Company Quick10K Filing
Lawson Products
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$0.00 9 $324
10-Q 2019-10-24 Quarter: 2019-09-30
10-Q 2019-07-25 Quarter: 2019-06-30
10-Q 2019-04-18 Quarter: 2019-03-31
10-K 2019-03-04 Annual: 2018-12-31
10-Q 2018-10-25 Quarter: 2018-09-30
10-Q 2018-07-26 Quarter: 2018-06-30
10-Q 2018-04-20 Quarter: 2018-03-31
10-K 2018-02-22 Annual: 2017-12-31
10-Q 2017-10-26 Quarter: 2017-09-30
10-Q 2017-07-27 Quarter: 2017-06-30
10-Q 2017-04-20 Quarter: 2017-03-31
10-K 2017-02-23 Annual: 2016-12-31
10-Q 2016-10-20 Quarter: 2016-09-30
10-Q 2016-07-21 Quarter: 2016-06-30
10-Q 2016-04-28 Quarter: 2016-03-31
10-K 2016-02-18 Annual: 2015-12-31
10-Q 2015-10-22 Quarter: 2015-09-30
10-Q 2015-07-23 Quarter: 2015-06-30
10-Q 2015-04-30 Quarter: 2015-03-31
10-K 2015-02-19 Annual: 2015-02-19
10-Q 2014-10-23 Quarter: 2014-09-30
10-Q 2014-07-24 Quarter: 2014-06-30
10-Q 2014-04-24 Quarter: 2014-03-31
10-K 2014-02-20 Annual: 2013-12-31
10-Q 2013-10-24 Quarter: 2013-09-30
10-Q 2013-07-25 Quarter: 2013-06-30
10-Q 2013-04-25 Quarter: 2013-03-31
10-K 2013-02-26 Annual: 2012-12-31
10-Q 2012-10-25 Quarter: 2012-09-30
10-Q 2012-08-09 Quarter: 2012-06-30
10-Q 2012-04-26 Quarter: 2012-03-31
10-K 2012-03-01 Annual: 2011-12-31
10-Q 2011-11-07 Quarter: 2011-09-30
10-Q 2011-07-28 Quarter: 2011-06-30
10-Q 2011-04-28 Quarter: 2011-03-31
10-K 2011-02-17 Annual: 2010-12-31
10-Q 2010-10-28 Quarter: 2010-09-30
10-Q 2010-07-28 Quarter: 2010-06-30
10-Q 2010-04-29 Quarter: 2010-03-31
10-K 2010-02-25 Annual: 2009-12-31
8-K 2019-11-07 Regulation FD, Exhibits
8-K 2019-10-11
8-K 2019-09-30 Earnings, Exhibits
8-K 2019-08-05 Regulation FD, Exhibits
8-K 2019-07-25 Earnings, Exhibits
8-K 2019-05-23 Regulation FD, Exhibits
8-K 2019-05-14 Enter Agreement, Off-BS Arrangement, Officers, Shareholder Vote, Other Events, Exhibits
8-K 2019-05-03 Officers, Other Events, Exhibits
8-K 2019-04-17 Officers
8-K 2019-03-31 Earnings, Exhibits
8-K 2019-03-18 Officers
8-K 2019-02-28 Earnings, Exhibits
8-K 2019-01-21 Officers
8-K 2018-11-08 Regulation FD, Exhibits
8-K 2018-10-01 M&A, Exhibits
8-K 2018-08-07 Regulation FD, Exhibits
8-K 2018-05-31 Regulation FD, Exhibits
8-K 2018-05-15 Shareholder Vote
8-K 2018-04-19 Earnings, Exhibits
8-K 2018-04-09 Officers, Exhibits
8-K 2018-02-22 Earnings, Exhibits
LAWS 2019-09-30
Part I - Financial Information
Item 1 - Financial Statements
Note 1 - Basis of Presentation and Summary of Significant Accounting Policies
Note 2 - Leases
Note 3 - Revenue Recognition
Note 4 - Restricted Cash
Note 5 - Inventories, Net
Note 6 - Goodwill
Note 7 - Intangible Assets
Note 8 - Loan Agreement
Note 9 - Treasury Stock Repurchase Program
Note 10 - Severance Reserve
Note 11 - Stock-Based Compensation
Note 12 - Income Taxes
Note 13 - Contingent Liabilities
Note 14 - Acquisition
Note 15 - Segment Information
Note 16 - Subsequent Event
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 3 of Part I Is Inapplicable and Has Been Omitted From This Report.
Item 4. Controls and Procedures
Part II
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 6. Exhibits
EX-31.1 a2019q3ex311.htm
EX-31.2 a2019q3ex312.htm
EX-32 a2019q3ex32.htm

Lawson Products Earnings 2019-09-30

LAWS 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

Comparables ($MM TTM)
Ticker M Cap Assets Liab Rev G Profit Net Inc EBITDA EV G Margin EV/EBITDA ROA
ESTA 424 105 51 75 44 -29 -19 393 59% -20.4 -28%
PKOH 388 1,324 994 1,656 265 50 140 938 16% 6.7 4%
WLFC 349 1,931 1,561 396 318 66 233 1,567 80% 6.7 3%
SIEN 337 246 131 74 46 -109 -102 230 62% -2.2 -44%
LAWS 324 209 100 352 194 7 15 316 55% 20.5 3%
RTIX 292 361 111 281 140 -1 15 330 50% 22.5 -0%
CFMS 267 65 38 91 50 -32 -24 265 55% -11.2 -49%
NTIC 230 66 10 57 18 7 8 225 32% 26.6 11%
IVC 162 868 536 948 260 -40 14 306 27% 22.3 -5%
LAKE 96 101 18 101 33 -0 3 89 33% 26.2 -0%

10-Q 1 a2019q310q.htm 10-Q Document
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 
 
 
 
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.)
 
 
8770 W. Bryn Mawr Avenue, Suite 900, Chicago, Illinois
 
60631
(Address of principal executive offices)
 
(Zip Code)
(773) 304-5050
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading Symbol
 
Name of each exchange on which registered
Common stock, $1.00 par value
 
LAWS
 
NASDAQ Global Select Market
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  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
¨
Accelerated filer
ý
Non-accelerated filer
¨ (Do not check if a smaller reporting company)
Smaller reporting company
ý
 
 
Emerging growth company
¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ¨  
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
The number of shares outstanding of the registrant’s common stock, $1 par value, as of October 15, 2019 was 8,961,648.



TABLE OF CONTENTS
 
 
 
Page #
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 3.
Quantitative and Qualitative Disclosure About Market Risk
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2



“Safe Harbor” Statement under the Securities Litigation Reform Act of 1995:

This Quarterly Report on Form 10-Q contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties. The terms “may,” “should,” “could,” “anticipate,” “believe,” “continues,” “estimate,” “expect,” “intend,” “objective,” “plan,” “potential,” “project” and similar expressions are intended to identify forward-looking statements. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. These statements are based on management’s current expectations, intentions or beliefs and are subject to a number of factors, assumptions and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. Factors that could cause or contribute to such differences or that might otherwise impact the business include:

the effect of general economic and market conditions;
the ability to generate sufficient cash to fund our operating requirements;
the ability to meet the covenant requirements of our lines of credit;
the market price of our common stock may decline;
inventory obsolescence;
work stoppages and other disruptions at transportation centers or shipping ports;
changing customer demand and product mixes;
increases in energy costs, tariffs and the cost of raw materials, including commodity prices;
decreases in demand from oil and gas customers due to lower oil prices;
disruptions of our information and communication systems;
cyber attacks or other information security breaches;
failure to recruit, integrate and retain a talented workforce including productive sales representatives;
the inability to successfully make or integrate acquisitions into the organization;
foreign currency fluctuations
failure to manage change within the organization;
highly competitive market;
changes that affect governmental and other tax-supported entities;
violations of environmental protection or other governmental regulations;
negative changes related to tax matters;
Luther King Capital's significant influence over the Company given its ownership percentage; and
all other factors discussed in the Company’s “Risk Factors” set forth in its Annual Report on Form 10-K for the year ended December 31, 2018.

The Company undertakes no obligation to update any such factors or to publicly announce the results of any revisions to any forward-looking statements contained herein whether as a result of new information, future events or otherwise.



3



PART I - FINANCIAL INFORMATION

ITEM 1 - FINANCIAL STATEMENTS
Lawson Products, Inc.
Condensed Consolidated Balance Sheets
(Dollars in thousands, except share data)
 
September 30,
 
December 31,
 
2019
 
2018
ASSETS
(Unaudited)
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
8,626

 
$
11,883

Restricted cash
800

 
800

Accounts receivable, less allowance for doubtful accounts of $614 and $549, respectively
45,162

 
37,682

Inventories, net
54,894

 
52,887

Miscellaneous receivables and prepaid expenses
4,270

 
3,653

Total current assets
113,752

 
106,905

 
 
 
 
Property, plant and equipment, net
16,932

 
23,548

Deferred income taxes
17,372

 
20,592

Goodwill
20,582

 
20,079

Cash value of life insurance
14,440

 
12,599

Intangible assets, net
12,468

 
13,112

Lease assets
11,917

 

Other assets
275

 
307

Total assets
$
207,738

 
$
197,142

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Revolving lines of credit
$
2,195

 
$
10,823

Accounts payable
16,325

 
15,207

Lease obligation
3,781

 

Accrued expenses and other liabilities
37,873

 
40,179

Total current liabilities
60,174

 
66,209

 
 
 
 
Security bonus plan
11,969

 
12,413

Lease obligation
10,360

 
5,213

Deferred compensation
5,915

 
5,304

Deferred tax liability
2,879

 
2,761

Other liabilities
3,460

 
6,069

Total liabilities
94,757

 
97,969

 
 
 
 
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 - 9,042,597 and 9,005,716 shares, respectively
Outstanding - 8,956,981 and 8,955,930 shares, respectively
9,043

 
9,006

Capital in excess of par value
17,626

 
15,623

Retained earnings
89,502

 
77,338

Treasury stock – 85,616 and 49,786 shares, respectively
(2,595
)
 
(1,234
)
Accumulated other comprehensive loss
(595
)
 
(1,560
)
Total stockholders’ equity
112,981

 
99,173

Total liabilities and stockholders’ equity
$
207,738

 
$
197,142


See notes to condensed consolidated financial statements.

4



Lawson Products, Inc.
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)
(Dollars in thousands, except per share data)
(Unaudited)
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2019
 
2018
 
2019
 
2018
 
 
 
 
 
 
 
 
Product revenue
$
84,440

 
$
78,377

 
$
252,351

 
$
233,744

Service revenue
10,339

 
10,153

 
29,868

 
29,627

Total revenue
94,779

 
88,530

 
282,219

 
263,371

 
 
 
 
 
 
 
 
Product cost of goods sold
39,635

 
36,979

 
118,222

 
109,667

Service costs
4,570

 
3,443

 
13,457

 
10,247

Gross profit
50,574

 
48,108

 
150,540

 
143,457

 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
Selling expenses
21,255

 
22,175

 
64,864

 
66,119

General and administrative expenses
22,873

 
28,199

 
72,063

 
72,213

Operating expenses
44,128

 
50,374

 
136,927

 
138,332

 
 
 
 
 
 
 
 
Operating income (loss)
6,446

 
(2,266
)
 
13,613

 
5,125

 
 
 
 
 
 
 
 
Interest expense
(138
)
 
(251
)
 
(481
)
 
(755
)
Other income (expense), net
(13
)
 
170

 
798

 
(320
)
 
 
 
 
 
 
 
 
Income (loss) before income taxes
6,295

 
(2,347
)
 
13,930

 
4,050

Income tax expense (benefit)
1,521

 
(1,531
)
 
3,703

 
436

 
 
 
 
 
 
 
 
Net income (loss)
$
4,774

 
$
(816
)
 
$
10,227

 
$
3,614

 
 
 
 
 
 
 
 
Basic income per share of common stock
$
0.53

 
$
(0.09
)
 
$
1.14

 
$
0.41

 
 
 
 
 
 
 
 
Diluted income per share of common stock
$
0.51

 
$
(0.09
)
 
$
1.09

 
$
0.39

 
 
 
 
 
 
 
 
Weighted average shares outstanding:
 
 
 
 
 
 
 
Basic weighted average shares outstanding
8,974

 
8,919

 
8,971

 
8,904

Effect of dilutive securities outstanding
415

 

 
399

 
346

Diluted weighted average shares outstanding
9,389

 
8,919

 
9,370

 
9,250

 
 
 
 
 
 
 
 
Comprehensive income (loss):
 
 
 
 
 
 
 
Net income (loss)
$
4,774

 
$
(816
)
 
$
10,227

 
$
3,614

Other comprehensive income (loss), net of tax
 
 
 
 
 
 
 
Adjustment for foreign currency translation
(427
)
 
692

 
965

 
(769
)
Net comprehensive income (loss)
$
4,347

 
$
(124
)
 
$
11,192

 
$
2,845






See notes to condensed consolidated financial statements.

5



Lawson Products, Inc.
Condensed Consolidated Statements of Changes in Stockholders’ Equity - 2019
(Dollars in thousands)
(Unaudited)
 
Common Stock
 
Capital in Excess of Par Value
 
 
 
 
 
Accumulated Other Comprehensive Income (Loss)
 
Total Stockholders' Equity
 
Outstanding Shares
 
$1 Par Value
 
 
Retained Earnings
 
Treasury Stock
 
 
Balance at January 1, 2019
8,955,930

 
$
9,006

 
$
15,623

 
$
77,338

 
$
(1,234
)
 
$
(1,560
)
 
$
99,173

Change in accounting principle (1)

 

 

 
1,937

 

 

 
1,937

Net income

 

 

 
4,146

 

 

 
4,146

Adjustment for foreign currency translation

 

 

 

 

 
675

 
675

Stock-based compensation

 

 
666

 

 

 

 
666

Shares issued
6,520

 
6

 
(6
)
 

 

 

 

Balance at March 31, 2019
8,962,450

 
9,012

 
16,283

 
83,421

 
(1,234
)
 
(885
)
 
106,597

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income

 

 

 
1,307

 

 

 
1,307

Adjustment for foreign currency translation

 

 

 

 

 
717

 
717

Stock-based compensation

 

 
711

 

 

 

 
711

Shares issued
20,712

 
21

 
(21
)
 

 

 

 

Balance at June 30, 2019
8,983,162

 
$
9,033

 
$
16,973

 
$
84,728

 
$
(1,234
)
 
$
(168
)
 
$
109,332

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income

 

 

 
4,774

 

 

 
4,774

Treasury shares repurchased
(35,830
)
 

 

 

 
(1,361
)
 

 
(1,361
)
Adjustment for foreign currency translation

 

 

 

 

 
(427
)
 
(427
)
Stock-based compensation

 

 
663

 

 

 

 
663

Shares issued
9,649

 
10

 
(10
)
 

 

 

 

Balance at September 30, 2019
8,956,981

 
9,043

 
17,626

 
89,502

 
(2,595
)
 
(595
)
 
112,981


(1)
The Company adopted the ASC No.842, Leases (ASC 842) on January 1, 2019 using the modified retrospective approach. See Note 2 - Leases for further details.





















See notes to condensed consolidated financial statements.

6






Lawson Products, Inc.
Condensed Consolidated Statements of Changes in Stockholders’ Equity - 2018
(Dollars in thousands)
(Unaudited)
 
Common Stock
 
Capital in Excess of Par Value
 
 
 
 
 
Accumulated Other Comprehensive Income (Loss)
 
Total Stockholders' Equity
 
Outstanding Shares
 
$1 Par Value
 
 
Retained Earnings
 
Treasury Stock
 
 
Balance at January 1, 2018
8,888,028

 
$
8,921

 
$
13,005

 
$
71,453

 
$
(711
)
 
$
822

 
$
93,490

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Change in accounting principle (2)

 

 

 
(329
)
 

 

 
(329
)
Net income

 

 

 
1,236

 

 

 
1,236

Adjustment for foreign currency translation

 

 

 

 

 
(1,483
)
 
(1,483
)
Stock-based compensation

 

 
651

 

 

 

 
651

Shares issued
307

 
1

 
(1
)
 

 

 

 

Balance at March 31, 2018
8,888,335

 
8,922

 
13,655

 
72,360

 
(711
)
 
(661
)
 
93,565

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income

 

 

 
3,194

 

 

 
3,194

Adjustment for foreign currency translation

 

 

 

 

 
22

 
22

Stock-based compensation

 

 
673

 

 

 

 
673

Shares issued
30,304

 
30

 
(30
)
 

 

 

 

Balance at June 30, 2018
8,918,639

 
$
8,952

 
$
14,298

 
$
75,554

 
$
(711
)
 
$
(639
)
 
$
97,454

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net loss

 

 

 
(816
)
 

 

 
(816
)
Adjustment for foreign currency translation

 

 

 

 

 
692

 
692

Stock-based compensation

 

 
692

 

 

 

 
692

Shares issued
1,005

 
1

 
(1
)
 

 

 

 

Balance at September 30, 2018
8,919,644

 
8,953

 
14,989

 
74,738

 
(711
)
 
53

 
98,022


(2)
The Company adopted the ASC 606, Revenue from Contracts with Customers (ASC 606) on January 1, 2018 using the modified retrospective approach.
















See notes to condensed consolidated financial statements.

7



Lawson Products, Inc.
Condensed Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)

 
Nine Months Ended September 30,
 
2019
 
2018
 
 
 
 
Operating activities:
 
 
 
Net income
$
10,227

 
$
3,614

 
 
 
 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
4,401

 
5,120

Stock-based compensation
7,621

 
8,694

Deferred income taxes
3,252

 
830

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(7,785
)
 
(5,624
)
Inventories
(1,593
)
 
(566
)
Prepaid expenses and other assets
(2,433
)
 
(3,651
)
Accounts payable and other liabilities
(6,193
)
 
1,443

Other
544

 
442

Net cash provided by operating activities
$
8,041

 
$
10,302

 
 
 
 
Investing activities:
 
 
 
Purchases of property, plant and equipment
$
(1,392
)
 
$
(1,626
)
Business acquisition

 
(157
)
Net cash used in investing activities
$
(1,392
)
 
$
(1,783
)
 
 
 
 
Financing activities:
 
 
 
Net payments on revolving lines of credit
$
(8,628
)
 
$
(4,625
)
Repurchase treasury shares
(1,361
)
 

Payment of financing lease principal
(192
)
 
(128
)
Proceeds from stock option exercises
16

 
14

Net cash used in financing activities
$
(10,165
)
 
$
(4,739
)
 
 
 
 
Effect of exchange rate changes on cash and cash equivalents
$
259

 
$
(533
)
 
 
 
 
Increase (decrease) in cash, cash equivalents and restricted cash
(3,257
)
 
3,247

 
 
 
 
Cash, cash equivalents and restricted cash at beginning of period
12,683

 
5,216

 
 
 
 
Cash, cash equivalents and restricted cash at end of period
$
9,426

 
$
8,463

 
 
 
 
Cash and cash equivalents
$
8,626

 
$
5,992

Restricted cash
800

 
800

Cash, cash equivalents and restricted cash
$
9,426

 
$
8,463

 
 
 
 
Supplemental disclosure of cash flow information
 
 
 
Net cash paid for income taxes
$
458

 
$
1,135


See notes to condensed consolidated financial statements.

8



Notes to Condensed Consolidated Financial Statements

Note 1 — Basis of Presentation and Summary of Significant Accounting Policies

The accompanying unaudited condensed consolidated financial statements of Lawson Products, Inc. (the “Company”) have been prepared in accordance with generally accepted accounting principles for interim financial information, the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not contain all disclosures required by generally accepted accounting principles. Reference should be made to the Company’s Annual Report on Form 10-K for the year ended December 31, 2018. In the opinion of the Company, all normal recurring adjustments have been made that are necessary to present fairly the results of operations for the interim periods. Operating results for the three and nine month periods ended September 30, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019.

The Company has two operating segments. The first segment, the Lawson operating segment, distributes maintenance, repair and operations ("MRO") products to customers primarily through a network of sales representatives offering vendor managed inventory ("VMI") service to customers throughout the United States and Canada. The second segment, The Bolt Supply House Ltd. ("Bolt Supply") operating segment, distributes MRO products primarily through its branches located in Western Canada. Bolt Supply had 14 branches in operation at the end of the third quarter 2019.

Note 2 - Leases

In February 2016 the FASB established Topic ASC 842, Leases, by issuing Accounting Standards Update 2016-02. Lawson adopted ASC 842 as of January 1, 2019. The Company leases property used for distribution centers, office space, and Bolt branch locations throughout the US and Canada, along with various equipment located in distribution centers and corporate headquarters. The Company is also a lessor of its Decatur, Alabama property previously used in conjunction with a discontinued operation, and is a sublessor of a portion of its corporate headquarters.

Lawson Operating Leases

Lawson MRO primarily has two types of leases: leases for real estate and leases for equipment. Operating real estate leases that have a material impact on the operations of the Company are related to the Company's distribution network and headquarters. The Company possesses several additional property leases that are month to month basis and are not material in nature. Lawson MRO does not possess any leases that have residual value guarantees. Several property leases include renewal clauses which vary in length and may not include specific rent renewal amounts. The Company will revise the value of the right of use assets and associated lease liabilities when the Company is reasonably certain it will renew a lease.

The key change commencing on January 1, 2019 for the Company is the recognition of assets and liabilities of operating leases with lease terms longer than twelve months that were not previously capitalized on the balance sheet. The value of the Right Of Use ("ROU") assets and associated lease liabilities is calculated using the total cash payments over the course of the lease, discounted to the present value using the appropriate incremental borrowing rate. The right of use asset will be amortized over its useful life. Similar to deferred rent under ASC 840, the lease liability is reduced in conjunction with the lease payments made, with adjustments made to the lease liability in order to account for non-straight line cash payments through the life of the lease.

Bolt primarily leases the real estate for its branch locations as well as its distribution center in Calgary, Alberta. Bolt possesses additional property leases that are month to month and not material in nature. Bolt property leases include renewal clauses which vary in length and may not include specific rent renewal amounts. The Company will revise the value of the right of use asset and associated lease liability when the Company is reasonably certain it will renew a lease.

Lease of McCook Distribution Facility

Upon adoption of ASC 842, the previously capitalized financing asset and lease liability for the McCook distribution facility was removed from the balance sheet and re-established as a ROU asset and a lease liability as an operating lease. The Company did not include the lease renewal periods in its assessment of the McCook lease as it did not meet the reasonably certain threshold required under ASC 842. Changes in the value of the assets and liabilities associated with the property due to adoption of ASC 842 have been accounted for as an adjustment to beginning retained earnings of $1.9 million.






9



Accounting Policy Elections

As part of the transition to ASC 842, the Company elected the following practical expedients:

The transitional package of practical expedients as prescribed by ASC 842. Per the practical expedient for the transition to ASC 842, the Company did not reassess expired leases, existing lease classifications or initial indirect costs for existing leases in the calculation of the right to use asset and lease liability.

The Company elected the modified retrospective method of transition, which resulted in no restatement of prior period results with the adoption impact being recorded to opening retained earnings.

The Company did not capitalize short term leases, for all asset classes defined as leases with a term of shorter than twelve months, on the balance sheet. These leases have not been transitioned to ASC 842.

As a practical expedient, the Company did not reassess the accounting for initial direct costs of current leases.

The Company elected not to use the hindsight practical expedient in determining the lease term.

The Company recognizes certain lease components and non-lease components together and not as separate parts of a lease for real estate leases. The Company will exercise this practical expedient in the future by asset class.

Significant Assumptions

The Company is required to determine a discount rate for the present value of lease payments. If the rate is not included in the lease or cannot be readily determined, the Company must estimate the incremental borrowing rate to be used for the discount rate. The Company determined that Lawson MRO and Bolt have different discount rates for leases, as both reporting units have separate borrowing agreements. The Lawson MRO segment will discount the present value of the total payments for the operating and financing leases using the incremental borrowing rate of 5.5%, given the similarity of the lease terms amongst asset classes. The Bolt segment will discount the present value of the total payments of each operating and financing lease at its incremental borrowing rate of 4.2%. The discount rate of Lawson MRO and Bolt will be reviewed on a periodic basis and updated as needed.

The expenses and income generated by the leasing activity of Lawson as lessee for the three and nine months ending September 30, 2019 are as follows (Dollars in thousands):
Lease Type
 
Classification
 
Three Months Ending September 30, 2019
 
Nine Months Ending September 30, 2019
 
 
 
 
 
 
 
Consolidated Operating Lease Expense (1)
 
Operating expenses
 
$
1,190

 
$
3,532

 
 
 
 
 
 
 
Consolidated Financing Lease Amortization
 
Operating expenses
 
60

 
159

Consolidated Financing Lease Interest
 
Interest expense
 
10

 
23

Consolidated Financing Lease Expense
 
 
 
70

 
182

 
 
 
 
 
 
 
Sublease Income (2)
 
Operating expenses
 

 
(160
)
Net Lease Cost
 
 
 
$
1,260

 
$
3,554


(1) Includes short term lease expense, which is immaterial
(2) Sublease income from sublease of a portion of the Company headquarters. The sublease was terminated in June 2019 and the Company has no other subleases.

The Company recorded $1.1 million and $3.3 million of operating lease expenses for the three and nine months ended September 30, 2018, respectively.


10



The value of the net assets and liabilities generated by the leasing activity of Lawson as lessee as of September 30, 2019 are as follows (Dollars in thousands):
Lease Type
 
Amount
 
 
 
Total ROU operating lease assets (1)
 
$
11,258

Total ROU financing lease assets (2)
 
659

Total lease assets
 
$
11,917

 
 
 
Total current operating lease obligation
 
$
3,534

Total current financing lease obligation
 
247

Total current lease obligations
 
$
3,781

 
 
 
Total long term operating lease obligation
 
$
9,976

Total long term financing lease obligation
 
384

Total long term lease obligation
 
$
10,360


(1) Operating lease assets are recorded net of accumulated amortization of $2.1 million as of September 30, 2019
(2) Financing lease assets are recorded net of accumulated amortization of $0.2 million as of September 30, 2019

The value of the lease liabilities generated by the leasing activities of Lawson as lessee as of September 30, 2019 were as follows (Dollars in thousands):
Maturity Date of Lease Liabilities
 
Operating Leases
 
Financing Leases
 
Total
 
 
 
 
 
 
 
Year one
 
$
4,097

 
$
258

 
$
4,355

Year two
 
4,141

 
214

 
4,355

Year three
 
3,582

 
118

 
3,700

Year four
 
1,717

 
70

 
1,787

Year five
 
701

 
20

 
721

Subsequent years
 
627

 

 
627

Total lease payments
 
14,865

 
680

 
15,545

Less: Interest
 
1,355

 
49

 
1,404

Present value of lease liabilities
 
$
13,510

 
$
631

 
$
14,141


The Company’s future minimum lease commitments as of December 31, 2018, were as follows (Dollars in thousands):
Maturity Date of Lease Liabilities
Operating Leases (2)(3)
Financing Lease (3)(4)
Capital Leases (4)
Year one
 
$
2,574
 
 
$
1,395

 
$
201

Year two
 
2,369
 
 
1,444

 
155

Year three
 
2,349
 
 
1,493

 
91

Year four
 
2,008
 
 
760

 
11

Year five
 
1,130
 
 

 

Subsequent years
 
374
 
 

 

Total lease payments (1)
 
$
10,804
 
 
$
5,092

 
$
458


(1)
Minimum lease payments exclude payments to landlord for real estate taxes and common area maintenance
(2)
On January 1, 2019, the Company elected the modified retrospective method of transition to adopt the new lease standard ASC 842, which resulted in no restatement of prior period results. At December 31, 2018, prior to adoption of the new lease standard, operating lease obligations were not included as a liability on the balance sheet. Therefore, the operating lease obligations are included in the table for comparative purposes only and the total lease liability is not included as it is not applicable
(3)
The $5.1 million minimum lease obligation attributable to the McCook lease that was classified as a financing lease on December 31, 2018 was reclassified as an operating lease under the new accounting standard adopted on January 1, 2019
(4)
Lease obligations classified as capital leases on December 31, 2018 were reclassified as financing leases under the new lease standard adopted on January 1, 2019


11



The weighted average lease terms and interest rates of the leases held by Lawson as of September 30, 2019 are as follows:
Lease Type
 
Weighted Average Term in Years
 
Weighted Average Interest Rate
 
 
 
 
 
Operating Leases
 
4.0
 
5.1%
Financing Leases
 
3.0
 
5.5%

The cash outflows of the leasing activity of Lawson as lessee for the nine months ending September 30, 2019 are as follows (Dollars in thousands):
Cash Flow Source
 
Classification
 
Amount
 
 
 
 
 
Operating cash flows from operating leases
 
Operating activities
 
$
3,014

Operating cash flows from financing leases
 
Operating activities
 
14

Financing cash flows from financing leases
 
Financing activities
 
192


Lawson as Lessor

The Company is a lessor of its facility in Decatur, Alabama, which was previously used in conjunction with a discontinued operation. The lease expires in February, 2024. Both the lessor and lessee have a put option to each other upon the completion of the remediation of the environmental matter at a pre-negotiated price less 50% of the rent paid upon the put option being exercised. The net book value at September 30, 2019 is $0.4 million. The Company classifies this lease as an operating lease. The operating lease of the Decatur facility generated approximately $0.1 million of income to the Company for the nine months ending September 30, 2019. Annual lease income classified as operating expenses of $0.2 million is anticipated through the earlier of the put option exercise or February, 2024.

Note 3 - Revenue Recognition

Adoption of ASC 606

On January 1, 2018 the Company adopted Accounting Standards Codification 606-Revenue From Contracts With Customers (“ASC 606”). As part of the Company's adoption of ASC 606, it concluded that it has two separate performance obligations, and accordingly, two separate revenue streams: products and services. As a result, the Company reports two separate revenue streams and two separate costs of revenues.

ASC 606 defines a five step process to recognize revenues at the time and in an amount that reflects the consideration expected to be received for the performance obligations that have been provided. ASC 606 defines contracts as written, oral and through customary business practice. Under this definition, the Company considers contracts to be created at the time an order to purchase product is agreed upon regardless of whether or not there is a written contract.

Performance Obligations

Lawson has two operating segments; the Lawson segment and the Bolt Supply segment. Customer contracts have the following performance obligations:

The Lawson segment has two distinct performance obligations offered to its customers: a product performance obligation and a service performance obligation. Although the Company has identified that it offers its customers both a product and a service obligation, the customer only receives one invoice per transaction with no price breakout between these obligations. The Company does not price its offerings based on any breakout between these obligations.

Lawson generates revenue primarily from the sale of MRO products to its customers. Revenue related to product sales is recognized at the time that control of the product has been transferred to the customer: either at the time the product is shipped or the time the product has been received by the customer. The Company does not commit to long-term contracts to sell customers a certain minimum quantity of products.

The Lawson segment offers a VMI service proposition to its customers. A portion of these services, primarily related to stocking of product and maintenance of the MRO inventory, is provided a short period of time after control of the purchased product has been transferred to the customer. Since some components of VMI service have not been provided at the time the control of the

12



product transfers to the customer, that portion of expected consideration is deferred until the time that those services have been provided.

The Bolt Supply segment does not provide VMI services for its customers or provide services in addition to product sales to customers. Revenue is recognized at the time that control of the product has been transferred to the customer which is either upon delivery or shipment depending on the terms of the contract.

Accounting Policy Elections

The Company has elected to treat shipping and handling costs after the control of the product has been transferred to the customer as a fulfillment cost.

Sales taxes that are imposed on our sales and collected from customers are excluded from revenues.

The Company expenses sales commissions when incurred as the amortization period is one year or less.

Significant Judgments

The Company employs certain significant judgments to estimate the dollar amount of revenue, and related expenses, allocated to the sale of product and service. These judgments include, among others, the percentage of customers that take advantage of the VMI services offered, the amount of revenue to be allocated to the VMI service based on the value of the service to its customers, and the amount of time after control of the product passes to the customer that the VMI service obligation is completed. It is assumed that any customer who averages placing orders at a frequency of longer than 30 days does not take advantage of the available VMI services offered. The estimate of the cost of sales is based on expenses directly related to sales representatives that provide direct VMI services to the customer.

Financial Impact of ASC 606 Adoption

As a result of applying ASC 606 the Company recorded a liability of $0.7 million for deferred revenue on January 1, 2018. Expenses related to these revenues of $0.4 million were also deferred resulting in a net reduction to opening retained earnings of $0.3 million as of January 1, 2018. At September 30, 2019, the Company had a deferred revenue liability of $0.7 million and a deferred expense of $0.3 million for related expenses associated with the deferred service performance obligations, respectively. The deferral of revenue and expenses does not affect the amount, timing and any uncertainty of cash flows generated from operations.

Disaggregated revenue by geographic area follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(Dollars in thousands)
2019
 
2018
 
2019
 
2018
 
 
 
 
 
 
 
 
United States
$
75,160

 
$
70,652

 
$
225,327

 
$
210,596

Canada
19,619

 
17,878

 
56,892

 
52,775

Consolidated total
$
94,779

 
$
88,530

 
$
282,219

 
$
263,371



13



Disaggregated revenue by product type follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
 
 
 
 
 
 
 
 
Fastening Systems
24.1
%
 
24.6
%
 
24.0
%
 
24.5
%
Fluid Power
15.1
%
 
14.6
%
 
15.2
%
 
14.7
%
Cutting Tools and Abrasives
13.1
%
 
13.7
%
 
13.1
%
 
13.5
%
Specialty Chemicals
11.7
%
 
12.6
%
 
11.6
%
 
12.3
%
Electrical
10.4
%
 
10.6
%
 
10.8
%
 
10.9
%
Aftermarket Automotive Supplies
7.6
%
 
7.6
%
 
7.9
%
 
8.0
%
Safety
4.7
%
 
4.6
%
 
4.7
%
 
4.6
%
Welding and Metal Repair
1.3
%
 
1.7
%
 
1.5
%
 
1.9
%
Other
12.0
%
 
10.0
%
 
11.2
%
 
9.6
%
Consolidated Total
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%

Note 4 — Restricted Cash

The Company has agreed to maintain $0.8 million in a money market account as collateral for an outside party that is providing certain commercial card processing services for the Company. The Company is restricted from withdrawing this balance without the prior consent of the outside party during the term of the agreement.

Note 5 — Inventories, Net

Inventories, net, consisting primarily of purchased goods which are offered for resale, were as follows:
 
(Dollars in thousands)
 
September 30, 2019
 
December 31, 2018
Inventories, gross
$
59,552

 
$
58,215

Reserve for obsolete and excess inventory
(4,658
)
 
(5,328
)
Inventories, net
$
54,894

 
$
52,887


Note 6 - Goodwill

Goodwill activity for the first nine months of 2019 and 2018 is included in the table below:
 
(Dollars in thousands)
 
Nine Months Ended September 30,
 
2019
 
2018
Beginning balance
$
20,079

 
$
19,614

Adjustment to original acquisition allocation
(12
)
 
(17
)
Impact of foreign exchange
515

 
(483
)
Ending balance
$
20,582

 
$
19,114



14



Note 7 - Intangible Assets

The gross carrying amount and accumulated amortization by intangible asset class were as follows:
 
(Dollars in thousands)
 
September 30, 2019
 
December 31, 2018
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Value
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Value
Trade names
$
8,289

 
$
(1,866
)
 
$
6,423

 
$
8,090

 
$
(1,447
)
 
$
6,643

Customer relationships
7,249

 
(1,204
)
 
6,045

 
7,114

 
(645
)
 
6,469

 
$
15,538

 
$
(3,070
)
 
$
12,468

 
$
15,204

 
$
(2,092
)
 
$
13,112


Amortization expense of $1.0 million and $0.7 million related to intangible assets was recorded in General and administrative expenses for the nine months ended September 30, 2019 and 2018, respectively.


15



Note 8 — Loan Agreement

Lawson Loan Agreement

In 2012, the Company entered into a Loan and Security Agreement (“Loan Agreement”). The Loan Agreement consisted of a $40.0 million revolving line of credit facility, which included a $10.0 million sub-facility for letters of credit. Certain terms of the original Loan Agreement have been revised by subsequent amendments.

On September 30, 2019, credit available under the Loan Agreement, as amended, was based upon:

a)
85% of the face amount of the Company’s eligible accounts receivable, generally less than 60 days past due, and

b)
the lesser of 60% of the lower of cost or market value of the Company’s eligible inventory, generally inventory expected to be sold within 18 months, or $20.0 million.

The applicable interest rates for borrowings were at the Prime rate or, if the Company elects, the LIBOR rate plus 1.50% to 1.85% based on the Company’s debt to EBITDA ratio. The Loan Agreement was secured by a first priority perfected security interest in substantially all existing assets of the Company. Dividends were restricted to amounts not to exceed $7.0 million annually.

At September 30, 2019, the Company had $1.3 million of borrowings under its revolving line of credit facility. The Company paid interest of $0.5 million and $0.8 million for the nine months ended September 30, 2019 and 2018, respectively. The weighted average interest rate was 4.54% and 3.82% for the nine months ended September 30, 2019 and 2018, respectively.

Commitment Letter

Bolt Supply had a Commitment Letter with BMO Bank of Montreal ("BMO") dated March 30, 2017 which allowed Bolt Supply to access up to $5.5 million Canadian dollars in the form of either an overdraft facility or as commercial letters of credit. The Commitment Letter was cancellable at any time at BMOs sole discretion and was secured by substantially all of Bolt Supply’s assets. It carried an interest rate of the bank's prime rate plus 0.25%. At September 30, 2019, Bolt Supply had $1.2 million Canadian dollars of outstanding borrowings.

As of September 30, 2019, the Company was in compliance with its required debt covenants.

New Credit Agreement

Subsequent to the end of the third quarter, on October 11, 2019, the Company entered into a new five-year credit agreement led by J.P. Morgan Chase Bank N.A, as administrative agent and including CIBC Bank USA and Bank of America, N.A. as other lenders. The new credit agreement matures on October 11, 2024 and provides for $100.0 million of revolving commitments. The new credit agreement allows borrowing capacity to increase to $150.0 million subject to meeting certain criteria and additional commitments from its lenders.

Along with certain standard terms and conditions of the new credit agreement, the Company is able to borrow up to a maximum ratio of its EBITDA to net borrowings of 3.25 times, as defined, and a minimum fixed charge ratio, as defined, of 1.15. On October 11, 2019, the Company paid off its previous loans to CIBC Bank USA and BMO.

Note 9 - Treasury Stock Repurchase Program

In the second quarter of 2019, our Board of Directors authorized a program in which the Company may repurchase up to $7.5 million of the Company's common stock from time to time in open market transactions, privately negotiated transactions or by other methods. In the third quarter of 2019 the Company purchased 32,362 shares of common stock at an average purchase price of $38.13 under the repurchase program.



16



Note 10 — Severance Reserve

Changes in the Company’s reserve for severance as of September 30, 2019 and 2018 were as follows:
 
(Dollars in thousands)
 
Nine Months Ended September 30,
 
2019
 
2018
Balance at beginning of period
$
359

 
$
483

Charged to earnings
1,542

 
723

Payments
(925
)
 
(787
)
Balance at end of period
$
976

 
$
419


Note 11 — Stock-Based Compensation

The Company recorded stock-based compensation expense of $7.6 million and $8.7 million for the first nine months of 2019 and 2018, respectively. A portion of stock-based compensation is related to the change in the market value of the Company's common stock.

A summary of stock-based awards issued during the nine months ended September 30, 2019 follows:

Stock Performance Rights ("SPRs")
The Company issued 26,825 SPRs to key employees with an exercise price of $30.78 per share that cliff vest on December 31, 2021 and have a termination date of December 31, 2026. SPRs 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 exercise price when the SPRs are surrendered.

Restricted Stock Units ("RSUs")
The Company issued 10,045 RSUs to certain members of the Company's Board of Directors with a vesting date of May 14, 2020. The Company issued 17,340 RSUs to key employees that cliff vest on December 31, 2021. Each RSU is exchangeable for one share of the Company's common stock at the end of the vesting period.

Market Stock Units ("MSUs")
The Company issued 41,219 MSUs to key employees that cliff vest on December 31, 2021. MSU's are exchangeable for the Company's common stock at the end of the vesting period. The number of shares of common stock that will be issued upon vesting, ranging from zero to 61,829, will be determined based upon the trailing sixty-day weighted average closing price of the Company's common stock on December 31, 2021.
 
No stock options were excluded from the computation of diluted earnings per share for the three and nine months ended September 30, 2019. For the three months ended September 30, 2018, the effect of restricted stock awards, market stock units and future stock option exercises equivalent of approximately 403,000 shares of the Company's common stock were excluded from the computation of diluted earnings per share because they were anti-dilutive. For the nine months ended September 30, 2018, stock options to purchase approximately 46,000 shares of the Company's common stock were excluded from the computation of diluted earnings per share because they were anti-dilutive.

Note 12 — Income Taxes

The Company recorded income tax expense of $3.7 million, a 26.6% effective tax rate for the nine months ended September 30, 2019. The effective tax rate is higher than the U.S. statutory rate due primarily to state taxes, income in higher tax jurisdictions and an inclusion for global intangible low taxed income. Income tax expense of $0.4 million, a 10.8% effective tax rate was recorded for the nine months ended September 30, 2018. The lower rate in the previous year is due mainly to the finalization of the Company's calculation for previously untaxed foreign earnings and profits as a result of the 2017 Tax Cuts and Jobs Act. Cash paid for income taxes was $0.5 million and $1.1 million in the first nine months of 2019 and 2018, respectively.

The Company and its subsidiaries are subject to U.S. Federal income tax, as well as income tax of multiple state and foreign jurisdictions. As of September 30, 2019, the Company is subject to U.S. Federal income tax examinations for the years 2016 through 2018 and income tax examinations from various other jurisdictions for the years 2012 through 2018.


17



Earnings from the Company’s foreign subsidiaries are considered to be indefinitely reinvested. A distribution of these non-U.S. earnings in the form of dividends or otherwise may subject the Company to foreign withholding taxes and U.S. federal and state taxes.

Note 13 — Contingent Liabilities

In 2012, the Company identified that a site it owns in Decatur, Alabama, contains hazardous substances in the soil and groundwater as a result of historical operations prior to the Company's ownership. The Company retained an environmental consulting firm to further investigate the contamination including the measurement and monitoring of the site and the site was enrolled in the Alabama Department of Environmental Management (“ADEM") voluntary cleanup program.

The remediation plan was approved by ADEM in 2018. The plan consists of chemical injections throughout the affected area, as well as subsequent monitoring of the area for three consecutive periods. The injection process was completed in the first quarter of 2019 and the environmental consulting firm is monitoring the affected area. The Company made payments of $1.3 million in the first three quarters of 2019 for services rendered by the environmental consulting firm. These payments were applied to the previously accrued environmental remediation liability. The Company believes the remaining environmental remediation liability of approximately $0.1 million, classified within Accrued expenses and other liabilities on the accompanying Consolidated Balance Sheet, will be sufficient to cover the remaining cost of the plan. The Company does not expect to capitalize any amounts related to the remediation plan.

Note 14 — Acquisition

The Company completed the acquisition of Screw Products, Inc. in October 2018 for approximately $5.2 million. The purchase price was funded with cash on hand and utilization of the Company's existing credit facility. Screw Products, Inc. is a distributor of bulk industrial products to large manufacturers and job shops. The Company allocated $2.6 million of the purchase price to an intangible asset for customer relationships and $0.5 million for intangible asset for trade names. These amounts were determined by a third party valuation firm with estimated useful lives of 10 and 15 years, respectively. The excess of the purchase price over the fair values of the identifiable assets and liabilities was recorded as goodwill and represents the expected future benefit to the Company from the acquisition of Screw Products. The Company's Lawson operating segment includes revenues of approximately $0.6 million and $2.1 million from Screw Products in the three and nine months ended September 30, 2019 respectively.

The following table contains unaudited pro forma revenue and net income for Lawson Products assuming the Screw Products acquisition closed on January 1, 2018.
 
(Dollars in thousands)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
Revenue
 
 
 
 
 
 
 
     Actual
$
94,779

 
$
88,530

 
$
282,219

 
$
263,371

     Pro forma
94,779

 
89,181

 
282,219

 
265,650

 
 
 
 
 
 
 
 
Net income
 
 
 
 
 
 
 
     Actual
$
4,774

 
$
(816
)
 
$
10,227

 
$
3,614

     Pro forma
4,774

 
(607
)
 
10,227

 
4,025


The pro forma disclosures in the table above include adjustments for, amortization of intangible assets and acquisition costs to reflect results as if the acquisition of Screw Products had closed on January 1, 2018 rather than on the actual acquisition date. This pro forma information utilizes certain estimates, is presented for illustrative purposes only and is not intended to be indicative of the actual results of operation. In addition, future results may vary significantly from the results reflected in the pro forma information. The unaudited pro forma financial information does not reflect the impact of future positive or negative events that may occur after the acquisition, such as anticipated cost savings from operating synergies.


18



Note 15 – Segment Information

The Company operates in two reportable segments. The businesses have been determined to be separate reportable segments because of differences in their financial characteristics and the methods they employ to deliver product to customers. The operating segments are reviewed by the Company’s chief operating decision maker responsible for reviewing operating performance and allocating resources. The Lawson segment primarily relies on its large network of sales representatives to visit the customer at the customers' work location and provide VMI service and produce sales orders for product that is then shipped to the customer. The Bolt Supply segment primarily sells product to customers through its branch locations. Bolt Supply had 14 branches in operation at the end of the third quarter of 2019.

Financial information for the Company's reportable segments follows:
 
(Dollars in thousands)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
Revenue
 
 
 
 
 
 
 
   Lawson product revenue
$
73,122

 
$
68,539

 
$
221,027

 
$
206,108

   Lawson service revenue
10,339

 
10,153

 
29,868

 
29,627

   Total Lawson revenue
83,461

 
78,692

 
250,895

 
235,735

   Bolt Supply
11,318

 
9,838

 
31,324

 
27,636

      Consolidated total
$
94,779

 
$
88,530

 
$
282,219

 
$
263,371

 
 
 
 
 
 
 
 
Gross profit
 
 
 
 
 
 
 
Lawson product gross profit
$
40,379

 
$
37,742

 
$
122,113

 
$
113,291

Lawson service gross profit
5,769

 
6,710

 
16,411

 
19,380

Total Lawson gross profit
46,148

 
44,452

 
138,524

 
132,671

Bolt Supply
4,426

 
3,656

 
12,016

 
10,786

Consolidated total
$
50,574

 
$
48,108

 
$
150,540

 
$
143,457

 
 
 
 
 
 
 
 
Operating income
 
 
 
 
 
 
 
   Lawson
$
5,377

 
$
(2,754
)
 
$
11,490

 
$
3,530

   Bolt Supply
1,069

 
488

 
2,123

 
1,595

      Consolidated total
6,446

 
(2,266
)
 
13,613

 
5,125

Interest expense
(138
)
 
(251
)
 
(481
)
 
(755
)
Other income (expense), net
(13
)
 
170

 
798

 
(320
)
      Income (loss) before income taxes
$
6,295

 
$
(2,347
)
 
$
13,930

 
$
4,050


Note 16 - Subsequent Event

Subsequent to the end of the third quarter, on October 11, 2019, the Company entered into a new five year credit agreement led by J.P. Morgan Chase Bank N.A, as administrative agent and including CIBC Bank USA and Bank of America, N.A. that transitioned our existing borrowing under an asset-based lending arrangement to a cash flow structure. The new Credit Agreement matures on October 11, 2024 and increases the committed borrowing level from $40.0 million to $100.0 million. The new credit agreement allows borrowing capacity to increase to $150.0 million subject to meeting certain criteria and additional commitments from its lenders.


19



ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

The Maintenance, Repair and Operations ("MRO") distribution industry is highly fragmented. We compete for business with several national distributors as well as a large number of regional and local distributors. The MRO business is significantly impacted by the overall strength of the manufacturing sector of the U.S. economy. One measure used to evaluate the strength of the industrial products market is the PMI index published by the Institute for Supply Management, which is considered by many economists to be a reliable near-term economic barometer of the manufacturing sector. A measure above 50 generally indicates expansion of the manufacturing sector while a measure below 50 generally represents contraction. The average monthly PMI was 49.4 in the third quarter of 2019 compared to 59.6 in the third quarter of 2018, indicating a slight contraction in the U.S. manufacturing economy in the current quarter compared to an expansion in the U.S. manufacturing economy a year ago.

Our sales are also affected by the number of sales representatives and their productivity. Our sales force increased to an average of 989 sales representatives in the third quarter of 2019 from 967 sales representatives during the third quarter of 2018. Our Lawson segment sales representative productivity, measured as sales per rep per day, increased 1.3% to $1,309 in the third quarter of 2019 from $1,292 in the third quarter of 2018. Sales in 2019 also benefited from the acquisition of Screw Products, Inc. ("Screw Products") in the fourth quarter of 2018. We anticipate the size of our sales force to remain relatively stable for the remainder of 2019 as we concentrate our efforts on providing training and support to continue to increase the productivity of our existing sales representatives.

Quarter ended September 30, 2019 compared to quarter ended September 30, 2018
 
2019
 
2018
(Dollars in thousands)
Amount
 
% of
Net Sales
 
Amount
 
% of
Net Sales
 
 
 
 
 
 
 
 
Revenue
$
94,779

 
100.0
 %
 
$
88,530

 
100.0
 %
Cost of goods sold
44,205

 
46.6
 %
 
40,422

 
45.7
 %
Gross profit
50,574

 
53.4
 %
 
48,108

 
54.3
 %
 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
Selling expenses
21,255

 
22.4
 %
 
22,175

 
25.0
 %
General and administrative expenses
22,873

 
24.2
 %
 
28,199

 
31.9
 %
Total operating expenses
44,128

 
46.6
 %
 
50,374

 
56.9
 %
 
 
 
 
 
 
 
 
Operating income (loss)
6,446

 
6.8
 %
 
(2,266
)
 
(2.6
)%
 
 
 
 
 
 
 
 
Interest expense
(138
)
 
(0.1
)%
 
(251
)
 
(0.3
)%
Other (expense) income, net
(13
)
 
(0.1
)%
 
170

 
0.2
 %
 
 
 
 
 
 
 
 
Income (loss) before income taxes
6,295

 
6.6
 %
 
(2,347
)
 
(2.7
)%
 
 
 
 
 
 
 
 
Income tax expense (benefit)
1,521

 
1.6
 %
 
(1,531
)
 
(1.8
)%
 
 
 
 
 
 
 
 
Net income (loss)
$
4,774

 
5.0
 %
 
$
(816
)
 
(0.9
)%

20




Revenue and Gross Profits
 
Three Months Ended September 30,
 
Increase
(Dollars in thousands)
2019
 
2018
 
Amount
 
%
 
 
 
 
 
 
 
 
Revenue
 
 
 
 
 
 
 
Lawson
$
83,461

 
$
78,692

 
$
4,769

 
6.1%
Bolt Supply
11,318

 
9,838

 
1,480

 
15.0%
Consolidated
$
94,779

 
$
88,530

 
$
6,249

 
7.1%
 
 
 
 
 
 
 
 
Gross profit
 
 
 
 
 
 
 
Lawson
$
46,148

 
$
44,452

 
$
1,696

 
3.8%
Bolt Supply
4,426

 
3,656

 
770

 
21.1%
Consolidated
$
50,574

 
$
48,108

 
$
2,466

 
5.1%
 
 
 
 
 
 
 
 
Gross profit margin
 
 
 
 
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