ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Overview
We are a distributor of products and services to the industrial, commercial, institutional, and governmental maintenance, repair and operations ("MRO") marketplace. We operate in two reportable segments: Lawson and Bolt. The Lawson operating segment primarily distributes MRO products to its customers through a network of sales representatives throughout the U.S. and Canada. The Bolt operating segment primarily distributes its MRO products through a network of 14 branches located in Alberta, Saskatchewan, Manitoba and British Columbia, Canada.
COVID-19 Pandemic
In March 2020, the World Health Organization declared a new strain of coronavirus (“COVID-19”) a pandemic. The COVID-19 pandemic continues to negatively impact the global economy by disrupting global supply chains and financial markets and has negatively impacted our operational and financial performance. The continued impact of the COVID-19 pandemic on our operational and financial performance, including our ability to execute our business strategies and initiatives in the expected time frame, will depend on future developments, including the duration and spread of the pandemic and related restrictions on travel and transports, all of which remain uncertain. An extended period of global supply chain and economic disruption could materially affect our business, sales, results of operations and financial condition.
Lawson continues to be defined as an essential business by the state of Illinois. A change in this status could result in the temporary closure of our business. Additionally the COVID-19 pandemic could result in a temporary closure of some or all of our distribution facilities or the Bolt branch locations, which would negatively impact our operations. Other disruptions to our supply chain such as reduced capacity or temporary shutdowns of freight carriers could also negatively impact our performance. The pandemic has negatively impacted our current operations and may negatively impact our future financial results, liquidity and overall performance. Additionally, it is possible that estimates made in support of our financial statements may be materially and adversely impacted in the near term as a result of these conditions, including delay in payment of receivables, impairment losses related to goodwill and other long-lived assets, and inability to utilize deferred tax assets.
The Company experienced the most severe impacts of the COVID-19 pandemic in the second quarter 2020. The onset of the pandemic and government regulations, including social distancing guidelines and shutdowns of nonessential businesses, led to closure of customer businesses throughout the United States and Canada, as well as substantial restrictions on the ability of Lawson MRO sales representatives to visit customer locations and perform VMI services. Additionally government regulations also severely restricted the ability of customers to visit Bolt branch locations. The economic climate in the third and fourth quarters improved as many nonessential businesses have reopened in both limited capacity and full capacity. The relaxed restrictions have resulted in consistent customer visits and increased customer contact.
While business conditions improved in the third and fourth quarters, the Company expects to continue to be adversely impacted by the COVID-19 pandemic and the various federal, state and local restrictions enacted to combat the pandemic. In the fourth quarter of 2020, U.S. Food and Drug Administration approved certain vaccines that have demonstrated effectiveness in preventing the spread of the COVID-19 virus. However, it is projected that the production, distribution and administration of the vaccine to a sufficient percentage of the population to significantly minimize the future effect of the pandemic will not be reached until mid-2021 or later.
We continue to take action to mitigate the potential negative impacts of COVID-19. The actions taken included, but are not limited to, furloughing employees, reducing base salaries and incentive awards for a period of time, canceling travel and award trips, temporarily consolidating our Suwanee distribution center operations into the McCook facility, eliminating non-critical capital expenditures and eliminating various positions throughout the Company.
We continue to monitor our balance sheet and liquidity position and take actions to protect our cash flows from operations while at the same time managing our operating expenses in relation to current sales trends. At December 31, 2020, we had $28.4 million of unrestricted cash and cash equivalents and an additional $66.0 million of borrowing capacity, net of outstanding letters of credit. Our outstanding letters of credit include a letter of credit for $33.0 million to secure the remaining payment of the Partsmaster acquisition.
We will continue to closely monitor the overall economic and operating environment and we will take appropriate actions to protect the safety of our employees, customers and suppliers while continuing to meet our working capital needs and remain in compliance with our debt covenants. While COVID-19 has negatively impacted our sales, cost control measures and ability to effectively service our customers, we have continued to generate positive cash flow that has enabled us to maintain a strong financial position. We plan to continue to respond to pandemic developments in a prompt and disciplined manner with an emphasis on protecting our employees and maintaining our strong financial position.
Sales Drivers
The North American MRO market 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 influenced by the overall strength of the manufacturing sector of the U.S. economy which has been significantly affected by the COVID-19 pandemic. One measure used to evaluate the strength of the industrial products market is the PMI index published by the Institute for Supply Management. The PMI index is a composite index of economic activity in the United States manufacturing sector and is available at https://www.instituteforsupplymanagement.org. A measure of that index above 50 generally indicates expansion of the manufacturing sector while a measure below 50 generally represents contraction. The average monthly PMI (Purchasing Managers Index) was 52.5 for the year ended December 31, 2020 compared to 51.3 for the year ended December 31, 2019. The average monthly PMI for the fourth quarter of 2020 was 59.2, which indicates expansion of the manufacturing sector compared to the previous periods. This is compared to the fourth quarter of 2019 which was 48.1, which indicates contraction of the manufacturing sector compared to the previous periods.
One metric we use to measure our success is Average Daily Sales ("ADS") in which we calculate our total sales divided by the number of selling days, which exclude weekends and holidays. Our sales are affected by the number and effectiveness of sales representatives and the amount of sales each representative can generate from providing products and services to our customers, which we measure as average sales per day per sales representative. We had an average of 1,012 sales representatives working for us in 2020, a 2.1% increase over 2019. Excluding the Partsmaster acquisition, we had an average of 944 sales representatives working for us in 2020.
Partsmaster Acquisition
In August 2020, we acquired Partsmaster, a leading Maintenance, Repair and Operations ("MRO") distributor from NCH Corporation ("NCH"). Partsmaster has approximately 200 sales representatives and serves approximately 16,000 customers throughout the United States and Canada. We also subleased the Partsmaster distribution center located in Greenville, Texas from NCH, and we will continue to fulfill orders from this facility as we integrate Partsmaster into our MRO segment operations.
The purchase price of the acquisition was $35.3 million in cash and the assumption of certain liabilities. We paid $2.3 million at the time of the acquisition and we will pay the remaining $33.0 million in May 2021. We plan to pay the remaining portion of the purchase price with cash on hand with any remaining portion using our existing credit facility.
Assets acquired and liabilities assumed as a result of the acquisition were accounted for at their fair value on the acquisition date. The identified assets include $5.0 million of intangible assets for customer relationships and $2.8 million for trade names with estimated useful lives of 10 years and 5 years, respectively. Goodwill of $15.8 million related to this acquisition reflects the purchase price less the fair market value of the identifiable assets. The liabilities assumed include approximately $2.9 million relating to deferred employee compensation and $4.1 million of accounts payable and other accrued liabilities. The appropriate fair values of the assets acquired and liabilities assumed are based on preliminary estimates and assumptions. These preliminary estimates and assumptions could change during the purchase price measurement period as we finalize the valuations of the assets acquired and liabilities assumed.
Additional information related to the Partsmaster acquisition is provided in Note 3 - Acquisition in the notes to the consolidated financial statements. The Partsmaster acquisition is reported in the Lawson MRO segment.
RESULTS OF OPERATIONS FOR 2020 AS COMPARED TO 2019
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Year Ended December 31,
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Year-to-Year
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2020
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2019
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Change
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(Dollars in thousands)
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Amount
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% of Net Sales
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Amount
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% of Net Sales
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Amount
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%
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Revenue
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$
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351,591
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100.0
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%
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$
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370,785
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100.0
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%
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$
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(19,194)
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(5.2)
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%
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Cost of goods sold
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165,053
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46.9
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173,431
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46.8
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(8,378)
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(4.8)
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Gross profit
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186,538
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53.1
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197,354
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53.2
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(10,816)
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(5.5)
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Operating expenses:
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Selling expenses
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76,775
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21.8
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85,342
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23.0
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(8,567)
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(10.0)
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General and administrative expenses
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89,213
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25.5
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102,946
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27.8
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(13,733)
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(13.3)
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Total operating expenses
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165,988
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47.3
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188,288
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50.8
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(22,300)
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(11.8)
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Operating income
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20,550
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5.8
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9,066
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2.4
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11,484
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Interest expense
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(654)
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(0.2)
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(603)
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(0.1)
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(51)
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Other income, net
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889
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0.3
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1,211
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0.3
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(322)
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Income before income taxes
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20,785
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5.9
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9,674
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2.6
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11,111
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Income tax expense
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5,672
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1.6
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2,453
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0.7
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3,219
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Net income
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$
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15,113
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4.3
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%
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$
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7,221
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1.9
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%
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$
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7,892
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Non-GAAP Financial Measure - Adjusted Operating Income
The Company's management believes that certain non-GAAP financial measures may provide users of this financial information with additional meaningful comparisons between current results and results in prior operating periods. Management believes that these non-GAAP financial measures can provide additional meaningful reflection of underlying trends of the business because they provide a comparison of historical information that excludes certain infrequently occurring, seasonal or non-operational items that impact the overall comparability. These non-GAAP financial measures should be viewed in addition to, and not as an alternative for, the Company's reported results prepared in accordance with GAAP.
Adjusted operating income is defined by us as GAAP operating income excluding stock-based compensation, severance expense, and other non-recurring items in the period in which these items are incurred.
Operating income was $20.6 million for 2020 inclusive of $2.0 million of stock-based compensation compared to $9.1 million in 2019 which included $17.8 million of stock-based compensation. Excluding stock-based compensation, severance and other non-recurring items, adjusted operating income decreased to $27.4 million from $28.6 million on lower sales, offset by cost control measures enacted in response to the COVID-19 pandemic and the contribution of Partsmaster to the adjusted non-GAAP operating income of $1.7 million.
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Reconciliation of GAAP Operating Income to Adjusted Non-GAAP Operating Income (Unaudited)
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Twelve Months Ended
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December 31,
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(Dollars in Thousands)
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2020
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2019
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Operating income as reported per GAAP
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$
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20,550
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$
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9,066
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Stock-based compensation (1)
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2,009
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17,788
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Severance expense (2)
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2,077
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1,756
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Goodwill impairment (3)
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1,918
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—
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Acquisition related costs (4)
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880
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—
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Adjusted non-GAAP operating Income
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$
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27,434
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$
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28,610
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(1) Expense for stock-based compensation, of which a portion varies with the Company's stock price
(2) Includes severance expense from actions taken in 2020 and 2019 along with 2020 severance and retention costs related to the Partsmaster acquisition.
(3) Represents the goodwill impairment related to the 2018 acquisition of Screw Products, Inc as the carrying value of the reporting unit exceeded its estimated fair value.
(4) Primarily legal and accounting costs pertaining to the Partsmaster acquisition.
Sales and Gross Profits
Sales and gross profit results by operating segment for the years ended December 31, 2020 and 2019 were as follows:
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Year Ended December 31,
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Increase (Decrease)
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(Dollars in thousands)
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2020
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2019
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Amount
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%
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Net sales
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Lawson
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$
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312,803
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$
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329,367
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$
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(16,564)
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(5.0)
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%
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Bolt
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38,788
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41,418
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(2,630)
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(6.3)
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%
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Consolidated
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$
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351,591
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$
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370,785
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$
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(19,194)
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(5.2)
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%
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Gross profit
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Lawson
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$
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171,258
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$
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181,567
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$
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(10,309)
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(5.7)
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%
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Bolt
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15,280
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15,787
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(507)
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(3.2)
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%
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Consolidated
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$
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186,538
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$
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197,354
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$
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(10,816)
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(5.5)
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%
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Gross profit margin
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Lawson
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54.7
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%
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55.1
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%
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Bolt
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39.4
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%
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38.1
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%
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Consolidated
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53.1
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%
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53.2
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%
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Consolidated revenue in 2020 decreased 5.2% to $351.6 million from $370.8 million in 2019. Sales were negatively impacted by the COVID-19 pandemic and lower sales to oil and gas customers. All customer categories have been negatively impacted by the effect of the COVID-19 pandemic. The most acute negative impacts of the COVID-19 pandemic were experienced in the second quarter at the onset of the pandemic. Restrictions related to the pandemic began to be relaxed in the third quarter and continued to be relaxed in the fourth quarter, which led to improved customer activity, as well as increased customer contact for Lawson MRO sales representatives and greater foot traffic for the Bolt branches compared to the second quarter. Excluding Partsmaster, sales decreased 11.3% primarily as a result of the pandemic. The decrease in sales was offset by the inclusion of $22.6 million of sales contributed by the Partsmaster acquisition since August 31, 2020. Average daily sales decreased to $1.390 million in 2020 compared to $1.471 million in 2019 with one more selling day in 2020. Excluding a foreign currency effect of $0.7 million, consolidated revenue decreased by 5.0% for the year.
Gross profit decreased to $186.5 million in 2020 from $197.4 million in 2019 driven primarily by the decrease in sales due to the COVID-19 pandemic, partially offset by the inclusion of $13.2 million of gross profit from Partsmaster. Gross profit as a percent of sales decreased to 53.1% from 53.2% a year ago. Gross profit as a percentage of sales generated by sales representatives acquired from the Partsmaster acquisition was 58.4% post-acquisition. The organic Lawson MRO (excluding Bolt, Screw Products, and Partsmaster) gross margin as a percent of sales declined to 59.8% compared to the prior year organic gross margin percent of 60.7% primarily as a result of lower margin products comprising a larger portion of our sales compared to the prior year and fixed distribution costs allocated over a lower sales base.
Selling, General and Administrative Expenses
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Year Ended December 31,
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Increase (Decrease)
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(Dollars in thousands)
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2020
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2019
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Amount
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%
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Selling expenses
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Lawson
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$
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73,706
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$
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81,999
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$
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(8,293)
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(10.1)
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%
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Bolt
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3,069
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3,343
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(274)
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(8.2)
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%
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Consolidated
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$
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76,775
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$
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85,342
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$
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(8,567)
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(10.0)
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%
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General and administrative expenses
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Lawson
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$
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79,837
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$
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93,085
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$
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(13,248)
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(14.2)
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%
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Bolt
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9,376
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9,861
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(485)
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(4.9)
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%
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Consolidated
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$
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89,213
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$
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102,946
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$
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(13,733)
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(13.3)
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%
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Selling expenses decreased to $76.8 million in 2020 from $85.3 million in 2019 and, as a percent of sales decreased to 21.8% in 2020 from 23.0% in 2019. The decrease in selling expense as a percent of sales was primarily driven by reduced sales compensation driven by lower sales and a reduction of travel related expenses after the onset of the COVID-19 pandemic. These declines were partially offset by an inclusion of $6.5 million of selling expenses from the Partsmaster acquisition.
General and administrative expenses decreased to $89.2 million in 2020 from $102.9 million in 2019 primarily due to a decrease in stock-based compensation expense of $15.8 million, a portion of which varies with the Company stock price, and lower employee compensation, lower travel expense and other cost control measures in order to mitigate the negative impacts of COVID-19. The decline was offset by the inclusion of $7.4 million of General and administrative expense from the Partsmaster acquisition and the goodwill impairment of $1.9 million related to the 2018 acquisition of Screw Products as the carrying value of the reporting unit exceeded its fair value. Additionally the Company recorded $1.4 million under the Canada Emergency Wage Subsidy ("CEWS") as a reduction of general and administrative expenses.
Goodwill Impairment
The Company performed a quantitative goodwill impairment analysis as of December 1, 2020 for the Screw Products reporting unit. The Company engaged a third-party valuation firm to determine the value of the Screw Products reporting unit and determined that the carrying value of the net assets exceeded the fair value of the reporting unit and accordingly recognized an impairment charge of $1.9 million.. The impairment charge is included in general and administrative expense.
Interest Expense
Interest expenses increased $0.1 million in 2020 over the prior year, due primarily to the inclusion of imputed interest expense from our accrued acquisition liability offset by lower average outstanding balances under our credit agreement.
Other Income, Net
Other income, net was $0.9 million in 2020 compared to other income, net of $1.2 million in 2019. Other income, net in both years was driven by fluctuations in the Canadian currency exchange rate.
Income Tax Expense
Income tax expenses were $5.7 million resulting in a 27.3% effective tax rate for 2020 compared to income tax expense of $2.5 million and a 25.4% effective tax rate for 2019. The higher effective tax rate in 2020 is due primarily to increases in uncertain tax positions and lower stock compensation deductions.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities was $32.5 million and $9.2 million in 2020 and 2019, respectively, reflecting stronger operating results along with tightly managing its working capital.
Capital expenditures of $1.7 million and $2.0 million in 2020 and 2019 respectively, were primarily for improvements to our distribution centers and information technology. In the third quarter of 2020, the Company paid $2.3 million in cash related to the Partsmaster acquisition.
In 2019, our Board of Directors authorized a program in which we may repurchase up to $7.5 million of our common stock from time to time in open market transactions, privately negotiated transactions or by other methods. In the first quarter of 2020 we purchased 47,504 shares of our common stock at an average purchase price of $36.93 under the repurchase program. During 2019, the Company purchased 32,362 shares of common stock at an average purchase price of $38.13 under the repurchase program. On December 31, 2020, the Company had $4.5 million available under its repurchasing program.
Credit Agreement
At December 31, 2020, we had no borrowings under the Credit Agreement and had borrowing availability of $66.0 million. See Note 13 - Credit Agreement for further information on the Company Credit Agreement.
In addition to other customary representations, warranties and covenants, the Credit Agreement contains certain financial covenants. The following chart reflects the EBITDA to fixed charges ratio and total net leverage ratio covenant:
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Quarterly Financial Covenants
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Requirement
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Actual
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EBITDA to fixed charges ratio
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1.15 : 1.00
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4.77 : 1.00
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Total net leverage ratio
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3.25 : 1.00
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0.60 : 1.00
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The Company was in compliance with all financial covenants as of December 31, 2020.
No cash dividends have been paid in the two years ended December, 31 2020. Dividends are subject to certain restrictions under our Credit Agreement.
Partsmaster Acquisition Liability
As a part of the Partsmaster acquisition, payment of $33.0 million is due to the sellers in May 2021. The payment has been guaranteed under the Purchase Agreement, which includes the issuance of a $33.0 million irrevocable standby letter of credit. Payment will be made with cash on hand and with any remaining portion using our existing credit facility. The $33.0 million obligation has been discounted to its present value and is recognized as a current liability of $32.7 million in our condensed consolidated balance sheet as of December 31, 2020.
OFF-BALANCE SHEET ARRANGEMENTS
The majority of our operating leases were recognized as right of use assets and lease liabilities on the balance sheet upon the adoption of ASU 2016-02, Leases ("ASU 2016-02") in the first quarter of 2019. See Note 12 - Leases for the transition to ASU 2016-02.
Also, as of December 31, 2020, we had contractual commitments to purchase approximately $24.4 million of product from our suppliers and contractors.
CRITICAL ACCOUNTING POLICIES
We have disclosed our significant accounting policies in Note 2 to the consolidated financial statements. The following provides information on the accounts requiring more significant estimates.
Allowance for Doubtful Accounts — We evaluate the collectability of accounts receivable based on a combination of factors. In circumstances where we are aware of a specific customer’s inability to meet its financial obligations (e.g.,
bankruptcy filings, substantial down-grading of credit ratings), a specific reserve for bad debts is recorded against amounts due to reduce the receivable to the amount we believe will be collected. For all other customers, we recognize reserves for bad debts based on our historical experience of bad debt write-offs as a percent of accounts receivable outstanding. If circumstances change (e.g., higher than expected defaults or an unexpected material adverse change in a major customer’s ability to meet its financial obligations), the estimates of the recoverability of amounts due to us could be revised. At December 31, 2020, our reserve was 1.4% of our gross accounts receivable outstanding. A hypothetical change of one percent to our reserve as a percent of our gross accounts receivable would have affected our annual doubtful accounts expense by approximately $0.4 million.
Inventory Reserves — Inventories consist principally of finished goods and are stated at the lower of cost (determined using the first-in-first-out method for the Lawson segment and weighted average for the Bolt segment) or net realizable value. Most of our products are not exposed to the risk of obsolescence due to technology changes. However, some of our products do have a limited shelf life, and from time to time we add and remove items from our catalogs, brochures or website for marketing and other purposes.
To reduce our inventory to a lower of cost or market value, we record a reserve for slow-moving and obsolete inventory based on historical experience and monitoring of our current inventory activity. We use estimates to determine the necessity of recording these reserves based on periodic detailed analysis, using both qualitative and quantitative factors. As part of this analysis, we consider several factors including the inventories’ length of time on hand, historical sales, product shelf life, product life cycle, product category and product obsolescence. In general, depending on the product category, we reserve inventory with low turnover at higher rates than inventory with higher turnover.
At December 31, 2020, our inventory reserve was $5.3 million, equal to approximately 7.8% of our gross inventory. A hypothetical change of one percent to our reserve as a percent of total inventory would have affected our cost of goods sold by $0.6 million.
Income Taxes — Deferred tax assets or liabilities reflect temporary differences between amounts of assets and liabilities for financial and tax reporting. Such amounts are adjusted, as appropriate, to reflect changes in enacted tax rates expected to be in effect when the temporary differences reverse. Significant judgment is required in determining income tax provisions as well as deferred tax asset and liability balances, including the estimation of valuation allowances and the evaluation of uncertain tax positions.
Goodwill Impairment – Goodwill represents the cost of business acquisitions in excess of the fair value of identifiable net tangible and intangible assets acquired. Goodwill is allocated to the appropriate reporting unit as reviewed by the Company's segment managers. The Company reviews goodwill for potential impairment annually on December 1st, or when an event or other circumstances change that would more likely than not reduce the fair value of the asset below its carrying value. The first step in the multi-step process to determine if goodwill has been impaired and to what degree is to review the relevant qualitative factors that could cause the fair value of the reporting unit to decrease below the carrying value of the reporting unit. The Company considers factors such as macroeconomic, industry and market conditions, cost factors, overall financial performance and other relevant factors that would affect the individual reporting units. If we determine that it is more likely than not that the fair value of the reporting unit is greater than the carrying value of the reporting unit, then no further impairment testing is needed. If we determine that it is more likely than not that the carrying value of the reporting unit is greater than the fair value of the reporting unit, the Company will move to the next step in the process. The Company will estimate the fair value of the reporting unit and compare it to the reporting unit's carrying value. If the carrying value of the reporting unit exceeds its fair value, the Company will record an impairment of goodwill equal to the amount the carrying value of the reporting unit exceeds its fair value, up to the total amount of goodwill previously recognized.
Revenue Recognition - For reporting purposes, the Company has two separate performance obligations including products and vendor managed inventory services. The allocation of product and service revenue as well as the estimation of service costs requires judgments and assumptions including the standalone selling prices, the period of time that it takes for the service obligation to be fulfilled and the amount of time spent on vendor managed inventory services during the sales process. Changes in various assumptions could increase or decrease the allocation of service revenue and related costs; however, would not materially impact total reported revenues or reported operating income.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The following information is presented in this item:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statements of Cash Flows for the Years ended December 31, 2020 and 2019
|
|
|
|
|
|
Report of Independent Registered Public Accounting Firm
Shareholders and Board of Directors
Lawson Products, Inc.
Chicago, Illinois
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Lawson Products, Inc. (the “Company”) as of December 31, 2020 and 2019, the related consolidated statements of income and comprehensive income, changes in stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2020, and the related notes and financial statement schedule listed in the accompanying index (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company's internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and our report dated February 26, 2021 expressed an unqualified opinion thereon.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing a separate opinion on the critical audit matters or on the accounts or disclosures to which they relate.
Goodwill Impairment Assessment - Bolt Reporting Unit
As described in Note 8 to the consolidated financial statements, the Company’s consolidated goodwill balance as of December 31, 2020 was $35.2 million. At December 31, 2020, the Bolt reporting unit’s (“Bolt”) goodwill balance was $13.8 million. The Company tests for impairment annually on a reporting unit basis or more often when impairment indicators exist. As a result of the COVID-19 pandemic and its impact on Bolt’s revenue and earnings during the first quarter of 2020, the Company performed interim goodwill impairment tests of Bolt. The Company prepared a valuation of Bolt using both a market approach and an income approach. The determination of the fair value of the reporting unit requires management to make significant estimates and assumptions related to forecasts of future revenue and earnings.
We identified the valuation of Bolt during the interim impairment assessment of goodwill as a critical audit matter. The principal considerations for our determination are: (i) Bolt’s excess fair value over book value was less than 10% in the first quarter of 2020, as such, management’s estimates were more sensitive to the assumptions and judgments used, (ii) inherent uncertainties exist related to the Company’s forecasts and how various economic and other factors including the projected impact from the COVID-19 pandemic, could affect the Company’s forecasted assumptions of revenue and earnings included in the income approach, and (iii) the appropriateness and relative weighting of valuation methods, and the appropriateness of the selected comparable companies and market multiples used in the market approach. Auditing these elements involved especially challenging auditor judgment due to the nature and extent of audit effort required to address these matters, including the extent of specialized skill or knowledge needed.
The primary procedures we performed to address this critical audit matter included:
•Evaluating the reasonableness of assumptions used in management’s income approach analysis by independently comparing the forecasts to: (i) historical results, and (ii) market trends by obtaining multiple independent publicly available market reports and assessing the projected impact of the COVID-19 pandemic and the forecasted recovery period for the industry.
•Assessing the appropriateness of the market approach and evaluating the reasonableness of the comparable companies and market multiples selected.
•Utilizing personnel with specialized knowledge and skill in valuation to assist in: (i) testing the underlying source information utilized in the market approach, (ii) assessing the appropriateness and relative weighting of valuation methods, (iii) evaluating the reasonableness of selected comparable companies and market multiples used in the market approach, and (iv) testing the mathematical accuracy of the Company’s calculations.
Business Combination- Partsmaster Intangible Assets Valuation
As described in Note 3 to the consolidated financial statements, the Company completed the acquisition of Partsmaster on August 31, 2020 for $35.3 million in cash plus assumed liabilities, which resulted in $7.7 million of intangible assets. The Company applied significant judgment in estimating the fair value of the intangible assets acquired which involved the use of significant estimates and assumptions with respect to expected future cash flows and discount rates.
We identified the valuation of the intangible assets acquired in the Partsmaster business combination as a critical audit matter. Management was required to make significant judgments and assumptions, including forecasted cash flows and discount rates, in determining the fair values of the intangible assets acquired which were identified as customer relationships and trade names. Auditing these elements involved especially challenging auditor judgment due to the nature and extent of audit effort required to address these matters, including the extent of specialized skill or knowledge needed.
The primary procedures we performed to address this critical audit matter included:
•Evaluating the reasonableness of the forecasted cash flows through: (i) evaluating historical results of Partsmaster (ii) assessing forecasted performance against market trends and guideline companies, and (iii) testing the mathematical accuracy of the Company’s calculations.
•Utilizing personnel with specialized knowledge and skill in valuation to assist in: (i) evaluating the appropriateness of the selected comparable companies, (ii) evaluating the reasonableness of the discount rate used, and (iii) testing the mathematical accuracy of the Company’s calculations.
/s/BDO USA, LLP
We have served as the Company's auditors since 2013.
Chicago, Illinois
February 26, 2021
Lawson Products, Inc.
Consolidated Balance Sheets
(Dollars in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2020
|
|
2019
|
ASSETS
|
|
|
|
Current assets:
|
|
|
|
Cash and cash equivalents
|
$
|
28,393
|
|
|
$
|
5,495
|
|
Restricted cash
|
998
|
|
|
802
|
|
Accounts receivable, less allowance for doubtful accounts of $654 and $593, respectively
|
44,515
|
|
|
38,843
|
|
Inventories, net
|
61,867
|
|
|
55,905
|
|
Miscellaneous receivables and prepaid expenses
|
7,289
|
|
|
5,377
|
|
Total current assets
|
143,062
|
|
|
106,422
|
|
|
|
|
|
Property, plant and equipment, less accumulated depreciation and amortization
|
15,800
|
|
|
16,546
|
|
Deferred income taxes
|
18,482
|
|
|
21,711
|
|
Goodwill
|
35,176
|
|
|
20,923
|
|
Cash value of life insurance
|
16,185
|
|
|
14,969
|
|
Intangible assets, net
|
18,503
|
|
|
12,335
|
|
Right of use assets
|
8,764
|
|
|
11,246
|
|
Other assets
|
332
|
|
|
277
|
|
Total assets
|
$
|
256,304
|
|
|
$
|
204,429
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
Current liabilities:
|
|
|
|
Accrued acquisition liability
|
$
|
32,673
|
|
|
$
|
—
|
|
Accounts payable
|
22,262
|
|
|
13,789
|
|
Lease obligation
|
4,568
|
|
|
3,830
|
|
Accrued expenses and other liabilities
|
38,492
|
|
|
39,311
|
|
Total current liabilities
|
97,995
|
|
|
56,930
|
|
|
|
|
|
Revolving line of credit
|
—
|
|
|
2,271
|
|
Security bonus plan
|
11,262
|
|
|
11,840
|
|
Lease obligation
|
5,738
|
|
|
9,504
|
|
Deferred compensation
|
10,461
|
|
|
6,370
|
|
Deferred tax liability
|
2,841
|
|
|
6,188
|
|
Other liabilities
|
5,585
|
|
|
3,325
|
|
Total liabilities
|
133,882
|
|
|
96,428
|
|
|
|
|
|
Commitments and contingencies – Note 16
|
|
|
|
|
|
|
|
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 – 9,287,625 and 9,190,171 shares, respectively
Outstanding – 9,061,039 and 9,043,771 shares, respectively
|
9,288
|
|
|
9,190
|
|
Capital in excess of par value
|
19,841
|
|
|
18,077
|
|
Retained earnings
|
101,609
|
|
|
86,496
|
|
Treasury stock – 226,586 and 146,400 shares held, respectively
|
(9,015)
|
|
|
(5,761)
|
|
Accumulated other comprehensive income (loss)
|
699
|
|
|
(1)
|
|
Total stockholders’ equity
|
122,422
|
|
|
108,001
|
|
Total liabilities and stockholders’ equity
|
$
|
256,304
|
|
|
$
|
204,429
|
|
See notes to Consolidated Financial Statements
Lawson Products, Inc.
Consolidated Statements of Income and Comprehensive Income
(Dollars in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2020
|
|
2019
|
Revenue
|
351,591
|
|
|
370,785
|
|
Cost of goods sold
|
165,053
|
|
|
173,431
|
|
Gross profit
|
186,538
|
|
|
197,354
|
|
|
|
|
|
Operating expenses:
|
|
|
|
Selling expenses
|
76,775
|
|
|
85,342
|
|
General and administrative expenses
|
89,213
|
|
|
102,946
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
165,988
|
|
|
188,288
|
|
|
|
|
|
Operating income
|
20,550
|
|
|
9,066
|
|
|
|
|
|
Interest expense
|
(654)
|
|
|
(603)
|
|
Other income, net
|
889
|
|
|
1,211
|
|
|
|
|
|
Income before income taxes
|
20,785
|
|
|
9,674
|
|
Income tax expense
|
5,672
|
|
|
2,453
|
|
|
|
|
|
Net income
|
$
|
15,113
|
|
|
$
|
7,221
|
|
|
|
|
|
Basic income per share of common stock
|
$
|
1.68
|
|
|
$
|
0.81
|
|
|
|
|
|
Diluted income per share of common stock
|
$
|
1.62
|
|
|
$
|
0.77
|
|
|
|
|
|
Weighted average shares outstanding:
|
|
|
|
Basic weighted average shares outstanding
|
9,020
|
|
|
8,968
|
|
Effect of dilutive securities outstanding
|
311
|
|
|
408
|
|
Diluted weighted average shares outstanding
|
9,331
|
|
|
9,376
|
|
|
|
|
|
Comprehensive income
|
|
|
|
Net income
|
$
|
15,113
|
|
|
$
|
7,221
|
|
Other comprehensive income, net of tax:
|
|
|
|
Adjustment for foreign currency translation
|
700
|
|
|
1,559
|
|
Comprehensive income
|
$
|
15,813
|
|
|
$
|
8,780
|
|
See notes to Consolidated Financial Statements
Lawson Products, Inc.
Consolidated Statements of Changes in Stockholders’ Equity
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding Shares
|
|
$1 Par Value
|
|
Capital in Excess of Par Value
|
|
Retained Earnings
|
|
Treasury Stock
|
|
Accumulated Other Comprehensive Income (Loss)
|
|
Total Stockholders' Equity
|
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
|
—
|
|
|
—
|
|
|
—
|
|
|
7,221
|
|
|
—
|
|
|
—
|
|
|
7,221
|
|
Adjustment for foreign currency translation
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,559
|
|
|
1,559
|
|
Stock-based compensation
|
—
|
|
|
—
|
|
|
2,638
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,638
|
|
Shares issued
|
184,455
|
|
|
184
|
|
|
(184)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Shares repurchased held in treasury
|
(96,614)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(4,527)
|
|
|
—
|
|
|
(4,527)
|
|
Balance at December 31, 2019
|
9,043,771
|
|
|
9,190
|
|
|
18,077
|
|
|
86,496
|
|
|
(5,761)
|
|
|
(1)
|
|
|
108,001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
15,113
|
|
|
—
|
|
|
—
|
|
|
15,113
|
|
Adjustment for foreign currency translation
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
700
|
|
|
700
|
|
Stock-based compensation
|
—
|
|
|
—
|
|
|
1,847
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,847
|
|
Shares issued
|
97,454
|
|
|
98
|
|
|
(83)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
15
|
|
Shares repurchased held in treasury
|
(80,186)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(3,254)
|
|
|
—
|
|
|
(3,254)
|
|
Balance at December 31, 2020
|
9,061,039
|
|
|
$
|
9,288
|
|
|
$
|
19,841
|
|
|
$
|
101,609
|
|
|
$
|
(9,015)
|
|
|
$
|
699
|
|
|
$
|
122,422
|
|
(1) The Company adopted the ASC No.842, Leases (ASC 842) on January 1, 2019 using the modified retrospective approach. See Note 12 - Leases for further details.
See notes to Consolidated Financial Statements
Lawson Products, Inc.
Consolidated Statements of Cash Flows
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2020
|
|
2019
|
Operating activities
|
|
|
|
Net income
|
$
|
15,113
|
|
|
$
|
7,221
|
|
|
|
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
Depreciation and amortization
|
6,701
|
|
|
5,893
|
|
Stock-based compensation
|
1,479
|
|
|
4,054
|
|
Deferred income taxes
|
(167)
|
|
|
2,169
|
|
Goodwill impairment
|
1,918
|
|
|
—
|
|
|
|
|
|
Changes in operating assets and liabilities, net of effect of acquired businesses:
|
|
|
|
Accounts receivable
|
1,762
|
|
|
(1,380)
|
|
Inventories
|
2,100
|
|
|
(2,308)
|
|
Miscellaneous receivables, prepaid expenses and other assets
|
(2,899)
|
|
|
(3,890)
|
|
|
|
|
|
Accounts payable and other liabilities
|
5,788
|
|
|
(3,230)
|
|
Other
|
733
|
|
|
667
|
|
Net cash provided by operating activities
|
32,528
|
|
|
9,196
|
|
|
|
|
|
Investing activities
|
|
|
|
Purchases of property, plant and equipment
|
(1,687)
|
|
|
(2,028)
|
|
Business acquisition, net of acquired cash
|
(2,300)
|
|
|
—
|
|
Net cash used in investing activities
|
(3,987)
|
|
|
(2,028)
|
|
|
|
|
|
Financing activities
|
|
|
|
Net payments on revolving lines of credit
|
(2,271)
|
|
|
(8,552)
|
|
Shares repurchased held in treasury
|
(3,254)
|
|
|
(4,527)
|
|
Payment of financing fees
|
—
|
|
|
(573)
|
|
Payment of financing lease principal
|
(257)
|
|
|
(271)
|
|
Proceeds from stock option exercises
|
15
|
|
|
33
|
|
Net cash used in financing activities
|
(5,767)
|
|
|
(13,890)
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
320
|
|
|
336
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents and restricted cash
|
23,094
|
|
|
(6,386)
|
|
Cash, cash equivalents and restricted cash at beginning of year
|
6,297
|
|
|
12,683
|
|
Cash, cash equivalents and restricted cash at end of year
|
$
|
29,391
|
|
|
$
|
6,297
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
28,393
|
|
|
$
|
5,495
|
|
Restricted cash
|
998
|
|
|
802
|
|
Total cash, cash equivalents and restricted cash
|
$
|
29,391
|
|
|
$
|
6,297
|
|
|
|
|
|
Supplemental disclosure of cash flow information
|
|
|
|
Net noncash financing liability related to acquisition
|
(32,673)
|
|
|
—
|
|
Net cash paid for income taxes
|
5,377
|
|
|
947
|
|
Net cash paid for interest
|
398
|
|
|
590
|
|
See notes to Consolidated Financial Statements
Lawson Products, Inc.
Notes to Consolidated Financial Statements
Note 1 - Description of Business
Lawson Products, Inc. (“Lawson” or the “Company”) is a North American distributor of products and services to the industrial, commercial, institutional and government maintenance, repair and operations (“MRO”) marketplace. The Company has two reportable segments. The Lawson reportable segment distributes 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 Bolt reportable segment distributes MRO products primarily through its 14 branches located in Western Canada. On August 31, 2020, the Company acquired Partsmaster, a distributor of MRO products. Partsmaster is included in the Lawson reportable segment.
Note 2 - Summary of Significant Accounting Policies
Principles of Consolidation — The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States and include the accounts and transactions of the Company and its wholly-owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. Certain reclassifications have been made to prior period amounts to conform to the current period presentation. Such reclassifications have no effect on net income as previously reported.
Revenue Recognition — The Company recognizes two revenue streams: revenues from the sale of product and revenues from the performance of VMI services. The Company offers VMI services only in conjunction with product sales. The Company does not bill product sales and services separately. A portion of selling expenses is allocated to cost of sales for reporting purposes based upon the estimated time spent on such services. Product revenue includes product sales and billings for freight and handling charges. Sales and associated cost of goods sold are generally recognized when products are shipped and title passes to customers. We accrue for returns based on historical evidence of return rates. Service revenue and associated cost of sales are recognized when services are performed. A portion of service revenue and cost of service is deferred, as not all services are performed in the same period as billed. The Company also operates as a lessor and recognizes lease revenue on a straight-line basis over the life of each lease. The Company has adopted the practical expedient not to separate the non-lease components that would be within the scope of ASC 606 from the associated lease component as the relevant criteria under ASC 842 are met.
Cash Equivalents — The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. The carrying amount of the Company’s cash equivalents at December 31, 2020 approximates fair value.
Allowance for Doubtful Accounts — The Company evaluates the collectability of accounts receivable based on a combination of factors. In circumstances where the Company is aware of a specific customer’s inability to meet its financial obligations (e.g., bankruptcy filings, substantial down-grading of credit ratings), a specific reserve for bad debts is recorded against amounts due to reduce the receivable to the amount the Company reasonably believes will be collected. For all other customers, the Company recognizes reserves for bad debts based on the Company’s historical experience of bad debt write-offs as a percent of accounts receivable outstanding. If circumstances change (e.g., higher than expected defaults or an unexpected material adverse change in a major customer's ability to meet its financial obligations), the estimates of the recoverability of amounts due the Company could be revised.
Inventories — Inventories principally consist of finished goods stated at the lower of cost or net realizable value using the first-in-first-out method for the Lawson segment and weighted average for the Bolt segment as well as Partsmaster. To reduce the cost basis of inventory to a lower of cost or net realizable value, a reserve is recorded for slow-moving and obsolete inventory based on historical experience and monitoring of current inventory activity. Estimates are used to determine the necessity of recording these reserves based on periodic detailed analysis using both qualitative and quantitative factors. As part of this analysis, the Company considers several factors including the inventories length of time on hand, historical sales, product shelf life, product life cycle, product category and product obsolescence.
Property, Plant and Equipment — Property, plant and equipment are stated at cost less accumulated depreciation and amortization. Depreciation expense is computed primarily by the straight-line method for buildings, machinery and equipment, furniture and fixtures and vehicles. The Company estimates useful lives of 20 to 40 years for buildings and improvements and 3 to 10 years for machinery and equipment, furniture and fixtures and vehicles. Amortization of financing and capital leases is included in depreciation expense.
Depreciation expense was $4.4 million and $3.9 million for 2020 and 2019 respectively. Capitalized software is amortized over estimated useful lives of 3 to 5 years using the straight-line method. Amortization expense of capitalized software was $0.6 million for 2020 and 2019 respectively.
Cash Value of Life Insurance — The Company has invested funds in life insurance policies on certain current and former employees. The cash surrender value of the policies is invested in various investment instruments and is recorded as an asset on our consolidated balance sheet. The Company records these funds at contractual value. The change in the cash surrender value of the life insurance policies, which is recorded as a component of General and administrative expenses, is the change in the policies' contractual values.
Deferred Compensation — The Company’s Executive Deferral Plan (“Deferral Plan”) allows certain executives to defer payment of a portion of their earned compensation. The deferred compensation is recorded in an Account Balance, which is a bookkeeping entry made by the Company to measure the amount due to the participant. The Account Balance is equal to the participant’s deferred compensation, adjusted for increases and/or decreases in the amount that the participant has designated to one or more bookkeeping portfolios that track the performance of certain mutual funds. Lawson adjusts the deferred compensation liability to equal the contractual value of the participants’ Account Balances. These adjustments are the changes in contractual value of the individual plans and are recorded as a component of General and administrative expenses.
On August 31, 2020, the Company acquired Partsmaster from NCH Corporation, and assumed certain liabilities, including non-qualified deferred compensation plans related to Partsmaster employees. Effective December 31, 2020, Lawson accepted sponsorship of the portions of the non-qualified plans related to Partsmaster employees. The plans were frozen effective January 1, 2021.
Stock-Based Compensation — Compensation based on the share value of the Company’s common stock is valued at its fair value at the grant date and the expense is recognized over the vesting period. Fair value is re-measured each reporting period for liability-classified awards that may be redeemable in cash. We account for forfeitures of stock-based compensation in the period in which they occur.
Goodwill — The Company had $35.2 million and $20.9 million of goodwill in 2020 and 2019, respectively. Goodwill represents the cost of business acquisitions in excess of the fair value of identifiable net tangible and intangible assets acquired. Goodwill is allocated to the appropriate reporting unit as reviewed by the Company’s segment managers. The Company has four reporting units; Lawson MRO, Bolt, Screw Products, and Partsmaster. The Company reviews goodwill for potential impairment annually on December 1st, or when an event or other circumstances change that would more likely than not reduce the fair value of the asset below its carrying value.
The first step in the multi-step process to determine if goodwill has been impaired and to what degree is to review the relevant qualitative factors that could cause the fair value of the reporting unit to decrease below the carrying value of the reporting unit. During the first and second quarter of fiscal 2020, the Company identified a triggering event due to adverse changes in the business climate related to COVID-19. As a result, the Company performed interim quantitative impairment tests as of March 31, 2020 and June 30, 2020 on the goodwill in its Bolt reporting unit, which is also the Bolt reportable segment. The Company compared the estimated fair value using the income approach and the market approach of the reporting unit with its estimated book value. Based on the evaluation performed, the Company determined that goodwill was not impaired as the fair value of the reporting unit exceeded its respective carrying amounts. The income approach calculations are dependent on several subjective factors including forecasts of future revenue and earnings and the discount rate. The market approach is based on financial multiples of comparable companies.
After reviewing the financial performance of the reporting units compared to our projected results, as well as macroeconomic conditions as a whole including the effect of the COVD-19 pandemic, we determined that it is more likely than not that the fair value of the goodwill generated by the acquisition of Screw Products, which reporting unit is a part of the Lawson reportable segment, had been impaired. As a result, we performed a quantitative impairment test as of December 1, 2020. The Company bases its measurement of the fair value of the reporting unit using the income approach. The income approach calculations are dependent on several subjective factors, including forecasts of future revenue and earnings and the discount rate.
Related to the Lawson MRO, Bolt, and Partsmaster reporting units, the Company performed a qualitative assessment as of December 1, 2020 and determined that it was more likely than not the fair value of the reporting units exceeded the carrying value of the reporting units.
Intangible Assets — The Company's intangible assets consist of trade names, and customer relationships. Intangible assets are amortized over a weighted average of 12 and 11 year estimated useful lives for trade names and customer relationships, respectively. The Company amortizes trade name intangible assets on a straight-line basis and customer relationship intangible assets on a basis consistent with their estimated economic benefit.
Impairment of Long-Lived Assets — The Company reviews its long-lived assets, including property, plant and equipment and definite life intangibles, for impairment whenever events or changes in circumstances indicate that the carrying amounts of these assets may not be recoverable. Recoverability is measured by a comparison of the assets' carrying amount to their expected future undiscounted net cash flows. If such assets are considered to be impaired, the impairment to be recognized is measured based on the amount by which the carrying amount of the asset exceeds its fair value. No impairments occurred in 2019 or 2020.
Income Taxes — Deferred tax assets or liabilities reflect temporary differences between amounts of assets and liabilities for financial and tax reporting. Such amounts are adjusted, as appropriate, to reflect changes in enacted tax rates expected to be in effect when the temporary differences reverse. A valuation allowance is established to offset any deferred tax assets if, based upon the available evidence, it is more likely than not (i.e. greater than 50% likely) that some or all of the deferred tax assets will not be realized. The determination of the amount of a valuation allowance to be provided on recorded deferred tax assets involves estimates regarding (1) the timing and amount of the reversal of taxable temporary differences, (2) expected future taxable income, (3) the impact of tax planning strategies and (4) the ability to carry back deferred tax assets to offset prior taxable income. In assessing the need for a valuation allowance, we consider all available positive and negative evidence, including past operating results, projections of future taxable income and the feasibility of ongoing tax planning strategies. The projections of future taxable income include a number of estimates and assumptions regarding our volume, pricing and costs. Additionally, valuation allowances related to deferred tax assets can be impacted by changes to tax laws. Significant judgment is required in determining income tax provisions as well as deferred tax asset and liability balances, including the estimation of valuation allowances and the evaluation of tax positions.
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 would subject the Company to foreign withholding taxes and may subject the Company to U.S. federal and state taxes.
The Company recognizes the benefit of tax positions when a benefit is more likely than not (i.e., greater than 50% likely) to be sustained on its technical merits. Recognized tax benefits are measured at the largest amount that is more likely than not to be sustained, based on cumulative probability, in final settlement of the position. The Company recognizes interest and penalties related to unrecognized tax benefits as a component of income tax expense.
Leases — Leases are categorized as either operating or financing leases at commencement. For both classes of leases, a Right Of Use ("ROU") asset and corresponding lease liability are recognized at commencement. Operating leases consist of the company headquarters, distribution centers, and Bolt branches. Financing leases consist of equipment such as forklifts and copiers. The value of the lease assets and liabilities are the present value of the total cash payments for each lease. The Company uses its incremental borrowing rate to discount the total cash payments to present value for each lease. The Company will review each lease to determine if there is a more appropriate discount rate to apply. Upon commencement, rent expense is recognized on a straight line basis for each operating lease. Each financing lease ROU asset is amortized on a straight line basis over the lease period. Prior to acquisition, Partsmaster participated in a leasing program where they actively leased parts washer machines to customers. The Company will continue the leasing program for the foreseeable future. These leases are classified as operating leases. The leased machines are recognized as fixed assets on the Company's consolidated balance sheet and the leasing revenue is recognized on a straight line basis.
Earnings per Share — Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share reflect the potential dilution from the exercise or conversion of outstanding stock options, market stock units and restricted stock awards into common stock. For the years ended December 31, 2020 and December 31, 2019 no options to purchase shares of common stock were excluded from the computation of diluted earnings per share because all of the options were in the money.
Foreign Currency — The accounts of foreign subsidiaries are measured using the local currency as the functional currency. All balance sheet amounts are translated into U.S. dollars using the exchange rates in effect at the applicable period end. Components of income or loss are translated using the average exchange rate for each reporting period.
Gains and losses resulting from changes in the exchange rates from translation of the subsidiary accounts in local currency to U.S. dollars are reported as a component of Accumulated other comprehensive income or loss in the consolidated balance sheets. Gains and losses resulting from the effect of exchange rate changes on transactions denominated in currencies other than the functional currency are included as a component of net income or loss upon settlement of the transaction.
Gains and losses resulting from foreign intercompany transactions are included as a component of net income or loss each reporting period unless the transactions are of a long-term-investment nature and settlement is not planned or anticipated in the foreseeable future, in which case the gains and losses are recorded as a component of accumulated other comprehensive income or loss in the consolidated balance sheets.
Treasury Stock — The Company repurchased 47,504 and 32,362 of its common stock in 2020 and 2019, respectively, through its previously announced stock repurchase plan. The Company repurchased 32,682 and 64,252 shares of its common stock in 2020 and 2019, respectively from employees upon the vesting of restricted stock to offset the income taxes owed by
those employees. The Company accounts for treasury stock using the cost method and includes treasury stock as a component of stockholders’ equity. The cost of the common stock repurchased and held in treasury was $3.3 million and $4.5 million in 2020 and 2019, respectively.
Acquisitions — The Company recognizes identifiable assets acquired and liabilities assumed at their acquisition date fair values. Goodwill as of the acquisition date is measured as the excess of consideration transferred over the net of the acquisition date fair values of the assets acquired and the liabilities assumed. While the Company uses its best estimates and assumptions for the purchase price allocation process to value assets acquired and liabilities assumed at the acquisition date, the estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, the Company may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill.
Use of Estimates — Preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported for service revenue, service cost, allowance for doubtful accounts, inventory reserves, goodwill and intangible assets valuation, and income taxes in the consolidated financial statements and accompanying notes. Actual results could differ from these estimates.
Recent Accounting Pronouncements
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses, which revises the requirements for how an entity should measure credit losses on financial instruments. The pronouncement is effective for smaller reporting companies in fiscal years beginning after December 15, 2023, including interim periods within those fiscal years, and the new guidance will be applied on a prospective basis. The Company is still evaluating the effect the adoption of the new standard will have on its financial statements.
Note 3 - Acquisition
On August 31, 2020, the Company acquired Partsmaster from NCH Corporation. Partsmaster is a leading maintenance, MRO solutions provider that serves approximately 16,000 customers with approximately 200 sales representatives. The acquisition was made primarily to expand the Company's sales coverage, expand product lines, add experienced sales representatives, and leverage the Company's infrastructure.
The purchase price was $35.3 million in cash plus the assumption of certain liabilities. The Company paid $2.3 million of the purchase price in cash at closing and will pay the remaining $33.0 million in May 2021. The payment obligation has been discounted to its present value and was recognized as an accrued acquisition liability of $32.4 million at the time of acquisition. As of December 31, 2020, the discounted present value of the $33.0 million due in May 2021 is $32.7 million and is recorded in the Company's consolidated balance sheet as an accrued acquisition liability. Payment has been guaranteed under the Purchase Agreement, and includes the issuance of a $33.0 million irrevocable standby letter of credit. The Company will satisfy the payment obligation with cash on hand with any remaining portion using its existing credit facility.
The purchase price of the acquisition was allocated to the fair value of Partsmasters' assets and liabilities on the acquisition date. The fair market value appraisals of the majority of the assets and liabilities was determined by a third party valuation firm using management estimates and assumptions including intangible assets of $5.0 million for customer relationships and $2.8 million for trade names, and their estimated useful lives of 10 and 5 years, respectively. The $15.8 million allocated to goodwill reflects the purchase price less the fair market value of the identifiable net assets. The goodwill is attributable to the workforce of the acquired business and the significant synergies expected to arise after Lawson's acquisition of Partsmaster. The entire amount of goodwill is expected to be deductible for tax purposes.
The appropriate fair values of the assets acquired and liabilities assumed are based on estimates and assumptions. The Company continues to review preliminary estimates of various assets and liabilities including, but not limited to, pre-acquisition employee compensation liabilities and potential adjustments of certain accounts receivable balances as defined under the purchase agreement. These preliminary estimates and assumptions could change during the purchase price measurement period as the Company finalizes the valuations of the assets acquired and liabilities assumed. The Company recorded the fair value of accounts receivable after consideration of an estimate of cash flows not expected to be collected which was $0.4 million.
Partsmaster contributed $22.6 million of revenue and $0.8 million of operating income in the four months of 2020 post-acquisition.
A summary of the initial purchase price allocation of the acquisition is as follows (Dollars in thousands):
|
|
|
|
|
|
|
|
|
Cash paid and payable and liabilities assumed
|
|
|
Cash paid and payable
|
|
$
|
34,523
|
|
Accounts payable and accrued expenses
|
|
4,086
|
|
Lease obligation
|
|
620
|
|
Deferred compensation
|
|
2,938
|
|
|
|
$
|
42,167
|
|
Fair value of assets acquired
|
|
|
Goodwill
|
|
$
|
15,816
|
|
Inventories
|
|
7,797
|
|
Accounts receivable
|
|
7,706
|
|
Customer relationships
|
|
4,961
|
|
Trade names
|
|
2,775
|
|
Property, plant and equipment
|
|
2,121
|
|
Right of use asset
|
|
620
|
|
Other assets
|
|
371
|
|
|
|
$
|
42,167
|
|
The following table contains unaudited pro forma revenue and net income for Lawson Products assuming the Partsmaster acquisition closed on January 1, 2019.
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
Pro Forma Year Ended December 31,
|
|
2020
|
|
2019
|
|
|
|
|
Revenue
|
396,679
|
|
|
435,486
|
|
|
|
|
|
Net Income
|
16,535
|
|
|
7,277
|
|
The pro forma disclosures in the table above include adjustments for amortization of intangible assets, implied interest expense and acquisition costs to reflect results as if the acquisition of Partsmaster had closed on January 1, 2019 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.
Note 4 - Revenue Recognition
As part of the Company's revenue recognition analysis, it concluded that it has two separate performance obligations, and accordingly, two separate revenue streams: products and services. Under the definition of a contract as defined by ASC 606, 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.
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, including the Partsmaster acquisition, 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 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.
In previous financial statements, the Company presented the disaggregated components of total revenue: product revenue and service revenue, along with the cost of sales associated with each of these revenue streams as the service revenues exceeded 10% of consolidated sales. Since the Company qualifies as a smaller reporting company, the Company has elected to discontinue disclosure of the disaggregated components of revenue and cost of sales in its consolidated statements of income and comprehensive income and in the related notes to the consolidated financial statements. For the twelve months ended December 31, 2019, service revenue of $40.1 million was reported as service revenue which have now been combined as reported within total revenue.
Disaggregated revenue by product type follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaudited
|
|
Year Ended December 31,
|
Product Category
|
2020
|
|
2019
|
Fastening systems
|
22%
|
|
24%
|
Cutting tools and abrasives
|
14%
|
|
13%
|
Fluid power
|
13%
|
|
15%
|
Specialty chemicals
|
11%
|
|
11%
|
Electrical
|
10%
|
|
11%
|
Aftermarket automotive supplies
|
7%
|
|
8%
|
Safety
|
6%
|
|
5%
|
Welding and metal repair
|
2%
|
|
2%
|
Other
|
15%
|
|
11%
|
|
100%
|
|
100%
|
Lawson as Lessor
Prior to acquisition, Partsmaster leased parts washer machines to customers through its Torrents leasing program. The Torrents leasing program comprised a minor portion of the Partsmaster business. The Company will continue the leasing program for the foreseeable future. These leases are classified as operating leases. The leased machines are recognized as fixed assets on the Company's consolidated balance sheet and the leasing revenue is recognized on a straight line basis. The Torrents machine leasing program generated $0.9 million of revenue in 2020 post-acquisition. The Company has adopted the practical expedient not to separate the non-lease components that would be within the scope of ASC 606 from the associated lease component as the relevant criteria under ASC 842 are met.
Note 5 — 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 has also agreed to maintain $0.2 million in a guaranteed investment certificate as collateral for an outside party that is providing certain commercial credit card services for Bolt. The Company is restricted from withdrawing this balance without the prior consent of the outside party during the term of the agreement.
Note 6 – Inventories, net
Inventories, net, consisting primarily of purchased goods which are offered for resale, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
December 31,
|
|
2020
|
|
2019
|
Inventories, gross
|
$
|
67,137
|
|
|
$
|
60,500
|
|
Reserve for obsolete and excess inventory
|
(5,270)
|
|
|
(4,595)
|
|
Inventories, net
|
$
|
61,867
|
|
|
$
|
55,905
|
|
Note 7 - Property, Plant and Equipment
Components of property, plant and equipment were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
December 31,
|
|
2020
|
|
2019
|
Land
|
$
|
2,650
|
|
|
$
|
2,625
|
|
Buildings and improvements
|
15,765
|
|
|
15,356
|
|
Machinery and equipment
|
26,814
|
|
|
24,509
|
|
Capitalized software
|
23,013
|
|
|
22,136
|
|
Furniture and fixtures
|
5,725
|
|
|
5,673
|
|
Vehicles
|
151
|
|
|
155
|
|
Construction in progress
|
752
|
|
|
683
|
|
|
74,870
|
|
|
71,137
|
|
Accumulated depreciation and amortization
|
(59,070)
|
|
|
(54,591)
|
|
|
$
|
15,800
|
|
|
$
|
16,546
|
|
Note 8 - Goodwill
Goodwill activity related to acquisitions is included in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in Thousands)
|
|
|
Goodwill By Reportable Segment
|
|
|
Lawson
|
|
Bolt
|
|
Total
|
Beginning balance January 1, 2019
|
|
$
|
7,174
|
|
|
$
|
12,905
|
|
|
$
|
20,079
|
|
Impact of foreign exchange
|
|
205
|
|
|
649
|
|
|
854
|
|
Adjustment to prior year allocation
|
|
(10)
|
|
|
—
|
|
|
(10)
|
|
Balance at December 31, 2019
|
|
7,369
|
|
|
$
|
13,554
|
|
|
20,923
|
|
|
|
|
|
|
|
|
Impact of foreign exchange
|
|
85
|
|
|
270
|
|
|
355
|
|
Acquisition (1)
|
|
15,816
|
|
|
—
|
|
|
15,816
|
|
Impairment (2)
|
|
(1,918)
|
|
|
—
|
|
|
(1,918)
|
|
Balance at December 31, 2020
|
|
$
|
21,352
|
|
|
$
|
13,824
|
|
|
$
|
35,176
|
|
(1) The $15.8 million addition to goodwill in 2020 was due to the preliminary allocation of the purchase price to acquire Partsmaster.
(2) The Company performed a quantitative goodwill impairment analysis as of December 1, 2020 for the Screw Products reporting unit. The Company engaged a third party valuation firm to determine the value of the Screw Products reporting unit, and determined that the carrying value of the net assets exceeded the fair value of the reporting unit, and accordingly, recognized an impairment charge of $1.9 million.
Although the Company believes the projected future operating results and cash flows and related estimates regarding the values were based on reasonable assumptions, it is reasonably possible that estimates made may be materially and adversely impacted in the future as a result of the COVID-19 pandemic, including impairment losses related to goodwill.
Note 9 - Intangible assets
The gross carrying amount and accumulated amortization by intangible asset class were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
(Dollars in thousands)
|
|
December 31, 2020
|
|
December 31, 2019
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Carrying Value
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Carrying Value
|
Trade names
|
$
|
11,289
|
|
|
$
|
(2,733)
|
|
|
$
|
8,556
|
|
|
$
|
8,422
|
|
|
$
|
(2,020)
|
|
|
$
|
6,402
|
|
Customer relationships
|
12,349
|
|
|
(2,402)
|
|
|
9,947
|
|
|
7,337
|
|
|
(1,404)
|
|
|
5,933
|
|
|
$
|
23,638
|
|
|
$
|
(5,135)
|
|
|
$
|
18,503
|
|
|
$
|
15,759
|
|
|
$
|
(3,424)
|
|
|
$
|
12,335
|
|
Amortization expense of $1.7 million and $1.3 million related to intangible assets was recorded in General and administrative expenses for 2020 and 2019, respectively. The estimated aggregate amortization expense for each of the next five years are as follows:
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
Year
|
|
Amortization
|
2021
|
|
$
|
2,662
|
|
2022
|
|
2,457
|
|
2023
|
|
2,343
|
|
2024
|
|
2,247
|
|
2025
|
|
1,983
|
|
Thereafter
|
|
6,811
|
|
|
|
$
|
18,503
|
|
Note 10 – Income Taxes
Income from operations before income taxes consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Year Ended December 31,
|
|
2020
|
|
2019
|
United States
|
$
|
16,226
|
|
|
$
|
5,418
|
|
Canada
|
4,559
|
|
|
4,256
|
|
|
$
|
20,785
|
|
|
$
|
9,674
|
|
Provision (benefit) for income taxes from operations for the years ended December 31, consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Year Ended December 31,
|
|
2020
|
|
2019
|
Current income tax expense:
|
|
|
|
U.S. federal
|
$
|
3,858
|
|
|
$
|
—
|
|
U.S. state
|
710
|
|
|
136
|
|
Canada
|
1,288
|
|
|
291
|
|
Total
|
$
|
5,856
|
|
|
$
|
427
|
|
Deferred income tax expense (benefit):
|
|
|
|
U.S. federal
|
$
|
236
|
|
|
$
|
2,012
|
|
U.S. state
|
52
|
|
|
303
|
|
Canada
|
(472)
|
|
|
(289)
|
|
Total
|
$
|
(184)
|
|
|
$
|
2,026
|
|
Total income tax expense (benefit):
|
|
|
|
U.S. federal
|
$
|
4,094
|
|
|
$
|
2,012
|
|
U.S. state
|
762
|
|
|
439
|
|
Canada
|
816
|
|
|
2
|
|
Total
|
$
|
5,672
|
|
|
$
|
2,453
|
|
The reconciliation between the effective income tax rates and the statutory federal rates for operations are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2020
|
|
2019
|
Statutory Federal rate
|
21.0
|
%
|
|
21.0
|
%
|
Increase (decrease) resulting from:
|
|
|
|
Change in valuation allowance - current period activity
|
(2.2)
|
|
|
(4.5)
|
|
Change in valuation allowance - reversal
|
—
|
|
|
(13.6)
|
|
Capital loss
|
—
|
|
|
13.6
|
|
Stock compensation
|
(2.0)
|
|
|
(11.5)
|
|
Compensation deduction limitation
|
1.5
|
|
|
10.1
|
|
State and local taxes, net
|
3.8
|
|
|
4.5
|
|
Foreign income inclusion
|
—
|
|
|
3.1
|
|
Meals & entertainment
|
0.6
|
|
|
1.8
|
|
Change in uncertain tax positions
|
4.6
|
|
|
(1.0)
|
|
Provision to return differences
|
(0.1)
|
|
|
0.2
|
|
Other items, net
|
0.1
|
|
|
1.7
|
|
Provision for income taxes
|
27.3
|
%
|
|
25.4
|
%
|
At December 31, 2020, the Company had $7.2 million of U.S. federal net operating loss carryforwards which are subject to expiration beginning in 2030 and $7.7 million of various state net operating loss carryforwards which expire at varying dates through 2034.
Certain valuation allowances pertaining to the deferred tax assets related to our Canadian operations remain as of December 31, 2020. Lawson's Canadian operations have recently moved into a three-year cumulative income position. Based on the history of our Canadian operations and their multi-year pre-tax losses through 2018, the Company does not believe there is sufficient positive evidence at this time to consider reversing the $1.2 million valuation allowance. While forecasts may show future positive pre-tax income, future projected income is the least objective of the positive sources of evidence as
the projections are inherently subjective and not yet demonstrated. The uncertainty of the continuing pandemic may further affect our Canadian business. Based on this, the Company will maintain its valuation allowances related to Canada as of December 31, 2020. The Company will continue to monitor all positive and negative evidence regarding the Canadian operations and will re-assess our position on a regular basis.
As a result of acquisitions completed in recent years, the Company recorded $35.2 million of tax deductible goodwill that may result in a tax benefit in future periods.
Deferred income tax assets and liabilities contain the following temporary differences:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
December 31,
|
|
2020
|
|
2019
|
Deferred tax assets:
|
|
|
|
Net operating loss carryforward
|
$
|
5,431
|
|
|
$
|
7,786
|
|
Compensation and benefits
|
10,980
|
|
|
9,947
|
|
Inventory reserve
|
1,772
|
|
|
1,589
|
|
Accounts receivable reserve
|
167
|
|
|
152
|
|
Leased assets
|
1,061
|
|
|
3,326
|
|
Other
|
329
|
|
|
146
|
|
Total deferred tax assets
|
19,740
|
|
|
22,946
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
Intangible assets
|
1,948
|
|
|
2,360
|
|
Lease liabilities
|
1,366
|
|
|
2,850
|
|
Property, plant and equipment
|
(975)
|
|
|
353
|
|
Other
|
503
|
|
|
625
|
|
Total deferred liabilities
|
2,842
|
|
|
6,188
|
|
|
|
|
|
Net deferred tax assets before valuation allowance
|
16,898
|
|
|
16,758
|
|
Valuation allowance
|
(1,257)
|
|
|
(1,235)
|
|
|
|
|
|
Net deferred tax assets
|
$
|
15,641
|
|
|
$
|
15,523
|
|
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
December 31,
|
|
2020
|
|
2019
|
Balance at beginning of year
|
$
|
3,242
|
|
|
$
|
3,612
|
|
Additions for tax positions of current year
|
15
|
|
|
13
|
|
Additions for tax positions of prior years
|
1,413
|
|
|
121
|
|
Reductions for tax positions of prior year
|
—
|
|
|
(29)
|
|
Lapse of statute of limitations
|
(984)
|
|
|
(475)
|
|
Balance at end of year
|
$
|
3,686
|
|
|
$
|
3,242
|
|
The recognition of the unrecognized tax benefits would have a favorable effect on the effective tax rate. Due to the uncertainty of both timing and resolution of income tax examinations, the Company is unable to determine whether any amounts included in the December 31, 2020 balance of unrecognized tax benefits represent tax positions that could significantly change during the next twelve months. The unrecognized tax benefits are recorded as a component of Other liabilities in the Consolidated Balance Sheets. Interest and penalties related to unrecognized tax benefits are recorded as a component of income tax expense.
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 December 31, 2020, the Company was subject to U.S. federal income tax examinations for the years 2017 through 2019 and income tax examinations from various other jurisdictions for the years 2013 through 2019.
Note 11 - Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
December 31,
|
|
2020
|
|
2019
|
|
|
|
|
Accrued stock-based compensation (stock performance rights)
|
$
|
14,437
|
|
|
$
|
14,908
|
|
Accrued compensation
|
9,794
|
|
|
9,238
|
|
Accrued and withheld taxes, other than income taxes
|
3,788
|
|
|
4,387
|
|
Accrued profit sharing
|
240
|
|
|
916
|
|
Accrued severance
|
1,103
|
|
|
778
|
|
Deferred revenue
|
822
|
|
|
648
|
|
Accrued health benefits
|
732
|
|
|
578
|
|
Other
|
7,576
|
|
|
7,858
|
|
|
$
|
38,492
|
|
|
$
|
39,311
|
|
Note 12 - Leases
The Company leases property used for distribution centers, office space, and Bolt branch locations throughout the U.S. and Canada, along with various equipment located in distribution centers and corporate headquarters.
The expenses and income generated by the leasing activity of Lawson as lessee for the years ended December 31, 2020 and December 31, 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in Thousands)
|
|
|
|
|
Year Ended December 31,
|
Lease Type
|
|
Classification
|
|
2020
|
|
2019
|
|
|
|
|
|
|
|
Consolidated Operating Lease Expense (1)
|
|
Operating expenses
|
|
$
|
4,999
|
|
|
$
|
4,729
|
|
|
|
|
|
|
|
|
Consolidated Financing Lease Amortization
|
|
Operating expenses
|
|
226
|
|
|
206
|
|
Consolidated Financing Lease Interest
|
|
Interest expense
|
|
28
|
|
|
30
|
|
Consolidated Financing Lease Expense
|
|
|
|
254
|
|
|
236
|
|
|
|
|
|
|
|
|
Sublease Income (2)
|
|
Operating expenses
|
|
—
|
|
|
(160)
|
|
Net Lease Cost
|
|
|
|
$
|
5,253
|
|
|
$
|
4,805
|
|
(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 value of the net assets and liabilities generated by the leasing activity of Lawson as lessee as of December 31, 2020 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in Thousands)
|
|
|
Year Ended December 31,
|
Lease Type
|
|
2020
|
|
2019
|
|
|
|
|
|
Total ROU operating lease assets (1)
|
|
$
|
8,246
|
|
|
$
|
10,592
|
|
Total ROU financing lease assets (2)
|
|
518
|
|
|
654
|
|
Total lease assets
|
|
$
|
8,764
|
|
|
$
|
11,246
|
|
|
|
|
|
|
Total current operating lease obligation
|
|
$
|
4,360
|
|
|
$
|
3,591
|
|
Total current financing lease obligation
|
|
208
|
|
|
239
|
|
Total current lease obligations
|
|
$
|
4,568
|
|
|
$
|
3,830
|
|
|
|
|
|
|
Total long term operating lease obligation
|
|
$
|
5,498
|
|
|
$
|
9,133
|
|
Total long term financing lease obligation
|
|
240
|
|
|
371
|
|
Total long term lease obligation
|
|
$
|
5,738
|
|
|
$
|
9,504
|
|
(1) Operating lease assets are recorded net of accumulated amortization of $5.9 million and $1.2 million as of December 31, 2020 and December 31, 2019, respectively
(2) Financing lease assets are recorded net of accumulated amortization of $0.4 million and $0.2 million as of December 31, 2020 and December 31, 2019, respectively
The value of the lease liabilities generated by the leasing activities of Lawson as lessee as of December 31, 2020 were as follows (Dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
Operating Leases
|
|
Financing Leases
|
|
Total
|
|
|
|
|
|
|
|
2021
|
|
$
|
4,719
|
|
|
$
|
219
|
|
|
$
|
4,938
|
|
2022
|
|
3,212
|
|
|
143
|
|
|
3,355
|
|
2023
|
|
1,471
|
|
|
89
|
|
|
1,560
|
|
2024
|
|
509
|
|
|
25
|
|
|
534
|
|
2025
|
|
168
|
|
|
—
|
|
|
168
|
|
Thereafter
|
|
462
|
|
|
—
|
|
|
462
|
|
Total lease payments
|
|
10,541
|
|
|
476
|
|
|
11,017
|
|
Less: Interest
|
|
683
|
|
|
28
|
|
|
711
|
|
Present value of lease liabilities
|
|
$
|
9,858
|
|
|
$
|
448
|
|
|
$
|
10,306
|
|
(1) Of the $10.5 million future minimum operating lease commitments outstanding at December 31, 2020, $2.2 million relates to a lease for the Company's headquarters which expires in March 2023
(2) The Company has an operating lease for the McCook Facility which expires in June 2022 and includes future minimum lease payments of $2.6 million
The weighted average lease terms and interest rates of the leases held by Lawson as of December 31, 2020 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease Type
|
|
Weighted Average Term in Years
|
|
Weighted Average Interest Rate
|
|
|
|
|
|
Operating Leases
|
|
2.9
|
|
5.2%
|
Financing Leases
|
|
2.5
|
|
5.3%
|
The cash outflows of the leasing activity of Lawson as lessee for the year ending December 31, 2020 are as follows (Dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flow Source
|
|
Classification
|
|
Amount
|
|
|
|
|
|
Operating cash flows from operating leases
|
|
Operating activities
|
|
$
|
4,256
|
|
Operating cash flows from financing leases
|
|
Operating activities
|
|
28
|
|
Financing cash flows from financing leases
|
|
Financing activities
|
|
257
|
|
McCook Lease Adjustment
Subsequent to the adoption of ASC 842 in 2019 the Company recorded a non-cash transaction to establish $1.7 million of operating ROU assets, for which $1.7 million of operating lease liabilities were incurred. Also, in 2019 the Company recorded a non-cash transaction to establish $0.4 million of financing ROU assets, for which $0.4 million of financing lease liabilities were incurred.
Lawson as Lessor
Prior to acquisition, Partsmaster leased parts washer machines to customers through its Torrents leasing program. The Torrents leasing program comprised a minor portion of the Partsmaster business. The Company will continue the leasing program for the foreseeable future. These leases are classified as operating leases. The leased machines are recognized as fixed assets on the Company's consolidated balance sheet and the leasing revenue is recognized on a straight line basis. The Torrents machine leasing program generated $0.9 million of revenue in 2020 post-acquisition. The Company has adopted the practical expedient not to separate non-lease components that would be within the scope of ASC 606 from the associated lease components as the relevant criteria under ASC 842 are met.
Note 13 – Credit Agreement
In October, 2019, the Company entered into a Credit Agreement (the "Credit Agreement") with 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 Credit Agreement matures on October 11, 2024 and provides for $100.0 million of revolving commitments. The Credit Agreement allows borrowing capacity to increase to $150.0 million subject to meeting certain criteria and additional commitments from its lenders.
The Credit Agreement consists of borrowings as alternate base rate loans, Canadian prime rate loans, Eurodollar loans, and Canadian dollar offered rate loans as the Company requests. The applicable interest rate spread is determined by the type of borrowing used and the Total Net Leverage Ratio as of the most recent fiscal quarter as defined in the Credit Agreement.
The covenants associated with the Credit Agreement restrict the ability of the Company to, among other things: incur additional indebtedness and liens, make certain investments, merge or consolidate, engage in certain transactions such as the disposition of assets and sales-leaseback transactions, and make certain restricted cash payments such as dividends in excess of defined amounts contained within the Credit Agreement. In addition to these items and other customary terms and conditions, the Credit Agreement requires the Company to comply with certain financial covenants as follows:
a) The Company is required to maintain an EBITDA to Fixed Charge Coverage Ratio of at least 1.15 to 1.00 for any period of four consecutive fiscal quarters ending on the last day of any fiscal quarter; and
b) The Company is required to maintain a Total Net Leverage Ratio of no more than 3.25 to 1.00 on the last day of any fiscal quarter. The maximum Total Net Leverage Ratio will be allowed to increase to 3.75 to 1.00 after certain permitted acquisitions.
The Credit Agreement also includes events of default for, among others, non-payment of obligations under the Credit Agreement, change of control, cross default to other indebtedness in an aggregate amount in excess of $5.0 million, failure to comply with covenants, and insolvency.
At December 31, 2020, the Company had no outstanding balances under its revolving line of credit facility and additional borrowing availability of $66.0 million. The carrying amount of the Company’s debt at December 31, 2020 approximates its fair value. The weighted average interest rate was 2.65% in 2020. The Company had $34.0 million of outstanding letters of credit as of December 31, 2020 primarily related to the acquisition of Partsmaster.
In addition to other customary representations, warranties and covenants, the results of the financial covenants are provided below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarterly Financial Covenants
|
|
Requirement
|
|
Actual
|
EBITDA to fixed charges ratio
|
|
1.15 : 1.00
|
|
4.77 : 1.00
|
Total net leverage ratio
|
|
3.25 : 1.00
|
|
0.60 : 1.00
|
The Company was in compliance with all financial covenants as of December 31, 2020.
In the third quarter of 2020, the Company entered into an amendment to the Credit Agreement which among other items increased the letter of credit basket from $15.0 million to $40.0 million until August 31, 2021 and authorized the Company to incur indebtedness in an amount up to $36.0 million for the acquisition of Partsmaster.
Note 14 – Accrued Acquisition Liability
On August 31, 2020, Lawson acquired Partsmaster from NCH Corporation. As part of the purchase price the Company agreed to pay $33.0 million in May 2021. The payment obligation has been discounted to its present value using an implied interest rate of 1.8% and is recognized as a current liability of $32.7 million in the Company's consolidated balance sheet. Payment has been guaranteed under the Purchase Agreement which includes the issuance of a $33.0 million irrevocable standby letter of credit. The accrued acquisition liability is included as outstanding debt in the quarterly financial covenants. See Note 13 - Credit Agreement for further details.
Note 15 – Reserve for Severance
Severance costs are primarily related to management realignment and reorganization. The table below reflects the activity in the Company’s reserve for severance and related payments.
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Year Ended December 31,
|
|
2020
|
|
2019
|
Beginning balance
|
$
|
909
|
|
|
$
|
359
|
|
Charged to earnings
|
2,077
|
|
|
1,756
|
|
Cash paid
|
(1,735)
|
|
|
(1,206)
|
|
Ending balance
|
$
|
1,251
|
|
|
$
|
909
|
|
The majority of remaining severance liabilities outstanding as of December 31, 2020 will be paid by the end of 2021, and are included in accrued expenses and other liabilities on the accompanying Consolidated Balance Sheets.
Note 16 - Commitments and Contingencies
The Company is involved in legal actions that arise in the ordinary course of business. It is the opinion of management that the resolution of any currently pending litigation will not have a material adverse effect on the Company’s financial position, results of operations or cash flows.
Environmental matter
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.
A 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. At December 31, 2020 the Company has less than $0.1 million accrued for potential monitoring costs. The Company does not expect to capitalize any amounts related to the remediation plan.
Note 17 - Retirement and Security Bonus Plans
The Company provides a 401(k) defined contribution plan to allow employees a pre-tax investment vehicle to save for retirement. The Company made contributions to the 401(k) plan of $2.9 million and $3.2 million for the years ended December 31, 2020 and 2019, respectively.
The Company provides a Deferred Profit Savings Plan ("DPSP") for certain Canadian employees and a Registered Retirement Savings Plan ("RRSP") for other Canadian employees. Both are deferred defined contribution retirement investment plans. The Company contributed $0.2 million and $0.4 million in 2020 and 2019, respectively.
The Company provides a profit sharing plan for certain sales, office and warehouse employees. The amounts of the Company’s annual contributions are determined annually by the Board of Directors. Expenses incurred for the profit sharing plan were $0.2 million and $0.8 million for the years ended December 31, 2020 and 2019, respectively.
The Company has a security bonus plan which was previously created for the benefit of its independent sales representatives, under the terms of which participants are credited with a percentage of their annual net commissions. The aggregate amounts credited to participants’ accounts vest 25% after five years, and an additional 5% vests each year thereafter upon qualification for the plan. On January 1, 2013, the Company converted all of its U.S. independent sales representatives to employees. The security bonuses for those converted employees continue to vest, but their accounts are no longer credited with a percentage of net commissions. For financial reporting purposes, amounts are charged to operations
over the vesting period. Expenses incurred for the security bonus plan were $0.3 million and $0.5 million for the years ended December 31, 2020 and 2019, respectively. The security bonus plan is partially funded by a $6.9 million investment in the cash surrender value in life insurance of certain employees. Of the $11.5 million total liability, $0.3 million is classified as a current liability as of December 31, 2020, and the remaining $11.3 million is classified as long-term.
Note 18 – Stock-Based Compensation Plans
Plan Administration
The Company's Amended and Restated 2009 Equity Compensation Plan (“Equity Plan”) provides for the grant of nonqualified and incentive stock options, stock awards and stock units to officers and employees of the Company. The Equity Plan also provides for the grant of option rights and restricted stock to non-employee directors. As of December 31, 2020, the Company had approximately 247,000 shares of common stock still available under the Equity Plan. Non-employee directors are limited to grants of no more than 20,000 shares of common stock in any calendar year and other than non-employee directors are limited to grants of no more than 125,000 shares of common stock in any calendar year. The Equity Plan is administered by the Compensation Committee of the Board of Directors, or its designee, which as administrator of the plan, has the authority to select plan participants, grant awards, and determine the terms and conditions of the awards.
The Company also has a Stock Performance Rights Plan (“SPR Plan”) that provides for the issuance of Stock Performance Rights (“SPRs”) that allow non-employee directors, officers and key employees to receive cash awards, subject to certain restrictions, equal to the appreciation of the Company's common stock. The SPR Plan is administered by the Compensation Committee of the Board of Directors.
Stock Performance Rights
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. Expense, equal to the fair market value of the SPR at the date of grant and remeasured each reporting period, is recorded ratably over the vesting period. Compensation expense is included in General and administrative expense. The outstanding SPRs were granted with approximately a seven year life and vest over one to three years beginning on the first anniversary of the date of the grant.
On December 31, 2020, the SPRs outstanding were re-measured at fair value using the Black-Scholes valuation model. This model requires the input of subjective assumptions that may have a significant impact on the fair value estimate. The weighted-average estimated value of SPRs outstanding as of December 31, 2020 was $26.88 per SPR using the following assumptions:
|
|
|
|
|
|
Expected volatility
|
46.5% to 66.9%
|
Risk-free rate of return
|
0.1% to 0.2%
|
Expected term (in years)
|
0.5 to 3.5
|
Expected annual dividend
|
$0
|
The expected volatility was based on the historic volatility of the Company's stock price commensurate with the expected life of the SPR. The risk-free rate of return reflects the interest rate offered for zero coupon treasury bonds over the expected life of the SPR. The expected life represents the period of time that options granted are expected to be outstanding and was calculated using the simplified method allowed by the SEC, which approximates our historical experience. The estimated annual dividend was based on the recent dividend payout trend.
A compensation benefit of less than $0.1 million was recorded as a reduction to General and administrative expense for the year ended December 31, 2020. Compensation expenses of $14.9 million was recorded in General and administrative expenses for the year ended December 31, 2019. Cash in the amount of $0.5 million and $13.4 million was paid for SPR exercises in 2020 and 2019, respectively. A liability of $14.4 million reflecting the estimated fair value of future pay-outs is included as a component of Accrued expenses and other liabilities on the consolidated balance sheets.
Activity related to the Company’s SPRs during the year ended December 31, 2020 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of SPRs
|
|
Weighted Average Exercise Price
|
Outstanding on December 31, 2019
|
599,861
|
|
|
$
|
26.56
|
|
Exercised
|
(18,861)
|
|
|
16.48
|
|
Outstanding on December 31, 2020
|
581,000
|
|
|
26.88
|
|
|
|
|
|
Exercisable on December 31, 2020
|
573,086
|
|
|
$
|
26.72
|
|
The SPRs outstanding had an intrinsic value of $14.6 million as of December 31, 2020. Unrecognized compensation cost related to non-vested SPRs was $0.2 million at December 31, 2020, which will be recognized over a weighted average period of 1.0 years. During the year ended December 31, 2020, 43,397 SPRs with a fair value of $1.3 million vested. At December 31, 2020, the weighted average remaining contractual term was 2.0 years for all outstanding SPRs and 1.8 years for all exercisable SPRs.
Restricted Stock Awards
Restricted stock awards ("RSAs") generally vest over a one to three year period beginning on the first anniversary of the date of the grant. Upon vesting, the vested restricted stock awards are exchanged for an equal number of the Company’s common stock. The participants have no voting or dividend rights with the restricted stock awards. The restricted stock awards are valued at the closing price of the common stock on the date of grant and the expense is recorded ratably over the vesting period.
Compensation expenses of $1.2 million and $1.3 million related to the RSAs were recorded in General and administrative expenses for 2020 and 2019, respectively. Activity related to the Company’s RSAs during the year ended December 31, 2020 was as follows:
|
|
|
|
|
|
|
Restricted Stock Awards
|
Outstanding on December 31, 2019
|
90,909
|
|
Granted
|
18,371
|
|
Exchanged for common shares
|
(63,481)
|
|
Outstanding on December 31, 2020
|
45,799
|
|
As of December 31, 2020, there was $0.8 million of total unrecognized compensation cost related to RSAs that will be recognized over a weighted average period of 1.0 year. The awards granted in 2020 had a weighted average grant date fair value of $36.68 per share.
Market Stock Units
Market Stock Units ("MSUs") are exchangeable for between 0% to 150% of the Company's common shares at the end of the vesting period based on the trailing 60 day average closing price of the Company's common stock. The value of the MSUs was determined using a geometric brownian motion model that, based on certain variables, generates a large number of random trials simulating the price of the common stock over the measurement period. Expenses of $0.7 million and $1.2 million related to MSUs were recorded in General and administrative expenses in the years ended December 31, 2020 and 2019, respectively. Activity related to the Company’s MSUs during the year ended December 31, 2020 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Market Stock Units
|
|
Maximum Shares Potentially Issuable
|
Outstanding on December 31, 2019
|
139,643
|
|
|
199,303
|
|
Granted
|
21,648
|
|
|
32,472
|
|
Exchanged for stock
|
(24,035)
|
|
|
(36,052)
|
|
Outstanding on December 31, 2020
|
137,256
|
|
|
195,723
|
|
Stock Options
Each stock option can be exchanged for one share of the Company’s common stock at the stated exercise price. Expense related to stock options was $0.1 million in both 2020 and 2019. There was no unrecognized compensation related to stock options as of December 31, 2020 as all compensation plans that included stock options were fully vested. Upon vesting, stock options are recognized as a component of equity. There were 80,000 stock options outstanding on December 31, 2020 with a weighted average exercise price of $27.70.
Performance Awards ("PAs")
The Company issued 10,852 PAs to key employees that cliff vest on December 31, 2022. PAs are exchangeable for the Company's common stock ranging from zero to 16,278, or the equivalent amount in cash, based upon the achievement of certain financial performance metrics. Expenses of $0.1 million related to the PAs were recorded in General and administrative expenses for the year ended December 31, 2020.
Note 19 – Segment Information
The Company's operating segments, Lawson and Bolt, also represent its reportable segments because of differences in the businesses' financial characteristics and the methods they employ to deliver product to customers. The results of the Company's 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' location and produce sales orders for product that is then shipped to the customer and also provides VMI services. The Bolt segment primarily sells product to customers when the customers visit one of Bolt's 14 branch locations and the product is delivered to the customers at the point of sale. The Bolt segment total assets include the value of the acquired intangibles and the related amortization within its operating income.
Financial information for the Company's reportable segments follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Year Ended December 31,
|
|
2020
|
|
2019
|
Net sales
|
|
|
|
Lawson
|
$
|
312,803
|
|
|
$
|
329,367
|
|
Bolt
|
38,788
|
|
|
41,418
|
|
Consolidated total
|
$
|
351,591
|
|
|
$
|
370,785
|
|
|
|
|
|
Gross profit
|
|
|
|
Lawson
|
$
|
171,258
|
|
|
$
|
181,567
|
|
Bolt
|
15,280
|
|
|
15,787
|
|
Consolidated total
|
$
|
186,538
|
|
|
$
|
197,354
|
|
|
|
|
|
Operating Income
|
|
|
|
Lawson
|
$
|
17,715
|
|
|
$
|
6,483
|
|
Bolt
|
2,835
|
|
|
2,583
|
|
Consolidated total
|
20,550
|
|
|
9,066
|
|
|
|
|
|
Interest expense
|
(654)
|
|
|
(603)
|
|
Other income, net
|
889
|
|
|
1,211
|
|
Income before income taxes
|
$
|
20,785
|
|
|
$
|
9,674
|
|
|
|
|
|
Capital expenditures
|
|
|
|
Lawson
|
$
|
1,529
|
|
|
$
|
1,522
|
|
Bolt
|
158
|
|
|
506
|
|
Consolidated total
|
$
|
1,687
|
|
|
$
|
2,028
|
|
|
|
|
|
Depreciation and amortization
|
|
|
|
Lawson
|
$
|
5,343
|
|
|
$
|
4,757
|
|
Bolt
|
1,358
|
|
|
1,136
|
|
Consolidated total
|
$
|
6,701
|
|
|
$
|
5,893
|
|
|
|
|
|
Total assets
|
|
|
|
Lawson
|
$
|
221,490
|
|
|
$
|
168,803
|
|
Bolt
|
43,533
|
|
|
44,174
|
|
Investment in Subsidiary
|
(8,719)
|
|
|
(8,548)
|
|
Consolidated total
|
$
|
256,304
|
|
|
$
|
204,429
|
|
Financial information related to the Company’s continuing operations by geographic area follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in Thousands)
|
|
Year Ended December 31,
|
|
2020
|
|
2019
|
Net sales (1)
|
|
|
|
United States
|
$
|
283,261
|
|
|
$
|
295,675
|
|
Canada
|
68,330
|
|
|
75,110
|
|
Consolidated total
|
$
|
351,591
|
|
|
$
|
370,785
|
|
|
|
|
|
Long-lived assets (2)
|
|
|
|
United States
|
$
|
44,395
|
|
|
$
|
25,478
|
|
Canada
|
34,180
|
|
|
35,849
|
|
Consolidated total
|
$
|
78,575
|
|
|
$
|
61,327
|
|
(1) Net sales are attributed to countries based on the location of customers.
(2) Long-lived assets primarily consist of property, plant and equipment, goodwill, intangibles, right of use assets and other assets.
Note 20 – Stock Repurchase Program
In 2019, the Company's 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 2020 and 2019, the Company purchased 47,504 and 32,362 shares of common stock at an average purchase price of $36.93 and $38.13, respectively, under the repurchase program. At December 31, 2020, the Company had approximately $4.5 million available under the repurchase plan.
Note 21 – Related Party Transactions
During the twelve months ended December 31, 2020 the Company purchased approximately $0.9 million of inventory from a company owned by an immediate relative of a Board member at fair market value. The Company paid substantially all of the amount owed in the third and fourth quarters and therefore immaterial remaining liabilities exist as of December 31, 2020.
Note 22 – COVID-19 Risks and Uncertainties
There is substantial uncertainty as to the overall effect the COVID-19 pandemic will have on the results of the Company for 2021 and beyond. Various events related to COVID-19 have resulted in lost revenue to our Company, limitations on our ability to source high demand products, limitations on our sales force to perform certain functions due to state or federal stay-at-home orders, slow-down of customer demand for our products and limitations of some customers to pay us on a timely basis.
On March 27, 2020, Congress enacted the Coronavirus Aid, Relief, and Economic Security ("CARES") Act to provide certain relief as a result of the COVID-19 outbreak. The Company has elected to defer the employer side social security payments in accordance with the CARES Act. The total amount deferred is $3.5 million, with $1.7 million expected to be paid in 2021 and the remainder in 2022. The Company will continue to evaluate how the provisions of the CARES Act will impact its financial position, results of operations and cash flows. The Company has also utilized the Canadian Emergency Wage Subsidy ("CEWS") Act for both Lawson Canada and Bolt for assistance with hourly employee costs. The CEWS is a program that provides a subsidy of certain eligible wages commencing March 15, 2020 through December 31, 2020 subject to meeting certain criteria. During 2020 the Company recorded $1.4 million in subsidies from the CEWS program which is recognized as a reduction to selling, general and administrative expenses in the consolidated statement of income and comprehensive income.
In the first quarter of 2020, the government of the state of Illinois defined essential businesses, allowing Lawson to operate during the pandemic. A change in this status could result in the temporary closure of our business. Additionally the COVID-19 pandemic could result in a temporary closure of any or all of our distribution facilities or the Bolt branch locations, which would negatively impact our operations. Other disruptions to our supply chain such as reduced capacity or temporary shutdowns of freight carriers could also negatively impact Company performance. The pandemic is negatively impacting sales and operations currently and may negatively impact future financial results, liquidity and overall performance of the Company. Additionally, it is reasonably possible that estimates made in the financial statements may be materially and adversely impacted in the future as a result of these conditions, including delay in payment of receivables, impairment losses related to goodwill and other long-lived assets, and inability to utilize deferred tax assets.
The Lawson MRO business model relies upon customer interaction as well as a consistent schedule of onsite visits by our sales representatives to customer locations. The Bolt business model relies on foot traffic in its branch locations. The onset of the COVID-19 pandemic, as well as social distancing guidelines and government mandated shelter in place orders, have negatively impacted the ability of our sales reps to visit our customers and for foot traffic to return to our Bolt branch locations, resulting in an overall negative impact on our business.
The second quarter 2020 financial performance of the Company was substantially negatively impacted as state and local governments throughout the United States and Canada imposed strict COVID-19 related restrictions, including shutdowns of nonessential businesses and stay-at-home orders, particularly in April. These restrictions were relaxed in May and June, and were further relaxed throughout the third quarter. The economic climate in the third quarter improved as non-essential businesses reopened in both limited capacity and full capacity. The relaxed restrictions resulted in increased customer contact and more consistent customer visits for Lawson MRO sales representatives, as well as increased customer visits to Bolt
branch locations. The relaxed restrictions continued in the fourth quarter as well, which allowed for continued sequential improvement in operating and financial performance.
Despite the improved economic climate, the Company continues to be negatively impacted by the COVID-19 pandemic and the various federal, state and local restrictions enacted to combat the pandemic. In the fourth quarter of 2020, the U.S. Food and Drug Administration approved certain vaccines that have demonstrated effectiveness in preventing the spread of the COVID-19 virus. However, it is projected that the production, distribution and administration of the vaccine to a sufficient percentage of the population to significantly minimize the future effect of the pandemic will not be reached until mid-2021.
The Company has taken several steps to mitigate the potential negative impacts of COVID-19. The actions taken included, but are not limited to, furloughing employees, reducing base salaries for a period of time, canceling travel and award trips, temporarily consolidating its Suwanee distribution center operations into the McCook facility, eliminating non-critical capital expenditures and eliminating various positions throughout the Company. In the third and fourth quarters the Company brought back various previously furloughed employees. The Company reopened the Suwanee distribution center in a reduced capacity in the third quarter as overall business activity increased.
The Company will continue to closely monitor the operating environment and will take appropriate actions to protect the safety for its employees, customers and suppliers.