UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
_________________________________________
FORM 10-Q
(Mark One)
x QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2005
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
______________________________
Commission file number 0 10546 |
| ||
LAWSON PRODUCTS, INC. | |||
(Exact name of registrant as specified in its charter) | |||
Delaware |
| 36-2229304 | |
| |||
(State or other jurisdiction of |
| (I.R.S. Employer | |
1666 East Touhy Avenue, Des Plaines, Illinois | 60018 | ||
(Address of principal executive offices) | (Zip Code) | ||
Registrant's telephone no., including area code: | (847) 827 9666 | ||
Not applicable | |||
Former name, former address and former fiscal year, if changed since last report.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes | X | No____ |
Indicate by checkmark wither the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes | X | No____ |
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
9,156,313 Shares, $1 par value, as of April 15, 2005.
PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL INFORMATIONLAWSON PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
| (Amounts in thousands, except share data) | March 31, 2005 | December 31, 2004 | ||||||
|---|---|---|---|---|---|---|---|---|
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Current Assets: | ||||||||
| Cash and cash equivalents | $ | 22,957 | $ | 28,872 | ||||
| Accounts receivable, less allowance for doubtful | ||||||||
| accounts | 51,914 | 52,129 | ||||||
| Inventories | 69,036 | 65,687 | ||||||
| Miscellaneous receivables and prepaid expenses | 8,772 | 9,560 | ||||||
| Deferred income taxes | 1,631 | 1,729 | ||||||
| Total Current Assets | 154,310 | 157,977 | ||||||
| Property, plant and equipment, less allowances for | ||||||||
| depreciation and amortization | 41,211 | 42,452 | ||||||
| Deferred income taxes | 14,954 | 14,779 | ||||||
| Goodwill, less accumulated amortization | 28,649 | 28,649 | ||||||
| Other assets | 17,167 | 16,693 | ||||||
| Total Assets | $ | 256,291 | $ | 260,550 | ||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| Current Liabilities: | ||||||||
| Accounts payable | $ | 10,321 | $ | 8,746 | ||||
| Accrued expenses and other liabilities | 26,542 | 32,628 | ||||||
| Income taxes | 2,370 | -- | ||||||
| Current portion of long term debt | 1,190 | 1,573 | ||||||
| Total Current Liabilities | 40,423 | 42,947 | ||||||
| Accrued liability under security | ||||||||
| bonus plans | 22,138 | 21,528 | ||||||
| Other | 15,964 | 15,743 | ||||||
| 38,102 | 37,271 | |||||||
| Stockholders' Equity: | ||||||||
| Preferred Stock, $1 par value: | ||||||||
| Authorized - 500,000 shares | ||||||||
| Issued and outstanding - None | -- | -- | ||||||
| Common Stock, $1 par value: | ||||||||
| Authorized - 35,000,000 shares | ||||||||
| Issued and outstanding-(2005-9,167,413 shares; | ||||||||
| 2004-9,280,935 shares) | 9,167 | 9,281 | ||||||
| Capital in excess of par value | 3,518 | 3,467 | ||||||
| Retained earnings | 164,795 | 167,187 | ||||||
| Accumulated other comprehensive | ||||||||
| income | 286 | 397 | ||||||
| Total Stockholders' Equity | 177,766 | 180,332 | ||||||
| Total Liabilities and | ||||||||
| Stockholders' Equity | $ | 256,291 | $ | 260,550 | ||||
See notes to condensed consolidated financial statements.
LAWSON PRODUCTS, INC. AND SUBSIDIARIESCONDENSED
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Amounts in thousands, except per share data)
| For the Three Months Ended March 31, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| 2005 | 2004 | ||||||||||
| Net sales | $ | 107,082 | $ | 100,658 | |||||||
| Cost of goods sold | 41,518 | 35,261 | |||||||||
| Gross profit | 65,564 | 65,397 | |||||||||
| Selling, general and | |||||||||||
| administrative expenses | 57,482 | 55,335 | |||||||||
| Operating income | 8,082 | 10,062 | |||||||||
| Investment and other income | 530 | 528 | |||||||||
| Interest expense | (26 | ) | (63 | ) | |||||||
| Income before income taxes | 8,586 | 10,527 | |||||||||
| Provision for income taxes | 3,630 | 4,001 | |||||||||
| Net income | $ | 4,956 | $ | 6,526 | |||||||
| Net income per share | |||||||||||
| of common stock: | |||||||||||
| Basic | $ | 0.54 | $ | 0.69 | |||||||
| Diluted | $ | 0.54 | $ | 0.69 | |||||||
| Cash dividends declared per | |||||||||||
| share of common stock | $ | 0.20 | $ | 0.18 | |||||||
| Weighted average shares | |||||||||||
| outstanding: | |||||||||||
| Basic | 9,208 | 9,487 | |||||||||
| Diluted | 9,232 | 9,515 | |||||||||
See notes to condensed consolidated financial statements.
LAWSON PRODUCTS, INC. AND SUBSIDIARIESCONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Amounts in thousands, except per share data)
| For the Three Months Ended March 31, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| 2005 | 2004 | ||||||||||
| Operating activities: | |||||||||||
| Net income | $ | 4,956 | $ | 6,526 | |||||||
| Adjustments to reconcile net income to net cash | |||||||||||
| provided by operating activities: | |||||||||||
| Depreciation and amortization | 1,732 | 1,700 | |||||||||
| Changes in operating assets and liabilities | (5,408 | ) | 268 | ||||||||
| Other | 997 | 598 | |||||||||
| Net Cash Provided by Operating Activities | 2,277 | 9,092 | |||||||||
| Investing activities: | |||||||||||
| Additions to property, plant and | |||||||||||
| equipment | (399 | ) | (1,114 | ) | |||||||
| Net Cash Used in Investing Activities | (399 | ) | (1,114 | ) | |||||||
| Financing activities: | |||||||||||
| Purchases of treasury stock | (5,678 | ) | (856 | ) | |||||||
| Payments on long term debt | (382 | ) | (356 | ) | |||||||
| Dividends paid | (1,833 | ) | (1,709 | ) | |||||||
| Other | 100 | 93 | |||||||||
| Net Cash Used in Financing Activities | (7,793 | ) | (2,828 | ) | |||||||
| Increase (Decrease) in Cash and Cash Equivalents | (5,915 | ) | 5,150 | ||||||||
| Cash and Cash Equivalents at Beginning of Period | 28,872 | 23,555 | |||||||||
| Cash and Cash Equivalents at End of Period | $ | 22,957 | $ | 28,705 | |||||||
See notes to condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
A) As contemplated by the Securities and Exchange Commission, the accompanying consolidated financial statements and footnotes have been condensed and therefore, do not contain all disclosures required by generally accepted accounting principles. Reference should be made to Lawson Products, Inc.’s (the “Company’s”) Annual Report on Form 10-K for the year ended December 31, 2004. The Condensed Consolidated Balance Sheet as of March 31, 2005, and the Condensed Consolidated Statements of Income and the Condensed Consolidated Statements of Cash Flows for the three month periods ended March 31, 2005 and 2004 are unaudited. In the opinion of the Company, all adjustments (consisting only of normal recurring accruals) have been made, which are necessary to present fairly the results of operations for the interim periods. Operating results for the quarter ended March 31, 2005 are not necessarily indicative of the results that may be expected for the year ending December 31, 2005.
Certain amounts have been reclassified in the 2004 financial statements to conform with the 2005 presentation.
B) | Comprehensive Income |
Comprehensive income (in thousands) was $4,845 and $6,608 for the first quarters of 2005 and 2004, respectively. Comprehensive income includes foreign currency translation adjustments of ($111) and $82 for the three-month periods ended March 31, 2005 and 2004, respectively.
Accumulated comprehensive income consists only of foreign currency translation adjustments, net of related income tax.
C) | Earnings per Share |
The calculation of dilutive weighted average shares outstanding at March 31, 2005 and 2004 are as follows (in thousands):
| 2005 | 2004 | |
|---|---|---|
| Basic weighted average shares | ||
| outstanding | 9,208 | 9,487 |
| Dilutive impact of options outstanding | 24 | 28 |
| Dilutive weighted average shares outstanding | 9,232 | 9,515 |
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D) Revolving Line of Credit
The Company has a $50 million revolving line of credit which matures in March 2006 and carries an interest rate of prime minus 150 basis points or LIBOR plus 75 basis points, at the Company’s option. Interest is payable quarterly on prime borrowings and at the earlier of quarterly or maturity with respect to the LIBOR contracts. The line of credit contains certain financial covenants regarding interest coverage, minimum stockholders’ equity and working capital, all of which the Company was in compliance with at March 31, 2005. The Company had no borrowings outstanding under the line at March 31, 2005 and December 31, 2004.
| E) Severance and Related Charges |
The table below shows an analysis of the Company’s reserves for severance and related payments for the first quarter of 2005 and 2004:
| In thousands | 2005 | 2004 | ||||||
|---|---|---|---|---|---|---|---|---|
| Balance at beginning of year | $ | 1,042 | $ | 2,476 | ||||
| Cash paid | (248 | ) | (365 | ) | ||||
| Balance at March 31 | $ | 794 | $ | 2,111 | ||||
| F) Intangible Assets |
Intangible assets subject to amortization, included within other assets, were as follows (in thousands):
| March 31, 2005 | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Gross Balance | Accumulated Amortization | Net Carrying Amount | |||||||||
| Trademarks and tradenames | $ | 1,747 | $ | 947 | $ | 800 | |||||
| Customer Lists | 953 | 409 | 544 | ||||||||
| $ | 2,700 | $ | 1,356 | $ | 1,344 | ||||||
| December 31, 2004 | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Gross Balance | Accumulated Amortization | Net Carrying Amount | |||||||||
| Trademarks and tradenames | $ | 1,747 | $ | 935 | $ | 812 | |||||
| Customer Lists | 953 | 400 | 553 | ||||||||
| $ | 2,700 | $ | 1,335 | $ | 1,365 | ||||||
Trademarks and tradenames are being amortized over a weighted average of 15.14 years. Customer lists are being amortized over 13.96 years. Amortization expense for intangible assets is expected to be $83,000 for 2005 and for each of the next four years.
| G) Accounting for Stock-Based Compensation |
The Company complies with FASB Statement No. 148, “Accounting for Stock Based Compensation – Transition and Disclosure,” which requires interim financial disclosure to show the effect on net income and earnings per share as required by FASB Statement No. 123, “Accounting for Stock-Based Compensation.” These disclosures are as follows:
| Three Months Ended March 31 | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| In thousands | 2005 | 2004 | |||||||||
| Net income-as reported | $ | 4,956 | $ | 6,526 | |||||||
| Deduct: Total stock based employee compensation expense | |||||||||||
| determined under fair value method, net of tax | 0 | (3 | ) | ||||||||
| Net income-pro forma | $ | 4,956 | $ | 6,523 | |||||||
| Basic and diluted earnings per share -as reported and pro forma | $ | 0.54 | $ | .69 | |||||||
The Company’s incentive stock plan provides for the issuance of Stock Performance Rights (SPRs). These SPRs vest at 20% per year and entitle the recipient to receive a cash payment equal to the excess of the market value of the Company’s common stock over the SPR price when the SPRs are surrendered. The Company records an accrued liability based on the number of outstanding vested SPRs and the market value of the Company’s common stock. The compensation expense accrual decreased $538,000 and $73,000 in the first quarter of 2005 and 2004, respectively. The decrease in the compensation expense accrual for the first quarter of 2005 is primarily due to the decrease in the Company’s stock price and SPRs exercised. No additional SPRs were issued during the first quarter of 2005.
On December 16, 2004, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 123(R), “Share-Based Payment,” which is a revision of FASB Statement No. 123, “Accounting for Stock-Based Compensation.” Statement No. 123(R) requires all share-based payments to employees, including grants of employee stock options to be recognized in the financial statements based on their fair values. Statement No. 123(R) is effective for public companies for annual periods that begin after June 15, 2005. The Company plans to comply timely with Statement No. 123(R). The Company expects that the impact of complying with Statement No. 123(R) is not significant.
| H) Segment Reporting |
The Company has four reportable segments: Maintenance, Repair and Replacement distribution in the U.S. (MRO-US), International Maintenance, Repair and Replacement distribution in Canada (MRO-CAN), Original Equipment Manufacturer distribution and manufacturing in the U.S. (OEM-US), International Original Equipment Manufacturer distribution in the United Kingdom and Mexico (OEM-INTL).
The operations of the Company’s MRO distribution segments distribute a wide range of MRO parts to repair and maintenance organizations by the Company’s force of independent field sales agents, and inside sales personnel.
The operations of the Company’s OEM segments manufacture and distribute component parts to OEM manufacturers through a network of independent manufacturers representatives as well as internal sales personnel.
The Company’s reportable segments are distinguished by the nature of products distributed and sold, types of customers, manner of servicing customers, and geographical location.
The Company evaluates performance and allocates resources to reportable segments primarily based on operating income.
Financial information for the Company’s reportable segments consisted of the following:
| Three Months Ended March 31 | ||||||||
|---|---|---|---|---|---|---|---|---|
| In thousands | 2005 | 2004 | ||||||
| Net sales | ||||||||
| MRO-US | $ | 80,231 | $ | 76,396 | ||||
| MRO-CAN | 6,317 | 5,052 | ||||||
| OEM-US | 17,377 | 14,740 | ||||||
| OEM-INTL | 3,157 | 4,470 | ||||||
| Consolidated total | $ | 107,082 | $ | 100,658 | ||||
| Operating income(loss) | ||||||||
| MRO-US | $ | 6,736 | $ | 9,212 | ||||
| MRO-CAN | 740 | 400 | ||||||
| OEM-US | 1,103 | 478 | ||||||
| OEM-INTL | (497 | ) | (28 | ) | ||||
| Consolidated total | $ | 8,082 | $ | 10,062 | ||||
The reconciliation of segment profit to consolidated income before income taxes consisted of the following:
| Three Months Ended March 31 | ||||||||
|---|---|---|---|---|---|---|---|---|
| In thousands | 2005 | 2004 | ||||||
| Total operating income | ||||||||
| from reportable segments | $ | 8,082 | $ | 10,062 | ||||
| Investment and other income | 530 | 528 | ||||||
| Interest expense | (26 | ) | (63 | ) | ||||
| Income before income taxes | $ | 8,586 | $ | 10,527 | ||||
Asset information related to the Company’s reportable segments consisted of the following:
| In thousands | March 31, 2005 | December 31, 2004 | ||||||
|---|---|---|---|---|---|---|---|---|
| Total assets | ||||||||
| MRO-US | $ | 165,338 | $ | 174,777 | ||||
| MRO-CAN | 21,133 | 18,519 | ||||||
| OEM-US | 42,614 | 40,275 | ||||||
| OEM-INTL | 10,621 | 10,471 | ||||||
| Total for reportable segments | 239,706 | 244,042 | ||||||
| Corporate | 16,585 | 16,508 | ||||||
| Consolidated total | $ | 256,291 | $ | 260,550 | ||||
At March 31, 2005 and December 31, 2004, the carrying value of goodwill within each reportable segment was as follows (in thousands):
| MRO-US | $22,104 | ||
| MRO-CAN | 4,294 | ||
| OEM-US | 2,251 | ||
| OEM-INT'L | -- | ||
| Consolidated total | $28,649 | ||
| I) Short Term Debt |
On July 1, 2003 the Company adopted FIN 46 which resulted in the Company’s consolidation of an investment in a limited partnership which owns an office building in Chicago, Illinois. In conjunction with the consolidation of its investment, the Company has recorded the short-term debt, which represents a non-recourse mortgage payable relative to the building, of approximately $1.2 million at March 31, 2005. The interest rate of the non-recourse mortgage payable is 7.315%, with a maturity date of December 31, 2005. The building and land have a net carrying value of approximately $4.1 million, which are included in property, plant and equipment. The remaining assets, none of which are significant, are recorded in other assets.
Report of Independent Registered Public Accounting FirmBoard
of Directors and Shareholders Lawson Products, Inc.
We have reviewed the condensed consolidated balance sheet of Lawson Products, Inc. and subsidiaries as of March 31, 2005 and the related condensed consolidated statements of income and the condensed consolidated statements of cash flows for the three-month periods ended March 31, 2005 and 2004. These financial statements are the responsibility of the Company’s management.
We conducted our review in accordance with standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards of the Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should be made to the condensed consolidated interim financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Lawson Products, Inc. and subsidiaries as of December 31, 2004, and the related consolidated statements of income, changes in stockholders’ equity and cash flows for the year then ended, not presented herein, and in our report dated March 10, 2005, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2004, is fairly stated in all material respects, in relation to the consolidated balance sheet from which it has been derived.
/s/ ERNST & YOUNG LLP
Chicago, Illinois
April 15, 2005
Safe Harbor” Statement under the Securities Litigation Reform Act of 1995: This Quarterly Report on Form 10-Q contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties. The terms “may,” “should,” “could,” “anticipate,” “believe,” “continues”, “estimate,” “expect,” “intend,” “objective,” “plan,” “potential,” “project” and similar expressions are intended to identify forward-looking statements. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. These statements are based on management’s current expectations, intentions or beliefs and are subject to a number of factors, assumptions and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. Factors that could cause or contribute to such differences or that might otherwise impact the business include, but are not limited to, the following risk factors:
| o | Lawson’s business strategy requires the Company to carry a significant amount of inventory in order to meet rapid processing of customer orders. |
| o | Disruptions of Lawson’s information systems could adversely affect the Company. |
| o | There is an ongoing risk that orders may be cancelled or rescheduled due to fluctuations in Lawson’s customers’ business needs or purchasing budgets. |
| o | A limited number of the Company’s stockholders can exert significant influence over the Company. |
| o | The Company operates in highly competitive markets. Some of the Company’s competitors have a greater variety of merchandise, financial resources, services, personnel resources and competitive pricing than Lawson. |
| o | Those related to general economic conditions and market conditions in the markets and industries the Company serves. |
| o | The risks of war, terrorism, and similar hostilities may adversely affect operating results. |
The Company undertakes no obligation to update any such factor or to publicly announce the results of any revisions to any forward-looking statements contained herein whether as a result of new information, future events or otherwise.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table presents a summary of the Company’s financial performance for the first quarter of 2005 and 2004:
| (Dollars in thousands) | 2005 | % of Net Sales | 2004 | % of Net Sales | |||||
|---|---|---|---|---|---|---|---|---|---|
| Net sales | $107,082 | 100.0 | $100,658 | 100.0 | |||||
| Cost of goods sold | 41,518 | 38.8 | 35,261 | 35.0 | |||||
| Gross Profit | 65,564 | 61.2 | 65,397 | 65.0 | |||||
| Operating expenses | 57,482 | 53.7 | 55,335 | 55.0 | |||||
| Operating income | 8,082 | 7.5 | 10,062 | 10.0 | |||||
| Other | 504 | 0.5 | 465 | 0.5 | |||||
| Income before taxes | 8,586 | 8.0 | 10,527 | 10.5 | |||||
| Income tax expense | 3,630 | 3.4 | 4,001 | 4.0 | |||||
| Net income | $ 4,956 | 4.6 | $ 6,526 | 6.5 | |||||
REVENUES AND GROSS PROFIT
Net sales for the three-month period ended March 31, 2005 increased 6.4% to $107.1 million, from $100.7 million in the same period of 2004.
The following table presents the Company’s net sales results for its MRO and OEM businesses for the first quarter of 2005 and 2004:
| (Dollars in millions) | 2005 | 2004 | |||
|---|---|---|---|---|---|
| MRO | $ 86.6 | $ 81.5 | |||
| OEM | 20.5 | 19.2 | |||
| $107.1 | $100.7 | ||||
Combined Maintenance, Repair and Replacement distribution (MRO-US and MRO-CAN) net sales increased $5.1 million in the first quarter of 2005, to $86.6 million from $81.5 million. Sales increases were achieved in both the U.S. and Canada for the quarter. The sales increases in the U.S. and Canada were principally attributable to the addition of new customers and improved penetration of existing customers, including the continued growth of the non-stock product category. Net sales increased $2.6 million, to $6.5 million from $3.9 million for the non-stock product category. The favorable impact of foreign exchange fluctuations accounted for approximately one-third of the $1.3 million net sales gain realized in Canada.
Combined Original Equipment Manufacturer (OEM-US and OEM-INTL) net sales increased $1.3 million in the first three months of 2005, to $20.5 million from $19.2 million. Sales were higher in the U.S. by $2.6 million but lower by $1.3 million internationally for the three-month period. The sales gain in the U.S. was primarily attributable to the addition of new customers. The decline in sales internationally is due to lower sales volume from a major customer in Europe.
Gross profit margins for the three-month periods ended March 31, 2005 and 2004 were 61.2% and 65.0%, respectively. The first quarter of 2005 reflected lower gross profit margins in both the MRO and OEM segments. MRO segment gross profit margins declined from 73.7% to 69.5%. The 420 basis point decrease is principally attributable to higher product costs, including surcharges from steel vendors, and a sales mix shift. In addition, a significant portion of the first quarter sales gain was realized from sales of lower margin non-stock product category items. OEM segment gross profit margins declined 160 basis points, from 28.1% to 26.5%. This decline was principally due to price competition and higher product costs in the U.S. and internationally.
OPERATING EXPENSES AND OPERATING INCOME
Operating expenses were $57.5 million and $55.3 million for the quarters ended March 31, 2005 and 2004, respectively. The $2.2 million dollar increase in quarterly operating expenses for 2005 over the prior year quarter is primarily related to higher employee compensation costs. This increase was driven by higher compensation costs associated with the Long-Term Capital Accumulation Plan, implemented in the third quarter of 2004, and marketing and technology personnel additions. As a result of the sales increases and the Company’s ability to leverage its operating cost infrastructure over a larger revenue base, operating expenses as a percent of net sales declined from 55.0% in the 2004 period to 53.7% of net sales in the 2005 period.
Operating income for the three-month period ended March 31, 2005 declined to $8.1 million, from $10.1 million in the comparable period of 2004. This $2.0 million decrease in operating income is principally attributable to lower gross profit margins and operating expense increases, which more than offset the gains in net sales.
INVESTMENT AND OTHER INCOME
Investment and other income consists primarily of rental and interest income. For the quarters ended March 31, 2005 and 2004, investment and other income was $0.5 million.
INTEREST EXPENSE
Interest expense is primarily attributable to interest paid relative to a mortgage payable for the building owned by the limited partnership referred to in Note I.
PROVISION FOR INCOME TAXES
The effective tax rates for the three months ended March 31, 2005 and 2004 were 42.3% and 38.0%, respectively. The increase in the effective tax rate for the quarter is principally due to higher operating losses from the foreign subsidiaries in the OEM segment in 2005, and to a lesser extent, lower exempt income in 2005 related to executive life insurance. The foreign losses were $0.5 million in the first quarter of 2005 compared to approximately $0 for the same period in 2004. Since no tax benefit was provided to the Company for foreign losses, the higher first quarter 2005 foreign loss had the effect of raising the overall effective tax rate by approximately 2.0% for the three months ended March 31, 2005.
NET INCOME
Net income for the first quarter of 2005 declined 24.1%, to $5.0 million ($.54 per diluted share), compared to $6.5 million ($.69 per diluted share) in the similar period of 2004. The $1.5 million decline in net income is the result of the $2.0 million decrease in operating income and higher effective tax rate discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities for the three months ended March 31, 2005 and 2004 was $2.3 million and $9.1 million, respectively. In 2005, net cash provided by operating activities was negatively impacted by lower net income, higher inventories and lower accrued expenses. Net cash used in financing activities increased by approximately $5.0 million related to increased stock purchases in the first quarter of 2005.
Working capital at March 31, 2005 was $113.9 million as compared to $115.0 million at December 31, 2004. At March 31, 2005 the current ratio was 3.8 to 1 as compared to 3.7 to 1 at December 31, 2004.
Additions to property, plant and equipment were $0.4 million and $1.1 million, respectively, for the three months ended March 31, 2005 and 2004. Capital expenditures in 2005 related to the purchase of equipment. In 2004, capital expenditures were principally related to the purchase of equipment and the development of software. The Company expects approximately $6.0 million for capital expenditures in 2005.
In the first quarter of 2005, the Company announced a cash dividend increase of $.02, to $.20 per share on common shares. This was an 11.1% increase over the previous $.18 per share on common shares paid each quarter in 2004.
During the first quarter of 2005, the Company purchased 117,972 shares of its own common stock for approximately $5,678,000. Of those shares, 37,163 shares were purchased pursuant to the 2000 Board authorization for up to 500,000 shares and 80,809 shares were pursuant to the Board authorization. In the first three months of 2004, the Company purchased 28,547 shares of its own common stock for approximately $856,000 pursuant to the 2000 Board authorization noted above. All shares purchased as of March 31, 2005 have been retired. Funds to purchase these shares were provided by cash and cash equivalents and net cash provided by operating activities. There is no expiration date relative to the 2004 share repurchase authorization.
Net cash provided by operating activities, current cash and cash equivalents and the $50,000,000 unsecured line of credit are expected to be sufficient to finance the Company’s future growth, cash dividends and capital expenditures.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKThere have been no material changes in market risk at March 31, 2005 from that reported in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.
ITEM 4. CONTROLS AND PROCEDURESThe Company’s chief executive officer and chief financial officer have concluded, based on their evaluation as of the end of the period covered by this report, that the Company’s disclosure controls and procedures (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) are effective to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosures. There was no change in the Company’s internal control over financial reporting that occurred during the quarter ended March 31, 2005 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II–OTHER INFORMATION
ITEMS 1, 3, 4 and 5 are inapplicable and have been omitted from this report.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS| Period | (a) Total Number of Shares Purchased | (b) Average Price Paid per Share | (c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | (d) Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs | |||||
|---|---|---|---|---|---|---|---|---|---|
| 01/01/05 - 01/31/05 | 86,357 | 48.72 | 86,357 | 450,806 | |||||
| 02/01/05 - 02/28/05 | 9,515 | 48.54 | 9,515 | 441,291 | |||||
| 03/01/05 - 03/31/05 | 22,100 | 45.65 | 22,100 | 419,191 | |||||
| Total | 117,972 | 48.13 | 117,972 | 419,191 | |||||
On May 16, 2000, the Board of Directors of the Company authorized the purchase of up to 500,000 shares of its own common stock. On October 13, 2004, the Company announced that its Board of Directors authorized a stock repurchase program to purchase up to 500,000 shares of its common stock in addition to that previously authorized. There is no expiration date relative to either authorization.
ITEM 6. EXHIBITS.
| 15 | Letter from Ernst & Young LLP Regarding Unaudited Interim Financial Information |
| 31.1 | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| 31.2 | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| 32 | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| LAWSON PRODUCTS, INC. (Registrant) | |||
| Dated May 10, 2005 | /s/Robert J. Washlow Robert J. Washlow Chief Executive Officer and Chairman of the Board | ||
| Dated May 10, 2005 | /s/Thomas Neri Thomas Neri Executive Vice President, Chief Financial Officer, and Treasurer |