Lawson Products, Inc. (LAWS) Q2 2020 Earnings Conference Call July 30, 2020 9:00 AM ET Company Participants Michael DeCata – President and Chief Executive Officer Ron Knutson – Chief Financial Officer Conference Call Participants Kevin Steinke – Barrington Research Operator Good morning, ladies and gentlemen, and welcome to the Lawson Products Second Quarter 2020 Earnings Call. This call will be hosted by Michael DeCata, Lawson Products' President and Chief Executive Officer, and Ron Knutson, Lawson Product ...

[PART I - FINANCIAL INFORMATION](index=4&type=section&id=PART%20I%20-%20FINANCIAL%20INFORMATION) [Item 1. Financial Statements](index=4&type=section&id=Item%201.%20Financial%20Statements) This section presents the unaudited condensed consolidated financial statements for Lawson Products, Inc. as of June 30, 2020, reflecting a decrease in revenue and net income for Q2 2020 due to the COVID-19 pandemic [Condensed Consolidated Balance Sheets](index=4&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) The balance sheet as of June 30, 2020, shows a decrease in total assets and liabilities, leading to an increase in total stockholders' equity Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2020 (Unaudited) | December 31, 2019 | | :--- | :--- | :--- | | **Total Current Assets** | $105,738 | $106,422 | | **Total Assets** | $195,707 | $204,429 | | **Total Current Liabilities** | $39,608 | $56,930 | | **Total Liabilities** | $76,663 | $96,428 | | **Total Stockholders' Equity** | $119,044 | $108,001 | [Condensed Consolidated Statements of Income and Comprehensive Income](index=5&type=section&id=Condensed%20Consolidated%20Statements%20of%20Income%20and%20Comprehensive%20Income) For Q2 2020, total revenue decreased to **$72.1 million** from **$96.1 million**, with net income falling to **$0.6 million** from **$1.3 million**, while six-month net income significantly increased to **$13.2 million** from **$5.5 million** Income Statement Summary (in thousands, except per share data) | Metric | Q2 2020 | Q2 2019 | Six Months 2020 | Six Months 2019 | | :--- | :--- | :--- | :--- | :--- | | **Total Revenue** | $72,146 | $96,097 | $163,181 | $187,440 | | **Gross Profit** | $38,313 | $51,043 | $87,234 | $99,966 | | **Operating Income** | $569 | $1,623 | $19,207 | $7,167 | | **Net Income** | $619 | $1,307 | $13,152 | $5,453 | | **Diluted EPS** | $0.07 | $0.14 | $1.41 | $0.58 | [Condensed Consolidated Statements of Cash Flows](index=7&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) Net cash provided by operating activities for the six months ended June 30, 2020, significantly improved to **$7.8 million** from **$2.2 million** used in the prior year, driven by higher net income and favorable working capital changes Cash Flow Summary for Six Months Ended June 30 (in thousands) | Activity | 2020 | 2019 | | :--- | :--- | :--- | | **Net cash provided by (used in) operating activities** | $7,837 | $(2,233) | | **Net cash used in investing activities** | $(720) | $(944) | | **Net cash used in financing activities** | $(2,435) | $(2,107) | | **Increase (decrease) in cash** | $4,517 | $(4,968) | | **Cash, cash equivalents and restricted cash at end of period** | $10,814 | $7,715 | [Notes to Condensed Consolidated Financial Statements](index=8&type=section&id=Notes%20to%20Condensed%20Consolidated%20Financial%20Statements) The notes detail accounting policies, segment performance, and the impact of **COVID-19 pandemic**, including the utilization of the **Canadian Emergency Wage Subsidy (CEWS) program** - The company operates through two segments: the **Lawson segment**, which distributes MRO products via a sales representative network in the U.S. and Canada, and the **Bolt Supply House segment**, which operates **14 branches** in Western Canada[31](index=31&type=chunk)[88](index=88&type=chunk) - The **COVID-19 pandemic** reduced the ability of sales reps to perform on-site **VMI services**, resulting in a lower allocation of revenue and costs to the service component in **Q2 2020**[43](index=43&type=chunk) - The company utilized the **Canadian Emergency Wage Subsidy (CEWS) program**, recording a **$0.9 million subsidy** in **Q2 2020**, which was recognized as a reduction to selling, general and administrative expenses[91](index=91&type=chunk) Segment Revenue for Three Months Ended June 30 (in thousands) | Segment | 2020 | 2019 | | :--- | :--- | :--- | | Total Lawson Revenue | $63,214 | $84,967 | | Bolt Supply | $8,932 | $11,130 | | **Consolidated Total** | **$72,146** | **$96,097** | [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=18&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses the significant negative impact of the **COVID-19 pandemic** on sales and operations, leading to a **24.9% decrease** in total sales for Q2 2020, while maintaining a strong liquidity position through cost-control measures [COVID-19 Pandemic Impact and Company Response](index=18&type=section&id=COVID-19%20Pandemic%20Impact%20and%20Company%20Response) The **COVID-19 pandemic** negatively impacted the company's performance by disrupting customer visits, **VMI services**, and supply chains, prompting cost-saving measures to maintain financial stability - The **pandemic** negatively impacted operations, including the ability of sales reps to call on customers and perform **VMI services**, leading to a **decrease in sales**[99](index=99&type=chunk)[101](index=101&type=chunk) - The company implemented cost-saving measures such as **furloughing ~100 employees**, **reducing salaries**, **canceling travel**, and **cutting non-critical capital expenditures**[102](index=102&type=chunk) [Results of Operations](index=20&type=section&id=Results%20of%20Operations) For Q2 2020, revenue fell **24.9%** to **$72.1 million** due to **COVID-19 pandemic** impacts, while six-month operating income rose **168.0%** to **$19.2 million** primarily from reduced **stock-based compensation expense** Q2 2020 vs Q2 2019 Performance (in thousands) | Metric | Q2 2020 | Q2 2019 | Change (%) | | :--- | :--- | :--- | :--- | | **Revenue** | $72,146 | $96,097 | (24.9)% | | **Gross Profit** | $38,313 | $51,043 | (24.9)% | | **Operating Income** | $569 | $1,623 | (65.0)% | | **Net Income** | $619 | $1,307 | (52.6)% | Six Months 2020 vs Six Months 2019 Performance (in thousands) | Metric | Six Months 2020 | Six Months 2019 | Change (%) | | :--- | :--- | :--- | :--- | | **Revenue** | $163,181 | $187,440 | (12.9)% | | **Gross Profit** | $87,234 | $99,966 | (12.7)% | | **Operating Income** | $19,207 | $7,167 | 168.0% | | **Net Income** | $13,152 | $5,453 | 141.2% | - The significant increase in **six-month operating income** was primarily due to a **$12.8 million decrease** in **stock-based compensation expense**, a portion of which varies with the company's stock price[130](index=130&type=chunk) [Liquidity and Capital Resources](index=24&type=section&id=Liquidity%20and%20Capital%20Resources) As of **June 30, 2020**, the company maintained a strong liquidity position with **$10.0 million in cash** and **$97.3 million of availability** under its **credit facility**, sufficient to fund operations for the next 12 months - The company's **liquidity position** as of **June 30, 2020** included **$10.0 million in cash** and **$97.3 million of availability** under its **credit facility**[134](index=134&type=chunk)[137](index=137&type=chunk) - In **Q1 2020**, the company **repurchased 47,504 shares of its common stock** at an average price of **$36.93**[136](index=136&type=chunk) - The company was in compliance with all **debt covenants** as of **June 30, 2020**[138](index=138&type=chunk) [Item 3. Quantitative and Qualitative Disclosure About Market Risk](index=25&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosure%20About%20Market%20Risk) This item is noted as **inapplicable** and has been **omitted** from the report - Item 3 of Part I, regarding quantitative and qualitative disclosures about market risk, is **inapplicable** and has been **omitted** from this report[142](index=142&type=chunk) [Item 4. Controls and Procedures](index=25&type=section&id=Item%204.%20Controls%20and%20Procedures) Management, including the **CEO** and **CFO**, concluded that the company's **disclosure controls and procedures** were **effective** as of June 30, 2020, with no material changes in **internal control over financial reporting** during the quarter - The **CEO** and **CFO** concluded that the company's **disclosure controls and procedures** were **effective** as of the end of the period covered by the report[143](index=143&type=chunk) - **No changes** in **internal control over financial reporting** occurred during the quarter that **materially affected**, or are reasonably likely to **materially affect**, internal controls[144](index=144&type=chunk) [PART II - OTHER INFORMATION](index=25&type=section&id=PART%20II%20-%20OTHER%20INFORMATION) [Item 1A. Risk Factors](index=25&type=section&id=Item%201A.%20Risk%20Factors) This section highlights the material risks associated with the **COVID-19 pandemic**, including **lost revenue**, **supply chain disruption**, and potential for **impairment of intangible assets and goodwill** - The **COVID-19 pandemic** is presented as a **significant risk factor**, with potential impacts including **lost revenue**, **supply chain disruption**, **reduced customer demand**, and **limitations on the sales force**[148](index=148&type=chunk) - A change in the company's **'essential business' status** could result in **temporary closures** of its business or distribution facilities[149](index=149&type=chunk) - The pandemic could **negatively impact future financial performance**, potentially leading to **impairment of intangible assets and goodwill**[152](index=152&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=26&type=section&id=Item%202.%20Unregistered%20Shares%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) The company reports no **shares** were **repurchased** during Q2 2020, with approximately **$4.5 million remained available** under the authorized **$7.5 million stock repurchase program** as of June 30, 2020 - **No shares** of the company's common stock were **repurchased** during the three months ended **June 30, 2020**[154](index=154&type=chunk) - As of **June 30, 2020**, approximately **$4.5 million remained available** for **repurchase** under the company's authorized **$7.5 million stock repurchase program**[154](index=154&type=chunk) [Item 6. Exhibits](index=27&type=section&id=Item%206.%20Exhibits%20Index) This section lists the exhibits filed with the Form 10-Q, including **Sarbanes-Oxley certifications** for the **CEO** and **CFO**, and **financial statements** formatted in **Inline XBRL** - Lists filed exhibits, including **Sarbanes-Oxley certifications** for the **CEO** and **CFO**[156](index=156&type=chunk) - Includes **financial statements** and cover page data formatted in **Inline XBRL** as required by the **SEC**[156](index=156&type=chunk)[157](index=157&type=chunk)

Financial Data and Key Metrics Changes - Consolidated sales contracted by 0.3% year-over-year, totaling $91 million compared to $91.3 million in Q1 2019 [14][22] - Adjusted EBITDA margin increased over 200 basis points to 10.4% of sales versus 8.2% a year ago, resulting in an adjusted EBITDA increase of nearly 27% [14][34] - Reported operating income was $18.6 million for Q1, inclusive of a stock-based compensation benefit of $10.7 million, compared to $5.5 million a year ago [34] Business Line Data and Key Metrics Changes - Strategic accounts achieved 1.7% growth, with 14.3% growth excluding two oil and gas customers negatively impacted by oil price declines [15] - Bolt Supply grew by 8.4% year-over-year for the quarter [15] - Government accounts contracted by 1.8% for the quarter, indicating broad-based softness [15] Market Data and Key Metrics Changes - Average daily sales for January, February, and March were $1.447 million, $1.468 million, and $1.356 million respectively, showing a decline in March [23] - April average daily sales for MRO business trended at approximately 61% of sales compared to the first two weeks of March, resulting in a decline of approximately 35% year-over-year [29] Company Strategy and Development Direction - The company is focused on maintaining safety and health protocols while continuing to service customers during the COVID-19 pandemic [5][9] - Actions taken include salary reductions, furloughing employees, and consolidating distribution centers to manage costs effectively [11][37] - The company aims to emerge from the current environment stronger and more resilient, with a commitment to innovation and customer service [18][60] Management's Comments on Operating Environment and Future Outlook - Management noted that the economic impact of COVID-19 began to manifest in the second half of March, with continued softness into April [21] - The company remains proactive in supporting customers and generating revenue despite challenging conditions [30] - Management expressed confidence in the company's ability to recover and grow post-pandemic, emphasizing the importance of customer loyalty and employee commitment [51][60] Other Important Information - The company ended the quarter with $4.1 million in cash and cash equivalents, with an additional $88 million available under its credit facility [22][39] - Total operating expenses decreased to $30.3 million from $43.4 million a year ago, reflecting effective cost management [32] Q&A Session Summary Question: Has there been any stabilization in sales as April progressed? - Management confirmed that stabilization has been observed throughout the weeks in April, with consistent trends [42] Question: How are the cost reductions distributed across various categories? - Cost reductions are primarily within selling and G&A expenses, with a significant portion being fixed costs [43][44] Question: Is the consolidation of the Georgia distribution center a permanent action? - Management indicated that the consolidation is volume-based and intends to bring back furloughed employees as demand increases [45] Question: What percentage of customers are deemed essential? - Management noted that while many customers are in essential sectors, they do not track this ratio specifically [46] Question: How has the process for winning new customers changed during the downturn? - Management reported that some new customers are more receptive due to being underserved by existing suppliers, presenting an opportunity for growth [50] Question: When will new sales reps start? - New sales rep start dates have been deferred until at least July 1, primarily due to training logistics [58]

[PART I - FINANCIAL INFORMATION](index=4&type=section&id=PART%20I%20-%20FINANCIAL%20INFORMATION) This section provides the unaudited condensed consolidated financial statements and management's discussion and analysis for the quarter ended March 31, 2020 [Item 1. Financial Statements](index=4&type=section&id=Item%201.%20Financial%20Statements) This section presents Lawson Products, Inc.'s unaudited condensed consolidated financial statements and detailed notes for Q1 2020 [Condensed Consolidated Balance Sheets](index=4&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) The balance sheet shows a slight decrease in total assets and total liabilities from December 31, 2019, to March 31, 2020, while total stockholders' equity increased **Condensed Consolidated Balance Sheets (Dollars in thousands)** | Item | March 31, 2020 (Unaudited) | December 31, 2019 | | :--------------------------------------------------------------------------------------------------------------- | :------------------------- | :------------------ | | Total assets | $198,415 | $204,429 | | Total liabilities | $81,680 | $96,428 | | Total stockholders' equity | $116,735 | $108,001 | | Cash and cash equivalents | $4,095 | $5,495 | | Accounts receivable, less allowance for doubtful accounts | $41,406 | $38,843 | | Inventories, net | $56,182 | $55,905 | | Accrued expenses and other liabilities | $18,960 | $39,311 | [Condensed Consolidated Statements of Income and Comprehensive Income](index=6&type=section&id=Condensed%20Consolidated%20Statements%20of%20Income%20and%20Comprehensive%20Income) For the three months ended March 31, 2020, the company reported a slight decrease in total revenue but a significant increase in operating income and net income compared to the same period in 2019, primarily driven by a stock-based compensation benefit **Condensed Consolidated Statements of Income and Comprehensive Income (Dollars in thousands, except per share data)** | Item | Three Months Ended March 31, 2020 (Unaudited) | Three Months Ended March 31, 2019 (Unaudited) | | :-------------------------------------------------------------- | :-------------------------------------------- | :-------------------------------------------- | | Total revenue | $91,035 | $91,343 | | Gross profit | $48,921 | $48,923 | | Operating income | $18,638 | $5,544 | | Net income | $12,533 | $4,146 | | Basic income per share of common stock | $1.39 | $0.46 | | Diluted income per share of common stock | $1.34 | $0.44 | | Adjustment for foreign currency translation | $(2,494) | $675 | | Net comprehensive income | $10,039 | $4,821 | [Condensed Consolidated Statements of Changes in Stockholders' Equity](index=8&type=section&id=Condensed%20Consolidated%20Statements%20of%20Changes%20in%20Stockholders'%20Equity) Stockholders' equity increased from $108.0 million at January 1, 2020, to $116.7 million at March 31, 2020, primarily due to net income, partially offset by treasury share repurchases and foreign currency translation adjustments **Condensed Consolidated Statements of Changes in Stockholders' Equity (Dollars in thousands)** | Item | Balance at January 1, 2020 | Net Income | Treasury Shares Repurchased | Adjustment for Foreign Currency Translation | Stock-Based Compensation | Balance at March 31, 2020 | | :-------------------------------------------------------------------------------------------------------------------------------------------- | :------------------------- | :--------- | :-------------------------- | :------------------------------------------ | :----------------------- | :------------------------ | | Total Stockholders' Equity | $108,001 | $12,533 | $(1,756) | $(2,494) | $451 | $116,735 | [Condensed Consolidated Statements of Cash Flows](index=9&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) The company used $6.9 million in operating activities and $0.6 million in investing activities, while generating $6.4 million from financing activities, resulting in a net decrease of $1.4 million in cash, cash equivalents, and restricted cash for Q1 2020 **Condensed Consolidated Statements of Cash Flows (Dollars in thousands)** | Activity | Three Months Ended March 31, 2020 (Unaudited) | Three Months Ended March 31, 2019 (Unaudited) | | :---------------------------------------------------------------------------------------------------- | :-------------------------------------------- | :-------------------------------------------- | | Net cash used in operating activities | $(6,888) | $(10,501) | | Net cash used in investing activities | $(551) | $(248) | | Net cash provided by financing activities | $6,366 | $2,256 | | Effect of exchange rate changes on cash and cash equivalents | $(327) | $213 | | Decrease in cash, cash equivalents and restricted cash | $(1,400) | $(8,280) | | Cash, cash equivalents and restricted cash at end of period | $4,897 | $4,403 | | Net cash paid for income taxes | $198 | $99 | [Notes to Condensed Consolidated Financial Statements](index=11&type=section&id=Notes%20to%20Condensed%20Consolidated%20Financial%20Statements) These notes detail accounting policies, specific financial items, segment performance, and COVID-19 risks for the condensed consolidated financial statements [Note 1 — Basis of Presentation and Summary of Significant Accounting Policies](index=11&type=section&id=Note%201%20%E2%80%94%20Basis%20of%20Presentation%20and%20Summary%20of%20Significant%20Accounting%20Policies) The unaudited condensed consolidated financial statements are prepared in accordance with GAAP for interim information, covering Lawson and Bolt Supply segments - Company operates two segments: Lawson (MRO products, VMI, US/Canada) and Bolt Supply (MRO products, branches, Western Canada)[29](index=29&type=chunk) [Note 2 - Revenue Recognition](index=11&type=section&id=Note%202%20-%20Revenue%20Recognition) Revenue is recognized from product sales and VMI services, disaggregated by geographic area and product type, with the US and Fastening Systems being largest - Revenue is recognized from two performance obligations: **product sales** (control transfer) and **VMI services** (deferred until provided)[30](index=30&type=chunk)[33](index=33&type=chunk)[34](index=34&type=chunk) **Disaggregated Revenue by Geographic Area (Three Months Ended March 31, Dollars in thousands)** | Geographic Area | 2020 | 2019 | | :-------------- | :--- | :--- | | United States | $73,584 | $74,048 | | Canada | $17,451 | $17,295 | | Consolidated Total | $91,035 | $91,343 | **Disaggregated Revenue by Product Type (Three Months Ended March 31, %)** | Product Type | 2020 (%) | 2019 (%) | | :----------- | :------- | :------- | | Fastening Systems | 22.8% | 23.5% | | Fluid Power | 14.2% | 15.2% | | Cutting Tools and Abrasives | 13.3% | 13.3% | | Specialty Chemicals | 11.2% | 11.3% | | Electrical | 10.8% | 11.5% | | Aftermarket Automotive Supplies | 8.2% | 8.4% | | Safety | 6.3% | 4.6% | | Welding and Metal Repair | 1.4% | 1.7% | | Other | 11.8% | 10.5% | | Consolidated Total | 100.0% | 100.0% | [Note 3 — Restricted Cash](index=12&type=section&id=Note%203%20%E2%80%94%20Restricted%20Cash) The company maintains $0.8 million in restricted cash as collateral for commercial card processing services - **$0.8 million** in restricted cash serves as collateral for commercial card processing services[43](index=43&type=chunk) [Note 4 — Inventories, Net](index=12&type=section&id=Note%204%20%E2%80%94%20Inventories,%20Net) Net inventories were $56.2 million at March 31, 2020, with a $4.5 million reserve for obsolete and excess inventory **Inventories, Net (Dollars in thousands)** | Item | March 31, 2020 | December 31, 2019 | | :-------------------------------------------------- | :------------- | :---------------- | | Inventories, gross | $60,668 | $60,500 | | Reserve for obsolete and excess inventory | $(4,486) | $(4,595) | | Inventories, net | $56,182 | $55,905 | [Note 5 - Goodwill](index=13&type=section&id=Note%205%20-%20Goodwill) Goodwill decreased to $19.6 million due to foreign exchange impact, with a COVID-19 related impairment trigger identified for both reporting units **Goodwill Activity (Dollars in thousands)** | Item | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | | :------------------------------- | :-------------------------------- | :-------------------------------- | | Beginning balance | $20,923 | $20,079 | | Impact of foreign exchange | $(1,368) | $372 | | Ending balance | $19,555 | $20,451 | - Identified goodwill impairment "trigger event" for Lawson and Bolt reporting units as of March 31, 2020, due to adverse changes in the business climate related to COVID-19[46](index=46&type=chunk) - The Bolt reporting unit's fair value exceeded its carrying value by less than **10%** (**$12.4 million** goodwill allocated to Bolt)[47](index=47&type=chunk) [Note 6 - Intangible Assets](index=13&type=section&id=Note%206%20-%20Intangible%20Assets) Net intangible assets were $11.3 million, primarily trade names and customer relationships, with an impairment trigger identified due to COVID-19 **Intangible Assets, Net (Dollars in thousands)** | Asset Class | Gross Carrying Amount (Mar 31, 2020) | Accumulated Amortization (Mar 31, 2020) | Net Carrying Value (Mar 31, 2020) | Gross Carrying Amount (Dec 31, 2019) | Accumulated Amortization (Dec 31, 2019) | Net Carrying Value (Dec 31, 2019) | | :--------------------- | :----------------------------------- | :-------------------------------------- | :-------------------------------- | :----------------------------------- | :-------------------------------------- | :-------------------------------- | | Trade names | $7,890 | $(2,067) | $5,823 | $8,422 | $(2,020) | $6,402 | | Customer relationships | $6,980 | $(1,527) | $5,453 | $7,337 | $(1,404) | $5,933 | | Total | $14,870 | $(3,594) | $11,276 | $15,759 | $(3,424) | $12,335 | - Amortization expense of **$0.3 million** related to intangible assets was recorded in General and administrative expenses for the three months ended March 31, 2020 and 2019, respectively[49](index=49&type=chunk) - Identified an impairment "trigger event" for definite life intangible assets as of March 31, 2020, due to adverse changes in the business climate related to COVID-19, but undiscounted future cash flows exceeded the net carrying value[50](index=50&type=chunk) [Note 7 - Leases](index=13&type=section&id=Note%207%20-%20Leases) Total lease assets were $10.2 million and liabilities $12.2 million at March 31, 2020, with weighted average terms of 3.5 years for operating leases **Net Lease Cost (Dollars in thousands)** | Lease Type | Classification | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | | :------------------------------------------------ | :---------------- | :-------------------------------- | :-------------------------------- | | Consolidated Operating Lease Expense | Operating expenses | $1,187 | $1,195 | | Consolidated Financing Lease Amortization | Operating expenses | $52 | $48 | | Consolidated Financing Lease Interest | Interest expense | $7 | $6 | | Net Lease Cost | | $1,246 | $1,169 | **Lease Assets and Liabilities (Dollars in thousands)** | Item | March 31, 2020 | December 31, 2019 | | :---------------------------------------------------------------------------------------------------- | :------------- | :---------------- | | Total ROU operating lease assets | $9,573 | $10,592 | | Total ROU financing lease assets | $605 | $654 | | Total lease assets | $10,178 | $11,246 | | Total current lease obligations | $3,825 | $3,830 | | Total long term lease obligation | $8,331 | $9,504 | **Weighted Average Lease Terms and Interest Rates (As of March 31, 2020)** | Lease Type | Weighted Average Term in Years | Weighted Average Interest Rate (%) | | :----------------- | :----------------------------- | :----------------------------- | | Operating Leases | 3.5 | 5.1% | | Financing Leases | 2.7 | 5.4% | [Note 8 — Credit Agreement](index=15&type=section&id=Note%208%20%E2%80%94%20Credit%20Agreement) The company has a $100.0 million revolving credit agreement, with $10.5 million borrowed and $87.5 million available, in compliance with covenants - Entered into a five-year credit agreement for **$100.0 million** of revolving commitments, maturing on October 11, 2024[62](index=62&type=chunk) **Credit Agreement Status (As of March 31, 2020, Dollars in thousands)** | Item | Amount | | :---------------------------- | :------- | | Borrowings | $10,460 | | Credit Availability Remaining | $87,500 | | Weighted Average Interest Rate (Q1 2020) | 4.04% | **Quarterly Financial Covenants (As of March 31, 2020)** | Covenant | Requirement Ratio | Actual Ratio | | :---------------------------- | :---------- | :----- | | EBITDA to fixed charges ratio | 1.15 : 1.00 | 7.13 : 1.00 | | Total net leverage ratio | 3.25 : 1.00 | 0.19 : 1.00 | Company was in compliance with its required debt covenants [Note 9 - Stock Repurchase Program](index=16&type=section&id=Note%209%20-%20Stock%20Repurchase%20Program) In Q1 2020, the company repurchased 47,504 shares for $1.76 million at $36.93 per share, with $4.5 million remaining - Board of Directors authorized a program in Q2 2019 to repurchase up to **$7.5 million** of common stock[69](index=69&type=chunk) **Stock Repurchase Activity (Three Months Ended March 31, 2020)** | Period | Total Number of Shares Purchased | Average Price Paid per Share (Dollars) | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs (Dollars) | | :------------------------------ | :------------------------------- | :--------------------------- | :------------------------------------------------------------------------------- | :------------------------------------------------------------------------------------------------------- | | March 1 to March 31, 2020 | 47,504 | $36.93 | 47,504 | $4,512,000 | [Note 10 — Severance Reserve](index=16&type=section&id=Note%2010%20%E2%80%94%20Severance%20Reserve) The severance reserve decreased to $0.55 million at March 31, 2020, due to payments exceeding new charges **Severance Reserve Activity (Dollars in thousands)** | Item | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | | :------------------------------------- | :-------------------------------- | :-------------------------------- | | Balance at beginning of period | $909 | $359 | | Charged to earnings | $7 | $27 | | Payments | $(365) | $(123) | | Balance at end of period | $551 | $263 | [Note 11 — Stock-Based Compensation](index=16&type=section&id=Note%2011%20%E2%80%94%20Stock-Based%20Compensation) The company recorded a significant $10.7 million stock-based compensation benefit in Q1 2020, primarily due to changes in common stock market value - Recorded a stock-based compensation benefit of **$10.7 million** for Q1 2020, compared to an expense of **$0.4 million** for Q1 2019, primarily due to changes in the market value of the company's common stock[71](index=71&type=chunk) - The accrued liability for Stock Performance Rights (SPRs) decreased from **$14.9 million** (Dec 31, 2019) to **$3.7 million** (Mar 31, 2020) due to changes in the market value of common stock[71](index=71&type=chunk) - Issued **6,847 Restricted Stock Units (RSUs)** to key employees, **5,500 RSUs** to an executive, **22,284 Market Stock Units (MSUs)** to key employees, and **10,852 Performance Awards (PAs)** to key employees in Q1 2020[72](index=72&type=chunk)[73](index=73&type=chunk)[75](index=75&type=chunk) [Note 12 — Income Taxes](index=17&type=section&id=Note%2012%20%E2%80%94%20Income%20Taxes) Income tax expense for Q1 2020 was $4.9 million, with an effective tax rate of 28.0%, higher due to state taxes and uncertain positions **Income Tax Expense and Effective Tax Rate (Dollars in thousands)** | Period | Income Tax Expense | Effective Tax Rate (%) | | :----- | :----------------- | :----------------- | | Q1 2020 | $4,879 | 28.0% | | Q1 2019 | $1,673 | 28.8% | - The effective tax rate is higher than the U.S. statutory rate due primarily to state taxes and the recording of reserves for uncertain tax positions[76](index=76&type=chunk) [Note 13 — Contingent Liabilities](index=17&type=section&id=Note%2013%20%E2%80%94%20Contingent%20Liabilities) The company has a minimal environmental remediation liability at its Decatur, Alabama site, with a plan approved and injections completed - Identified hazardous substances in soil and groundwater at a site in Decatur, Alabama, from historical operations prior to company ownership[79](index=79&type=chunk) - Remediation plan approved by ADEM in 2018, with chemical injections completed in Q1 2019 and ongoing monitoring[80](index=80&type=chunk) - Company believes the **minimal remaining environmental remediation liability** will be sufficient to cover the remaining cost of the plan[80](index=80&type=chunk) [Note 14 – Segment Information](index=18&type=section&id=Note%2014%20%E2%80%93%20Segment%20Information) The Lawson segment saw a slight revenue decrease but significant operating income increase, while Bolt Supply showed revenue and operating income growth **Segment Revenue (Dollars in thousands)** | Segment | 2020 | 2019 | | :------------------ | :----- | :----- | | Lawson product revenue | $71,791 | $73,039 | | Lawson service revenue | $9,700 | $9,428 | | Total Lawson revenue | $81,491 | $82,467 | | Bolt Supply | $9,544 | $8,876 | | Consolidated total | $91,035 | $91,343 | **Segment Gross Profit (Dollars in thousands)** | Segment | 2020 | 2019 | | :------------------ | :----- | :----- | | Lawson product gross profit | $39,729 | $40,604 | | Lawson service gross profit | $5,391 | $5,015 | | Total Lawson gross profit | $45,120 | $45,619 | | Bolt Supply | $3,801 | $3,304 | | Consolidated total | $48,921 | $48,923 | **Segment Operating Income (Dollars in thousands)** | Segment | 2020 | 2019 | | :---------- | :----- | :----- | | Lawson | $18,094 | $5,458 | | Bolt Supply | $544 | $86 | | Consolidated total | $18,638 | $5,544 | [Note 15 - COVID-19 Risks and Uncertainties](index=19&type=section&id=Note%2015%20-%20COVID-19%20Risks%20and%20Uncertainties) The COVID-19 pandemic negatively impacts revenue, supply chain, and demand, prompting mitigation efforts like remote work and cost-cutting - COVID-19 pandemic negatively impacted revenue, ability to source high demand products, sales force functions, customer demand, and timely customer payments[85](index=85&type=chunk) - Company is defined as an essential business in Illinois, allowing operations, but temporary closures of distribution facilities or Bolt branches remain a risk[87](index=87&type=chunk) - Mitigation actions include Lawson sales reps reaching out via phone/fax/internet, Bolt branches offering curbside pickup, monitoring customer liquidity, and managing supply chain to ensure inventory fulfillment[89](index=89&type=chunk) - Cost-cutting measures include furloughing approximately **100 employees**, reducing salaries, canceling travel, consolidating a distribution center, and eliminating non-critical capital expenditures[90](index=90&type=chunk) [Item 2. 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 the company's financial performance, condition, and results for the quarter, including the significant impact of the COVID-19 pandemic [Overview](index=20&type=section&id=Overview) The MRO distribution industry is fragmented and impacted by manufacturing, with flat PMI growth and decreased sales representative productivity in Q1 2020 - The Maintenance, Repair and Operations (MRO) distribution industry is highly fragmented and significantly impacted by the overall strength of the U.S. manufacturing sector[93](index=93&type=chunk) **PMI Index (Average Monthly)** | Period | PMI Index | Indication | | :----- | :-------- | :--------- | | Q1 2020 | 50.0 | Flat rate of growth | | Q1 2019 | 55.4 | Expansion | **Sales Force and Productivity** | Metric | Q1 2020 | Q1 2019 | Change | | :------------------------------------ | :------ | :------ | :----- | | Average sales representatives | 998 | 991 | +7 | | Lawson segment sales per rep per day | $1,268 | $1,308 | -3.1% | [COVID-19 Pandemic](index=20&type=section&id=COVID-19%20Pandemic) The COVID-19 pandemic significantly impacted MRO and Bolt Supply business models, leading to remote outreach, curbside pickup, and cost reductions - The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains, and created significant volatility in financial markets, leading to substantial uncertainty for the company's future results[95](index=95&type=chunk) - The MRO business model (onsite sales visits) and Bolt Supply business model (branch foot traffic) are negatively impacted by social distancing guidelines and government-mandated shelter-in-place orders[97](index=97&type=chunk) - Mitigation efforts include MRO sales reps reaching out via phone/fax/internet, Bolt branches offering curbside pickup, monitoring customer liquidity, and ensuring supply chain integrity[98](index=98&type=chunk)[99](index=99&type=chunk) - Company actions include furloughing approximately **100 employees**, reducing salaries, canceling travel, consolidating a distribution center, and eliminating non-critical capital expenditures[101](index=101&type=chunk) [Revenue and Gross Profits](index=24&type=section&id=Revenue%20and%20Gross%20Profits) Consolidated sales were flat at $91.0 million, impacted by COVID-19, with Lawson sales declining and Bolt Supply improving, while gross profit remained flat **Revenue by Segment (Three Months Ended March 31, Dollars in thousands)** | Segment | 2020 | 2019 | Increase (Decrease) Amount | Increase (Decrease) % | | :------------ | :----- | :----- | :------------------------- | :-------------------- | | Lawson | $81,491 | $82,467 | $(976) | (1.2)% | | Bolt Supply | $9,544 | $8,876 | $668 | 7.5% | | Consolidated | $91,035 | $91,343 | $(308) | (0.3)% | **Gross Profit by Segment (Three Months Ended March 31, Dollars in thousands)** | Segment | 2020 | 2019 | Increase (Decrease) Amount | Increase (Decrease) % | | :------------ | :----- | :----- | :------------------------- | :-------------------- | | Lawson | $45,120 | $45,619 | $(499) | (1.1)% | | Bolt Supply | $3,801 | $3,304 | $497 | 15.0% | | Consolidated | $48,921 | $48,923 | $(2) | —% | **Gross Profit Margin by Segment (Three Months Ended March 31, %)** | Segment | 2020 | 2019 | | :------------ | :----- | :----- | | Lawson | 55.4% | 55.3% | | Bolt Supply | 39.8% | 37.2% | | Consolidated | 53.7% | 53.6% | - Consolidated sales were negatively impacted by the onset of the COVID-19 pandemic in mid-March 2020 and decreases in sales to Government customers[110](index=110&type=chunk) - Lawson segment total sales were negatively impacted by a **3.1% decline** in sales productivity of Lawson sales representatives[111](index=111&type=chunk) [Selling, General and Administrative Expenses](index=24&type=section&id=Selling,%20General%20and%20Administrative%20Expenses) Selling expenses decreased by 8.1% due to lower incentives and travel, while G&A expenses significantly decreased by 52.4% due to a stock-based compensation benefit **Selling Expenses (Three Months Ended March 31, Dollars in thousands)** | Segment | 2020 | 2019 | Increase (Decrease) Amount | Increase (Decrease) % | | :------------ | :----- | :----- | :------------------------- | :-------------------- | | Lawson | $19,187 | $20,953 | $(1,766) | (8.4)% | | Bolt Supply | $797 | $789 | $8 | 1.0% | | Consolidated | $19,984 | $21,742 | $(1,758) | (8.1)% | **General and Administrative Expenses (Three Months Ended March 31, Dollars in thousands)** | Segment | 2020 | 2019 | Increase (Decrease) Amount | Increase (Decrease) % | | :------------ | :----- | :----- | :------------------------- | :-------------------- | | Lawson | $7,839 | $19,208 | $(11,369) | (59.2)% | | Bolt Supply | $2,460 | $2,429 | $31 | 1.3% | | Consolidated | $10,299 | $21,637 | $(11,338) | (52.4)% | - The decrease in selling expense as a percent of sales is primarily due to lower incentives, travel, and commission due to the impact of COVID-19 in the second half of March and better leveraging fixed selling expenses[114](index=114&type=chunk) - The lower general and administrative expense was primarily driven by a **$10.7 million stock-based compensation benefit** in Q1 2020[115](index=115&type=chunk) [Interest Expense](index=25&type=section&id=Interest%20Expense) Interest expense decreased to $0.1 million in Q1 2020 from $0.2 million in Q1 2019, primarily due to lower outstanding borrowing levels **Interest Expense (Dollars in thousands)** | Period | 2020 | 2019 | | :----- | :--- | :--- | | Q1 | $(115) | $(197) | - Interest expense decreased primarily as a result of lower outstanding borrowing levels[117](index=117&type=chunk) [Other Income (Expense), Net](index=25&type=section&id=Other%20Income%20(Expense),%20Net) Other income (expense), net, increased by $1.6 million in Q1 2020, primarily due to Canadian currency exchange rate changes **Other Income (Expense), Net (Dollars in thousands)** | Period | 2020 | 2019 | Change | | :----- | :----- | :----- | :----- | | Q1 | $(1,111) | $472 | $(1,583) | - Other income (expense), net, increased **$1.6 million** in Q1 2020 over the prior year quarter primarily due to the effect of a change in the Canadian currency exchange rate[118](index=118&type=chunk) [Income Tax Expense](index=25&type=section&id=Income%20Tax%20Expense) Income tax expense increased to $4.9 million in Q1 2020 from $1.7 million in Q1 2019, with effective tax rates of 28.0% and 28.8% respectively **Income Tax Expense and Effective Tax Rate (Three Months Ended March 31, Dollars in thousands)** | Period | Income Tax Expense | Effective Tax Rate (%) | | :----- | :----------------- | :----------------- | | Q1 2020 | $4,879 | 28.0% | | Q1 2019 | $1,673 | 28.8% | [Liquidity and Capital Resources](index=26&type=section&id=Liquidity%20and%20Capital%20Resources) Cash decreased to $4.1 million, with improved operating cash flow, increased capital expenditures, and cash generated from financing activities, maintaining sufficient liquidity **Cash and Cash Equivalents (Dollars in millions)** | Period | Amount | | :----------- | :----- | | March 31, 2020 | $4.1 | | December 31, 2019 | $5.5 | **Cash Flow Activities (Three Months Ended March 31, Dollars in millions)** | Activity | 2020 | 2019 | | :-------------------------------- | :----- | :----- | | Net cash used by operations | $(6.9) | $(10.5) | | Capital expenditures | $(0.6) | $(0.2) | | Cash from financing activities | $6.4 | $2.3 | - Repurchased **47,504 shares** of common stock at an average purchase price of **$36.93** in Q1 2020, with **$4.5 million** remaining availability under the program[123](index=123&type=chunk) - As of March 31, 2020, the company had **$10.5 million** of borrowings under its Credit Agreement and **$87.5 million** of credit availability remaining, net of outstanding letters of credit[123](index=123&type=chunk) - Management believes cash provided by operations and funds available under the Credit Agreement are sufficient to fund operating requirements, strategic initiatives, and capital improvements over the next 12 months, including potential COVID-19 impacts[125](index=125&type=chunk) [Item 3. Quantitative and Qualitative Disclosure About Market Risk](index=27&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosure%20About%20Market%20Risk) This item is inapplicable and has been omitted from the report - Item 3 of Part I is inapplicable and has been omitted from this report[128](index=128&type=chunk) [Item 4. Controls and Procedures](index=27&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded disclosure controls and procedures were effective as of March 31, 2020, with no material changes in internal control over financial reporting - The Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective as of March 31, 2020[129](index=129&type=chunk) - There were no changes in internal control over financial reporting during the quarter ended March 31, 2020, that materially affected, or are reasonably likely to materially affect, internal control over financial reporting[130](index=130&type=chunk) [PART II - OTHER INFORMATION](index=28&type=section&id=PART%20II%20-%20OTHER%20INFORMATION) This section covers other information including risk factors, equity security sales, and exhibit index [Item 1A. Risk Factors](index=28&type=section&id=Item%201A.%20Risk%20Factors) The primary new risk factor is the COVID-19 pandemic, posing significant threats to operations, financial performance, supply chains, and cybersecurity - A new material risk factor is related to the COVID-19 pandemic, with no other material changes from the risk factors disclosed in the Annual Report on Form 10-K[134](index=134&type=chunk) - The COVID-19 pandemic negatively impacts the global economy, supply chains, financial markets, and the company's ability to execute business strategies, with the full extent of the effect being uncertain[135](index=135&type=chunk) - Potential impacts include temporary closure of distribution facilities or Bolt branch locations, negative effects on sales due to social distancing and shelter-in-place orders, challenges in collecting receivables, and vendor supply disruptions[136](index=136&type=chunk)[137](index=137&type=chunk) - COVID-19 may lead to impairment losses related to goodwill and other long-lived assets due to potential detrimental impacts on future financial performance[138](index=138&type=chunk) - Increased remote work due to the pandemic can exacerbate risks related to internal controls and cybersecurity[139](index=139&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=29&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) In March 2020, the company repurchased 47,504 shares for $1.76 million under its stock repurchase program, with $4.5 million remaining **Stock Repurchase Summary (Three Months Ended March 31, 2020)** | Period | Total Number of Shares Purchased | Average Price Paid per Share (Dollars) | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs (Dollars) | | :------------------------------ | :------------------------------- | :--------------------------- | :------------------------------------------------------------------------------- | :------------------------------------------------------------------------------------------------------- | | March 1 to March 31, 2020 | 47,504 | $36.93 | 47,504 | $4,512,000 | [Item 6. Exhibits Index](index=29&type=section&id=Item%206.%20Exhibits%20Index) This section lists the exhibits filed with the Form 10-Q, including certifications from the CEO and CFO, and XBRL-related documents - Includes certifications of the Chief Executive Officer and Chief Financial Officer (Exhibits **31.1**, **31.2**, **32**)[142](index=142&type=chunk) - Includes XBRL Instance Document and Taxonomy Extension Documents (Exhibits **101.INS**, **101.SCH**, **101.CAL**, **101.DEF**, **101.LAB**, **101.PRE**)[142](index=142&type=chunk) [SIGNATURES](index=30&type=section&id=SIGNATURES) The report was signed on April 30, 2020, by Michael G. DeCata, President and Chief Executive Officer, and Ronald J. Knutson, Executive Vice President, Chief Financial Officer, Treasurer and Controller - Report signed on **April 30, 2020**, by Michael G. DeCata, President and Chief Executive Officer, and Ronald J. Knutson, Executive Vice President, Chief Financial Officer, Treasurer and Controller[145](index=145&type=chunk)[146](index=146&type=chunk)

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

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

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

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q (Mark One) ý Quarterly Report under Section 13 OR 15(d) of the Securities Exchange Act of 1934 For quarterly period ended September 30, 2019 or ¨ Transition Report under Section 13 OR 15(d) of the Securities Exchange Act of 1934 For the transition period from to Commission file Number: 0-10546 | --- | --- | |-----------------------------------------------------------------------------|----------------------------------------- ...

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q (Mark One) ý Quarterly Report under Section 13 OR 15(d) of the Securities Exchange Act of 1934 For quarterly period ended June 30, 2019 or ¨ Transition Report under Section 13 OR 15(d) of the Securities Exchange Act of 1934 For the transition period from to Commission file Number: 0-10546 | --- | --- | |-----------------------------------------------------------------------------|------------------------------------------| | ...

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q (Mark One) ý Quarterly Report under Section 13 OR 15(d) of the Securities Exchange Act of 1934 For quarterly period ended March 31, 2019 or ¨ Transition Report under Section 13 OR 15(d) of the Securities Exchange Act of 1934 For the transition period from to Commission file Number: 0-10546 LAWSON PRODUCTS, INC. (Exact name of registrant as specified in its charter) Delaware 36-2229304 (State or other jurisdiction of incorpora ...