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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

_________________________________________

 

FORM 10-Q

(Mark One)

x           QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2005

OR

 

o            TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

______________________________

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
incorporation or organization)

 

(I.R.S. Employer
Identification No.)

1666 East Touhy Avenue, Des Plaines, Illinois

60018

(Address of principal executive offices)

(Zip Code)

Registrant's telephone no., including area code:

(847) 827 9666

Not applicable

Former name, former address and former fiscal year, if changed since last report.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes

X

No____

Indicate by checkmark wither the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes

X

No____

 

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

9,156,313 Shares, $1 par value, as of April 15, 2005.

 


PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL INFORMATION

LAWSON PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except share data) March 31,
2005
 December 31,
2004
(Unaudited)
ASSETS        
Current Assets:  
   Cash and cash equivalents   $ 22,957   $ 28,872  
   Accounts receivable, less allowance for doubtful  
     accounts    51,914    52,129  
   Inventories    69,036    65,687  
   Miscellaneous receivables and prepaid expenses    8,772    9,560  
   Deferred income taxes    1,631    1,729  
       Total Current Assets    154,310    157,977  
Property, plant and equipment, less allowances for  
   depreciation and amortization    41,211    42,452  
Deferred income taxes    14,954    14,779  
Goodwill, less accumulated amortization    28,649    28,649  
Other assets    17,167    16,693  
       Total Assets   $ 256,291   $ 260,550  
LIABILITIES AND STOCKHOLDERS' EQUITY   
Current Liabilities:  
   Accounts payable   $ 10,321   $ 8,746  
   Accrued expenses and other liabilities    26,542    32,628  
   Income taxes    2,370    --  
   Current portion of long term debt    1,190    1,573  
       Total Current Liabilities    40,423    42,947  
Accrued liability under security  
   bonus plans    22,138    21,528  
Other    15,964    15,743  
     38,102    37,271  
Stockholders' Equity:  
   Preferred Stock, $1 par value:  
     Authorized - 500,000 shares  
     Issued and outstanding - None    --    --  
   Common Stock, $1 par value:  
     Authorized - 35,000,000 shares  
     Issued and outstanding-(2005-9,167,413 shares;  
       2004-9,280,935 shares)    9,167    9,281  
   Capital in excess of par value    3,518    3,467  
   Retained earnings    164,795    167,187  
   Accumulated other comprehensive  
     income    286    397  
       Total Stockholders' Equity    177,766    180,332  
       Total Liabilities and  
           Stockholders' Equity   $ 256,291   $ 260,550  

See notes to condensed consolidated financial statements.

LAWSON PRODUCTS, INC. AND SUBSIDIARIESCONDENSED
CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(Amounts in thousands, except per share data)
For the
Three Months Ended
March 31,
2005
 2004
Net sales     $ 107,082   $ 100,658  
Cost of goods sold    41,518    35,261  
Gross profit    65,564    65,397  
Selling, general and  
   administrative expenses    57,482    55,335  
Operating income    8,082    10,062  
Investment and other income    530    528  
Interest expense    (26 )  (63 )
Income before income taxes    8,586    10,527  
Provision for income taxes    3,630    4,001  
Net income   $ 4,956   $ 6,526  
Net income per share  
   of common stock:  
     Basic   $ 0.54   $ 0.69  
     Diluted   $ 0.54   $ 0.69  
Cash dividends declared per  
   share of common stock   $ 0.20   $ 0.18  
Weighted average shares  
   outstanding:  
     Basic    9,208    9,487  
     Diluted    9,232    9,515  

See notes to condensed consolidated financial statements.

LAWSON PRODUCTS, INC. AND SUBSIDIARIESCONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Amounts in thousands, except per share data)

For the
Three Months Ended
March 31,
2005
 2004
Operating activities:        
   Net income   $ 4,956   $ 6,526  
   Adjustments to reconcile net income to net cash  
     provided by operating activities:  
       Depreciation and amortization    1,732    1,700  
       Changes in operating assets and liabilities    (5,408 )  268  
       Other    997    598  
   Net Cash Provided by Operating Activities    2,277    9,092  
Investing activities:  
   Additions to property, plant and  
     equipment    (399 )  (1,114 )
   Net Cash Used in Investing Activities    (399 )  (1,114 )
Financing activities:  
   Purchases of treasury stock    (5,678 )  (856 )
   Payments on long term debt    (382 )  (356 )
   Dividends paid    (1,833 )  (1,709 )
   Other    100    93  
   Net Cash Used in Financing Activities    (7,793 )  (2,828 )
       Increase (Decrease) in Cash and Cash Equivalents    (5,915 )  5,150  
   Cash and Cash Equivalents at Beginning of Period    28,872    23,555  
       Cash and Cash Equivalents at End of Period   $ 22,957   $ 28,705  

See notes to condensed consolidated financial statements.

 

 

NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS

A)            As contemplated by the Securities and Exchange Commission, the accompanying consolidated financial statements and footnotes have been condensed and therefore, do not contain all disclosures required by generally accepted accounting principles. Reference should be made to Lawson Products, Inc.’s (the “Company’s”) Annual Report on Form 10-K for the year ended December 31, 2004. The Condensed Consolidated Balance Sheet as of March 31, 2005, and the Condensed Consolidated Statements of Income and the Condensed Consolidated Statements of Cash Flows for the three month periods ended March 31, 2005 and 2004 are unaudited. In the opinion of the Company, all adjustments (consisting only of normal recurring accruals) have been made, which are necessary to present fairly the results of operations for the interim periods. Operating results for the quarter ended March 31, 2005 are not necessarily indicative of the results that may be expected for the year ending December 31, 2005.

Certain amounts have been reclassified in the 2004 financial statements to conform with the 2005 presentation.

B)

Comprehensive Income

Comprehensive income (in thousands) was $4,845 and $6,608 for the first quarters of 2005 and 2004, respectively. Comprehensive income includes foreign currency translation adjustments of ($111) and $82 for the three-month periods ended March 31, 2005 and 2004, respectively.

Accumulated comprehensive income consists only of foreign currency translation adjustments, net of related income tax.

C)

Earnings per Share

The calculation of dilutive weighted average shares outstanding at March 31, 2005 and 2004 are as follows (in thousands):

2005
 2004
Basic weighted average shares    
   outstanding 9,208  9,487 
Dilutive impact of options outstanding 24  28 
Dilutive weighted average shares outstanding 9,232  9,515 

 

 

 

 

 

 

D)     Revolving Line of Credit

The Company has a $50 million revolving line of credit which matures in March 2006 and carries an interest rate of prime minus 150 basis points or LIBOR plus 75 basis points, at the Company’s option. Interest is payable quarterly on prime borrowings and at the earlier of quarterly or maturity with respect to the LIBOR contracts. The line of credit contains certain financial covenants regarding interest coverage, minimum stockholders’ equity and working capital, all of which the Company was in compliance with at March 31, 2005. The Company had no borrowings outstanding under the line at March 31, 2005 and December 31, 2004.

          E) Severance and Related Charges

        The table below shows an analysis of the Company’s reserves for severance and related payments for the first quarter of 2005 and 2004:

In thousands
 2005
 2004
Balance at beginning of year     $ 1,042   $ 2,476  
Cash paid    (248 )  (365 )
Balance at March 31   $ 794   $ 2,111  
          F)     Intangible Assets

        Intangible assets subject to amortization, included within other assets, were as follows (in thousands):

March 31, 2005
Gross Balance
 Accumulated
Amortization
 Net Carrying
Amount
Trademarks and tradenames     $ 1,747   $ 947   $ 800  
Customer Lists    953    409    544  
    $ 2,700   $ 1,356   $ 1,344  
December 31, 2004
Gross Balance
 Accumulated
Amortization
 Net Carrying
Amount
Trademarks and tradenames     $ 1,747   $ 935   $ 812  
Customer Lists    953    400    553  
    $ 2,700   $ 1,335   $ 1,365  
  

        Trademarks and tradenames are being amortized over a weighted average of 15.14 years. Customer lists are being amortized over 13.96 years. Amortization expense for intangible assets is expected to be $83,000 for 2005 and for each of the next four years.

          G)     Accounting for Stock-Based Compensation

        The Company complies with FASB Statement No. 148, “Accounting for Stock Based Compensation – Transition and Disclosure,” which requires interim financial disclosure to show the effect on net income and earnings per share as required by FASB Statement No. 123, “Accounting for Stock-Based Compensation.” These disclosures are as follows:

Three Months Ended
March 31
In thousands
 2005
 2004
Net income-as reported     $ 4,956   $ 6,526  
Deduct: Total stock based employee compensation expense  
   determined under fair value method, net of tax    0    (3 )
Net income-pro forma   $ 4,956   $ 6,523  
Basic and diluted earnings per share -as reported and pro forma   $ 0.54   $ .69  

        The Company’s incentive stock plan provides for the issuance of Stock Performance Rights (SPRs). These SPRs vest at 20% per year and entitle the recipient to receive a cash payment equal to the excess of the market value of the Company’s common stock over the SPR price when the SPRs are surrendered. The Company records an accrued liability based on the number of outstanding vested SPRs and the market value of the Company’s common stock. The compensation expense accrual decreased $538,000 and $73,000 in the first quarter of 2005 and 2004, respectively. The decrease in the compensation expense accrual for the first quarter of 2005 is primarily due to the decrease in the Company’s stock price and SPRs exercised. No additional SPRs were issued during the first quarter of 2005.

        On December 16, 2004, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 123(R), “Share-Based Payment,” which is a revision of FASB Statement No. 123, “Accounting for Stock-Based Compensation.” Statement No. 123(R) requires all share-based payments to employees, including grants of employee stock options to be recognized in the financial statements based on their fair values. Statement No. 123(R) is effective for public companies for annual periods that begin after June 15, 2005. The Company plans to comply timely with Statement No. 123(R). The Company expects that the impact of complying with Statement No. 123(R) is not significant.

          H)     Segment Reporting

        The Company has four reportable segments: Maintenance, Repair and Replacement distribution in the U.S. (MRO-US), International Maintenance, Repair and Replacement distribution in Canada (MRO-CAN), Original Equipment Manufacturer distribution and manufacturing in the U.S. (OEM-US), International Original Equipment Manufacturer distribution in the United Kingdom and Mexico (OEM-INTL).

        The operations of the Company’s MRO distribution segments distribute a wide range of MRO parts to repair and maintenance organizations by the Company’s force of independent field sales agents, and inside sales personnel.

        The operations of the Company’s OEM segments manufacture and distribute component parts to OEM manufacturers through a network of independent manufacturers representatives as well as internal sales personnel.

        The Company’s reportable segments are distinguished by the nature of products distributed and sold, types of customers, manner of servicing customers, and geographical location.

        The Company evaluates performance and allocates resources to reportable segments primarily based on operating income.

        Financial information for the Company’s reportable segments consisted of the following:

Three Months Ended
March 31
In thousands
 2005
 2004
Net sales        
   MRO-US   $ 80,231   $ 76,396  
   MRO-CAN    6,317    5,052  
   OEM-US    17,377    14,740  
   OEM-INTL    3,157    4,470  
       Consolidated total   $ 107,082   $ 100,658  
Operating income(loss)  
   MRO-US   $ 6,736   $ 9,212  
   MRO-CAN    740    400  
   OEM-US    1,103    478  
   OEM-INTL    (497 )  (28 )
       Consolidated total   $ 8,082   $ 10,062  

        The reconciliation of segment profit to consolidated income before income taxes consisted of the following:

Three Months Ended
March 31
In thousands
 2005
 2004
 Total operating income        
   from reportable segments   $ 8,082   $ 10,062  
Investment and other income    530    528  
 Interest expense    (26 )  (63 )
      Income before income taxes   $ 8,586   $ 10,527  

        Asset information related to the Company’s reportable segments consisted of the following:

In thousands
 March 31,
2005
 December 31,
2004
Total assets            
   MRO-US   $ 165,338   $ 174,777  
   MRO-CAN