs 2019 Performance (in thousands, except per share data) | Metric | Nine Months 2020 | Nine Months 2019 | | :--- | :--- | :--- | | Total revenue | $253,458 | $282,219 | | Gross profit | $134,459 | $150,540 | | Operating income | $21,208 | $13,613 | | Net income | $14,890 | $10,227 | | Diluted EPS | $1.60 | $1.09 | [Condensed Consolidated Statements of Cash Flows](index=8&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) Net cash from operating activities significantly improved to **$20.0 million** for the nine months ended September 30, 2020, leading to an **$11.7 million** increase in cash Cash Flow Summary for Nine Months Ended Sep 30 (in thousands) | Cash Flow Activity | 2020 | 2019 | | :--- | :--- | :--- | | Net cash provided by operating activities | $20,023 | $8,041 | | Net cash used in investing activities | $(3,611) | $(1,392) | | Net cash used in financing activities | $(4,640) | $(10,165) | | **Increase (decrease) in cash** | **$11,698** | **$(3,257)** | | Cash at end of period | $17,995 | $9,426 | [Notes to Condensed Consolidated Financial Statements](index=9&type=section&id=Notes%20to%20Condensed%20Consolidated%20Financial%20Statements) These notes detail accounting policies, the **$35.3 million** Partsmaster acquisition, segment revenue recognition, credit facility compliance, and the operational impacts of the COVID-19 pandemic - On August 31, 2020, the Company acquired Partsmaster for **$35.3 million**, paying **$2.3 million** in cash at closing with the remaining **$33.0 million** due in May 2021. The acquisition is intended to expand sales coverage and product lines[34](index=34&type=chunk)[35](index=35&type=chunk) - The Partsmaster acquisition added **$16.0 million** in goodwill, **$5.0 million** in customer relationships (10-year life), and **$2.8 million** in trade names (5-year life). Partsmaster contributed **$5.4 million** in revenue in Q3 2020 post-acquisition[36](index=36&type=chunk)[38](index=38&type=chunk) - The Company operates two segments: the Lawson segment, which uses a sales representative network for vendor-managed inventory (VMI) services, and the Bolt Supply segment, which sells through 14 branch locations in Western Canada[32](index=32&type=chunk)[87](index=87&type=chunk) - The COVID-19 pandemic has caused lost revenue, supply chain limitations, and reduced customer demand. The company has taken mitigation steps, including deferring social security payments under the CARES Act and utilizing the Canadian Emergency Wage Subsidy (CEWS) program[89](index=89&type=chunk)[90](index=90&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=20&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses the financial impacts of the Partsmaster acquisition and COVID-19, noting a Q3 sales decrease but a nine-month operating income increase due to cost controls and strong liquidity [Results of Operations - Q3 2020 vs. Q3 2019](index=22&type=section&id=Results%20of%20Operations%20-%20Q3%202020%20vs.%20Q3%202019) Q3 2020 total sales decreased **4.7%** to **$90.3 million** due to COVID-19, with operating income falling to **$2.0 million** impacted by lower sales and increased G&A expenses Q3 2020 vs Q3 2019 Segment Revenue (in thousands) | Segment | Q3 2020 | Q3 2019 | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Lawson | $79,806 | $83,461 | $(3,655) | (4.4)% | | Bolt Supply | $10,471 | $11,318 | $(847) | (7.5)% | | **Consolidated** | **$90,277** | **$94,779** | **$(4,502)** | **(4.7)%** | - Sales productivity (sales per rep per day) decreased **4.6%** to **$1,249**, primarily due to the negative impacts of COVID-19[112](index=112&type=chunk) - General and administrative expenses increased by **$3.2 million** (**14.0%**), driven by a **$2.4 million** increase in stock-based compensation, **$1.5 million** in Partsmaster expenses, and **$0.5 million** in acquisition costs[123](index=123&type=chunk) Reconciliation of GAAP to Non-GAAP Adjusted Operating Income - Q3 (in thousands) | Metric | Q3 2020 | Q3 2019 | | :--- | :--- | :--- | | Operating income (GAAP) | $2,001 | $6,446 | | Stock based compensation | $4,746 | $2,374 | | Severance expense | $488 | $30 | | Acquisition costs | $473 | $— | | **Adjusted non-GAAP operating income** | **$7,708** | **$8,850** | [Results of Operations - Nine Months 2020 vs. Nine Months 2019](index=25&type=section&id=Results%20of%20Operations%20-%20Nine%20Months%202020%20vs.%20Nine%20Months%202019) Nine-month revenue decreased **10.2%** to **$253.5 million**, yet operating income increased to **$21.2 million** primarily due to a **$14.3 million** reduction in general and administrative expenses Nine Months 2020 vs 2019 Revenue (in thousands) | Segment | Nine Months 2020 | Nine Months 2019 | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Lawson | $224,511 | $250,895 | $(26,384) | (10.5)% | | Bolt Supply | $28,947 | $31,324 | $(2,377) | (7.6)% | | **Consolidated** | **$253,458** | **$282,219** | **$(28,761)** | **(10.2)%** | - General and administrative expenses decreased by **$14.3 million**, primarily due to a **$10.4 million** decrease in stock-based compensation expense. Cost control measures related to COVID-19 also contributed[134](index=134&type=chunk) Reconciliation of GAAP to Non-GAAP Adjusted Operating Income - Nine Months (in thousands) | Metric | Nine Months 2020 | Nine Months 2019 | | :--- | :--- | :--- | | Operating income (GAAP) | $21,208 | $13,613 | | Stock based compensation | $(2,767) | $7,621 | | Severance expense | $1,520 | $1,542 | | Acquisition costs | $555 | $— | | **Adjusted non-GAAP operating income** | **$20,516** | **$22,776** | [Liquidity and Capital Resources](index=27&type=section&id=Liquidity%20and%20Capital%20Resources) The company maintains strong liquidity with **$17.2 million** cash and **$66.0 million** credit facility availability, sufficient to fund operations and the upcoming **$33.0 million** Partsmaster acquisition payment - As of September 30, 2020, the company had **$17.2 million** in cash and cash equivalents and **$66.0 million** of borrowing availability under its credit facility[140](index=140&type=chunk)[143](index=143&type=chunk) - A payment of **$33.0 million** for the Partsmaster acquisition is due in May 2021. This is secured by a letter of credit and is recorded as a **$32.5 million** current liability on the balance sheet[147](index=147&type=chunk) - In Q1 2020, the company repurchased **47,504 shares** for its public buyback program. No shares were repurchased under this program in Q2 or Q3[142](index=142&type=chunk) - The company was in compliance with all debt covenants as of September 30, 2020, including an EBITDA to fixed charges ratio of **4.73** (vs. **1.15** required) and a total net leverage ratio of **0.71** (vs. **3.25** required)[68](index=68&type=chunk)[144](index=144&type=chunk) [Quantitative and Qualitative Disclosure About Market Risk](index=28&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosure%20About%20Market%20Risk) This section is inapplicable and has been omitted from the report - Item 3 of Part I is inapplicable and has been omitted from this report[149](index=149&type=chunk) [Controls and Procedures](index=28&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded disclosure controls were effective as of September 30, 2020, excluding the recently acquired Partsmaster's internal controls, with no material changes during the quarter - The CEO and CFO concluded that disclosure controls and procedures were effective as of the evaluation date[150](index=150&type=chunk) - Management excluded the internal controls of the newly acquired Partsmaster from its assessment of internal control effectiveness for the quarter, as the acquisition occurred on August 31, 2020[151](index=151&type=chunk) PART II - OTHER INFORMATION This section addresses other information, including updated risk factors related to the COVID-19 pandemic, details on equity security sales, and a list of filed exhibits [Risk Factors](index=28&type=section&id=Item%201A.%20Risk%20Factors) This section updates risk factors, primarily highlighting new significant risks associated with the COVID-19 pandemic, including revenue loss, supply chain disruptions, and potential asset impairment - The COVID-19 pandemic is identified as a significant new risk factor[155](index=155&type=chunk) - Key pandemic-related risks include lost revenue, supply chain disruptions, reduced customer demand, and limitations on the sales force's ability to visit customers[156](index=156&type=chunk)[158](index=158&type=chunk) - The pandemic could negatively impact future financial performance, potentially leading to impairment losses on goodwill and other intangible assets[161](index=161&type=chunk) [Unregistered Sales of Equity Securities and Use of Proceeds](index=29&type=section&id=Item%202.%20Unregistered%20Shares%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) During Q3 2020, the company repurchased **12,077 shares** to satisfy employee tax withholding, with approximately **$4.5 million** remaining for future repurchases under the authorized program Share Repurchases for Q3 2020 | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | July 2020 | 357 | $31.25 | | August 2020 | 11,720 | $36.22 | | September 2020 | — | — | | **Total** | **12,077** | | - The shares repurchased during the quarter were for satisfying employee tax withholding obligations, not part of the public buyback plan[164](index=164&type=chunk) - Approximately **$4.5 million** remains authorized for future repurchases under the company's stock repurchase program[164](index=164&type=chunk)[165](index=165&type=chunk) [Exhibits](index=30&type=section&id=Item%206.%20Exhibits) This section lists filed exhibits, including financial statements in Inline XBRL format and certifications from the CEO and CFO - Filed exhibits include financial statements in Inline XBRL format[167](index=167&type=chunk) - Certifications by the CEO and CFO pursuant to Section 302 of the Sarbanes-Oxley Act are included as exhibits[168](index=168&type=chunk) [Signatures](index=31&type=section&id=SIGNATURES) The report is duly signed and authorized by the President and CEO, and the Executive Vice President and CFO, on October 29, 2020 - The report was signed on October 29, 2020, by the company's principal executive officer and principal financial officer[171](index=171&type=chunk)