DSG(DSGR) - 2018 Q4 - Annual Report

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