SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended December 31, 2002
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [No Fee Required]
Commission file number: 0-10546
LAWSON PRODUCTS, INC.
(Exact Name of Registrant as Specified in Charter)
DELAWARE 36-2229304
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1666 EAST TOUHY AVENUE, DES PLAINES, ILLINOIS 60018
(Address of principal executive offices)
Registrant's telephone number, including area code: (847) 827-9666
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of Each Class on which registered
------------------- -------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $1.00 PAR VALUE
(Title of class)
Indicate by check mark whether the Registrant (l) 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 check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and will
not be contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ X ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No ......
The aggregate market value of the Registrant's voting stock held by
non-affiliates (based upon the per share closing price of $30.70) on June 30,
2002 was approximately $150,564,000.
As of March 1, 2003, 9,494,711 shares of Common Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated into this Form 10-K by reference:
Proxy Statement for Annual Meeting of Stockholders to be held on May 13, 2003
filed with the SEC pursuant to Schedule 14D Part III
TABLE OF CONTENTS
PART I Page
----
Item 1. Business 1
Item 2. Properties 5
Item 3. Legal Proceedings 5
Item 4. Submission of Matters to a Vote of Security Holders 5
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 6
Item 6. Selected Financial Data 7
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Item 7a. Quantitative and Qualitative Disclosures About Market Risk 13
Item 8. Financial Statements and Supplementary Data 14
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 14
PART III
Item 10. Directors and Executive Officers of the Registrant 34
Item 11. Executive Compensation 34
Item 12. Security Ownership of Certain Beneficial Owners
and Management 34
Item 13. Certain Relationships and Related Transactions 34
Item 14. Controls and Procedures 34
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K 35
EXHIBITS
SIGNATURE PAGE 37
Certification of Chief Executive Officer 38
Certification of Chief Financial Officer 39
"SAFE HARBOR" STATEMENT UNDER THE SECURITIES LITIGATION REFORM ACT OF 1995: This
Annual Report on Form 10-K contains certain forward-looking statements. 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. The factors that could cause actual results to
differ materially from those described in the forward-looking statements include
increased competition, seasonality, an economic downturn and the ability to
integrate successfully newly acquired businesses. 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 to reflect future
events or developments.
PART I
ITEM 1. BUSINESS.
Lawson Products, Inc. was incorporated in Illinois in 1952 and reincorporated in
Delaware in 1982. The Company has four reportable segments: (i) maintenance,
repair and replacement distribution; (ii) original equipment manufacturer
distribution and manufacturing; (iii) international maintenance, repair and
replacement distribution in Canada; and (iv) international original equipment
manufacturer distribution in Mexico and the United Kingdom. Please see Note P in
the notes to the consolidated financial statements for additional information
regarding segment results.
PRODUCTS
The Company is a seller and distributor of systems, services and
products. The Company also manufactures and distributes production and
specialized component parts to the OEM marketplace. The Company offers to
customers over 900,000 expendable maintenance, repair and replacement products.
These products may be divided into three broad categories: Fasteners, Fittings
and Related Parts, such as screws, nuts, rivets and other fasteners; Industrial
Supplies, such as hoses and hose fittings, lubricants, cleansers, adhesives and
other chemicals, as well as files, drills, welding products and other shop
supplies; and Automotive and Equipment Maintenance Parts, such as primary
wiring, connectors and other electrical supplies, exhaust and other automotive
parts. The Company estimates that these categories of products accounted for the
indicated percentages of its total consolidated net sales for 2002, 2001 and
2000 respectively:
PERCENTAGE OF
CONSOLIDATED
NET SALES
2002 2001 2000
---- ---- ----
Fasteners, Fittings and Related Parts..................... 43% 45% 47%
Industrial Supplies....................................... 48 47 49
Automotive and Equipment Maintenance Parts................ 9 8 4
---- -- --
100% 100% 100%
Substantially all of the Company's maintenance and repair products are
manufactured by others and must meet the Company's specifications. Approximately
90% of the Company's products are sold under the Company label. Substantially
all maintenance and repair items which the Company distributes are purchased by
the Company in bulk and subsequently repackaged in smaller quantities. The
Company regularly uses a large number of suppliers but has no long-term or fixed
price contracts with any of them. Most maintenance and repair items which the
Company distributes are purchased from several sources, and the Company believes
that the loss of any single supplier would not significantly affect its
operations. No single supplier accounted for more than 3.1% of the Company's
purchases in 2002.
Production components sold to the O.E.M. marketplace may be
manufactured to customers' specification or purchased from other sources.
MARKETING
The Company's principal markets are as follows:
Heavy Duty Equipment Maintenance. Customers in this market include
operators of trucks, buses, agricultural implements, construction and road
building equipment, mining, logging and drilling equipment and other
off-the-road equipment. The Company estimates that approximately 26% of 2002
sales were made to customers in this market.
In-Plant and Building Maintenance. This market includes plants engaged
in a broad range of manufacturing and processing activities, as well as
institutions such as hospitals, universities, school districts and government
units. The Company estimates that approximately 42% of 2002 sales were made to
customers in this market.
Passenger Car Maintenance. Customers in this market include automobile
service center chains, independent garages, automobile dealers, car rental
agencies and other fleet operators. The Company estimates that approximately 16%
of 2002 sales were made to customers in this market.
Original Equipment Manufacturers. This market includes plants engaged
in a broad range of manufacturing and processing activities. The Company
estimates that approximately 16% of 2002 sales were made to customers in this
market.
At December 31, 2002, the Company had approximately 238,000 customers,
the largest of which accounted for less than one percent of net sales during
2002. Sales were made through a force of approximately 1,900 sales
representatives at December 31, 2002. Included in this group were 257 district
and zone managers, each of whom, in addition to his or her own sales activities,
acted in an advisory capacity to other sales representatives in a designated
area and 50 regional managers who coordinate regional marketing efforts. Most
sales representatives, including district and zone managers, are compensated on
a commission basis and are responsible for repayment of commissions on their
respective uncollectible accounts. In addition to the sales representatives and
district, zone and regional managers discussed above, the Company had
approximately 1,440 employees at December 31, 2002.
The Company's products are sold in all 50 states, Mexico, Puerto Rico,
the District of Columbia, Canada and the United Kingdom. The Company believes
that an important factor in its success is its ability to service customers
promptly. During the past five years, more than 99.2% of all items stocked were
shipped to the customer within 24 hours after an order was received by the
Company. This rapid delivery is facilitated by computer controlled order entry
and inventory control systems in each general distribution center. In addition,
the receipt of customer orders at Lawson distribution facilities has been
accelerated by portable facsimile transmission equipment and personal computer
systems used by sales representatives. Customer orders are delivered by common
carriers.
INVENTORY
The Company is required to carry significant amounts of inventory in
order to meet its high standards of rapid processing of customer orders. The
Company has historically funded its working capital requirements internally.
Such internally generated funds, along with a $50 million unsecured revolving
line of credit, are expected to finance the Company's future growth and working
capital requirements.
DISTRIBUTION AND MANUFACTURING FACILITIES
Substantially all of the Company's maintenance products are stocked in
and distributed from each of its eight general distribution centers in; Addison,
Illinois; Reno, Nevada; Farmers Branch, Texas; Suwanee, Georgia; Fairfield, New
Jersey; Mississauga, Ontario, Canada, Bradley Stoke (Bristol) England and
Guadalajara, Mexico. Chemical products are distributed from a facility in Vernon
Hills, Illinois and welding products are distributed from a facility in
Charlotte, North Carolina. Production components are stocked in and distributed
from five centers located in Decatur, Alabama; Burr Ridge, Illinois; Memphis,
Tennessee; Lenexa, Kansas and Cincinnati, Ohio. Production components are
manufactured in Decatur, Alabama. In the opinion of the Company, all existing
facilities are in good condition and are well maintained. All are being used
substantially to capacity on a single shift basis, except the manufacturing
facility in Decatur, Alabama which operates two shifts and the inbound facility
in Des Plaines, Illinois, which operates two shifts. Further expansion of
warehousing capacity may require new or expanded warehouses, some of which may
be located in new geographical areas.
INTERNATIONAL OPERATIONS
Approximately 6% of the Company's net sales came from international
sales, primarily in Canada, the United Kingdom and Mexico.
Canadian operations are conducted at the Company's 65,000 square foot
general distribution center in Mississauga, Ontario, a suburb of Toronto. These
operations constituted less than 5% of the Company's net sales during 2002.
Operations in the United Kingdom are conducted under the name of Lawson
Products Limited from a 19,000 square foot general distribution center in
Bradley Stoke (Bristol) England. These operations constituted less than 1% of
the Company's net sales during 2002.
Operations in Mexico are conducted under the name of Lawson Products de
Mexico S.A. de C.V. from a 10,000 square foot facility in Guadalajara, Mexico.
These operations constituted less than 2% of the Company's net sales during
2002.
COMPETITION
The Company encounters intense competition from several national
distributors and manufacturers and a large number of regional and local
distributors. Due to the nature of its business and the absence of reliable
trade statistics, the Company cannot estimate its position in relation to its
competitors. However, the Company recognizes that some competitors may have
greater financial and personnel resources, handle more extensive lines of
merchandise, operate larger facilities and price some merchandise more
competitively than the Company. Although the Company believes that the prices of
its products are competitive, it endeavors to meet competition primarily through
the quality of its product line, its response time and its delivery systems.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers all of whose terms of office expire on May 13,
2003, are as follows:
YEAR FIRST
NAME AND PRESENT ELECTED TO OTHER OFFICES HELD
POSITION WITH COMPANY AGE PRESENT OFFICE DURING THE PAST FIVE YEARS
- --------------------- --- -------------- --------------------------
Sidney L. Port 92 1977 *
Chairman of the Executive
Committee and Director
Robert J. Washlow 58 1999 Mr. Washlow has been Chairman of the Board and Chief
Chairman of the Board, Chief Executive Officer since August 1999. Prior thereto,
Executive Officer and Director Mr. Washlow was Executive Vice President-Corporate
Affairs beginning in 1998, Secretary beginning in 1985
and a member of the Office of the President beginning
in January 1999.
YEAR FIRST
NAME AND PRESENT ELECTED TO OTHER OFFICES HELD
POSITION WITH COMPANY AGE PRESENT OFFICE DURING THE PAST FIVE YEARS
- --------------------- --- -------------- --------------------------
Jeffrey B. Belford 56 1999 Mr. Belford became Chief Operating Officer and a
Office of the President and Chief member of the Office of the President effective
Operating Officer January 1, 1999. Prior to 1999, Mr. Belford was
Executive Vice President - Operations, Chief
Operating Officer since 1989.
Roger Cannon 54 1999 Mr. Cannon has been a member of the Office of the
Office of the President and Chief President since January 1, 1999. Prior to 1999,
Sales Officer Mr. Cannon was Executive Vice President, Sales -
Marketing from 1997-1999, and Vice President - -
Central Field Sales from 1991 to 1997.
Jerome Shaffer, 75 1987 *
Vice President, Treasurer and Director
Joseph L. Pawlick, 60 1999 Prior to 1999, Mr. Pawlick was Vice President,
Chief Financial Officer Controller and Assistant Secretary of the Company
since 1987.
Victor G. Galvez 46 1999 Mr. Galvez was Assistant Controller of the Company
Controller from 1994 to 1999.
John Murray 47 2001 Mr. Murray is the Vice President - Corporate Affairs
Vice President -Corporate Affairs since July 2001. Mr. Murray has held the same office
since joining the Company. From 1998 to 2001, Mr.
Murray served as a consultant and outside director
for KMR Industries, Inc., an internet company. From
1992 to 1997, Mr. Murray was President and Chief
Operating Officer for Park Ohio Industries, a
diversified public company.
Neil Jenkins 53 2000 From 1996 to 2000, Mr. Jenkins operated a golf
Secretary travel business and was a business consultant.
Prior thereto, Mr. Jenkins was executive vice
president, secretary and a member of the Board of
Directors of Bally Gaming International, Inc., a
publicly held manufacturer and distributor of gaming
equipment and systems.
* Held position for more than five years.
AVAILABLE INFORMATION
The Company's Internet Address is: www.lawsonproducts.com. The Company makes
available free of charge through its website its annual report on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to
those reports filed pursuant to Section 13(a) or 15(d) of the Exchange Act as
soon as reasonably practicable after such documents are electronically filed
with the SEC. Our internet website and the information contained therein or
incorporated therein are not intended to be incorporated into this Annual Report
on Form 10-K.
ITEM 2. PROPERTIES.
The Company owns two facilities located in Des Plaines, Illinois,
(152,600 and 27,000 square feet, respectively). These buildings contain the
Company's main administrative activities and an inbound warehouse facility that
principally supports the Addison, Illinois facility and all Lawson distribution
facilities. The Company also leases a facility in Des Plaines, Illinois (114,000
square feet). This building contains administrative and warehouse activities.
Additional administrative, warehouse and distribution facilities owned by the
Company are located in Addison, Illinois (90,000 square feet); Fairfield, New
Jersey (61,000 square feet); Reno, Nevada (97,000 square feet); Suwanee, Georgia
(105,000 square feet); Farmers Branch, Texas (54,500 square feet); and
Mississauga, Ontario, Canada (65,000 square feet). The Company also leases
administrative office space (25,300 square feet) in Independence, Ohio. Chemical
products are distributed from a 105,400 square foot owned facility in Vernon
Hills, Illinois and welding products are distributed from a 40,000 square foot
owned facility located in Charlotte, North Carolina. Administrative, warehouse
and distribution facilities in Bradley Stoke (Bristol) England (19,000 square
feet) are leased by the Company. Administrative and distribution facilities in
Guadalajara, Mexico (10,000 square feet) are leased by the Company. Production
components are distributed from leased facilities in Burr Ridge, Illinois
(23,400 sq. ft.) Memphis, Tennessee, (26,300 sq. ft.), Lenexa, Kansas (40,500
sq. ft.) and Cincinnati, Ohio (16,800 sq. ft.). The Company owns a 61,000 square
foot facility in Decatur, Alabama which manufacturers and distributes production
components. From time to time, the Company leases additional warehouse space
near its present facilities. Management believes that the current facilities are
adequate to meet its needs. See Item 1, "Business - Distribution and
Manufacturing Facilities" for further information regarding the Company's
properties.
ITEM 3. LEGAL PROCEEDINGS.
There is no material pending litigation to which the Company, or any of
its subsidiaries, is a party or to which any of their property is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this Report.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock is traded on the NASDAQ National Market
System under the symbol of "LAWS." The approximate number of stockholders of
record at December 31, 2002 was 901. The following table sets forth the high and
low closing sale prices as reported on the NASDAQ National Market System during
the last two years. The table also indicates the cash dividends for each
outstanding share of common stock paid by the Company during such periods.
2002 2001
----------------------------------- ------------------------------------
CASH DIVIDENDS CASH DIVIDENDS
HIGH LOW PER SHARE HIGH LOW PER SHARE
---- --- --------- ---- --- ---------
First Quarter $29.00 $25.71 $.16 $28.69 $23.38 $.16
Second Quarter 33.09 26.80 .16 29.30 24.64 .16
Third Quarter 30.31 25.68 .16 29.47 22.79 .16
Fourth Quarter 31.90 27.55 .16 27.80 22.55 .16
ITEM 6. SELECTED FINANCIAL DATA.
The following selected financial data should be read in conjunction
with the Financial Statements of the Company and notes thereto included
elsewhere in this Annual Report. The income statement data and balance sheet
data is for, and as of the end of each of, the years in the five-year period
ended December 31, 2002, are derived from the audited Financial Statements of
the Company.
2002 2001 2000 1999 1998
------ ------ ------ ------ ------
Net Sales (1) $387,455,899 $379,407,075 $348,967,486 $328,987,099 $301,831,128
Income Before Income Taxes 23,188,915 17,142,193 47,565,673 40,269,981 33,590,229
Net Income (2) 12,446,915 8,787,193 28,135,673 23,927,981 19,474,229
Total Assets 225,830,649 234,206,007 222,721,466 215,990,877 198,982,290
Return on Assets (percent) 5.5 3.8 12.6 11.1 9.8
Noncurrent Liabilities 31,764,636 40,520,140 28,946,453 27,525,033 25,246,269
Stockholders' Equity 162,343,106 159,898.075 159,912,465 150,039,989 142,934,735
Return on Average
Equity (percent) 7.7 5.4 18.6 16.5 13.5
Per Share of Common Stock:
Basic Net Income $1.30 $0.91 $2.85 $2.29 $1.77
Diluted Net Income 1.30 0.91 2.85 2.29 1.76
Stockholders' Equity (3) 16.96 16.51 16.22 14.37 12.97
Cash Dividends Declared .64 .64 .60 .57 .56
Basic Weighted Average
Shares Outstanding 9,569,947 9,684,510 9,859,610 10,444,076 11,023,934
Diluted Weighted Average
Shares Outstanding 9,595,945 9,708,299 9,873,680 10,445,836 11,041,819
- ------------------
(1) Net sales for the years 2000 and 1999 were positively impacted by the
acquisition of ACS/SIMCO in the third quarter of 1999. In addition, net
sales for 2002 and 2001 were also positively impacted by the acquisition of
the North American Industrial Products and Kent Automotive Divisions in
March 2001.
(2) In 2002, the Company recorded $421,000, net of tax, of restructuring
charges for compensation arrangements related to management personnel
reductions. The Company adopted SFAS No. 142 as of January 1, 2002.
Therefore, the Company discontinued amortization of goodwill for 2002. Net
income for 2001 was reduced by $731,000 related to goodwill amortization.
In 2001, the Company recorded non-recurring charges for the write-off of
capitalized software and implementation costs related to an enterprise
information system project which the Company decided to discontinue as well
as a promotional program related to the acquisition of Premier operations.
These charges reduced net income by $5,138,000 and $2,021,000,
respectively. During 2000, the Company recorded a gain of $2,136,000 as a
result of the sale of the Company's interest in a real estate investment.
In 1999 and 1998, the Company recorded special charges for compensation
arrangements related to management personnel reductions and retirements
which reduced net income by $1,760,000 and $1,520,000, respectively.
Additionally, in 1999, a gain of $554,000 was recorded on the sale of
marketable securities.
(3) These per share amounts were computed using basic weighted average shares
outstanding for all periods presented.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001
As further described in the Notes to Consolidated Financial Statements, Note P -
Segment Reporting, the Company distributes Maintenance, Repair and Replacement
consumables, reporting this activity as the "MRO distribution" segment in the
United States and as the "International MRO distribution" segment in Canada. The
manufacture and distribution of specialized component parts in the United States
is reported as the "OEM distribution" segment. Distribution of specialized
component parts in Mexico and the United Kingdom is reported as the
"International OEM distribution" segment.
In 2002, total sales increased by $8.1 million, or 2.1%, to $387.5 million from
$379.4 million in 2001, comprising an increase of $2.5 million, or 0.8% in the
MRO segments and $5.6 million, or 9.6% in the OEM segments. The MRO increase was
attributable to sales generated by the addition of field and inside sales
representatives from the IPD and Kent divisions of the North American business
of Premier Farnell, acquired March 30, 2001, partially offset by the effects of
continuing difficult market conditions and a planned reduction in the number of
under-performing domestic sales agents from 2001 levels. The sales increase in
the OEM segments was attributable to increased penetration of existing accounts
as well as new customer development efforts, both domestically and
internationally in these growing business segments.
Gross profit increased by $2.0 million, or 0.8%, to $250.3 million during 2002
from $248.3 million in 2001. This increase resulted from the sales increase
noted above, partially offset by a decline in gross profit as a percent of total
sales, to 64.6% from 65.5%. This reduction in gross profit percentage is due to
relatively higher growth in the OEM segments, which traditionally carry a lower
gross profit rate than MRO but also have lower operating costs. In 2002, OEM
gross profit was 25.2% of sales, compared to 30.2% in 2001. In 2002, OEM gross
profit was negatively impacted by a $2.1 million inventory write-off,
principally resulting from a change in the inventory profile by our U.K.
business to better serve our current customer base. Excluding this write-off,
OEM gross profit was 28.5% and total gross profit was 65.1%. The gross profit
percentage of the MRO segments was 72.4% of sales in 2002, compared to 71.9% in
2001.
Selling, general and administrative (S,G&A) expenses increased by $4.8 million,
or 2.2%, to $226.6 million (58.5% of sales) in 2002 from $221.7 million (58.4%
of sales) in 2001. The increase in S,G&A was attributable to wage and operating
cost increases, and to continued investment in various selling and product
education initiatives, coupled with higher health costs. The increase was
partially offset by the cessation of amortization of goodwill pursuant to
adoption of FASB Statement No. 142 by the Company at the beginning of 2002,
reduced MRO promotional program costs put in place to support the newly acquired
Premier business and the absence of non-recurring costs associated with the
IPD/Kent acquisition. If FASB Statement No. 142 had been adopted at the
beginning of 2001, the non-amortization of goodwill would have resulted in
decreased S,G&A expenses of approximately $1.2 million.
Operating income increased by $5.6 million, or 34.6%, to $21.8 million in 2002
from $16.2 million in 2001. The increase resulted primarily from higher net
sales, the $8.5 million write-off of an enterprise information system included
in 2001 results and the absence of goodwill amortization and acquisition costs
noted above, partially offset by the OEM inventory write-off.
Interest expense was $0.2 million in 2002 compared to $0.7 million in 2001. The
decrease was attributable to the Company's repayment of all of its outstanding
debt from a revolving line of credit, coupled with lower interest rates in 2002.
The effective income tax rates were approximately 46.3% and 48.7%, respectively,
for 2002 and 2001.
Net income increased by $3.6 million, or 41.6%, to $12.4 million during 2002
from $8.8 million in 2001, while income per share increased 42.9% to $1.30 in
2002 from $0.91 in 2001. The principal factors affecting net income and earnings
per share are stated above. Per share net income for 2002 and 2001 was
positively impacted by the Company's share repurchase program.
YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000
In 2001, net sales increased by $30.4 million, or 8.7%, to $379.4 million in
2001 from $349.0 million in 2000, reflecting an increase of $28.9 million, or
9.9% in the MRO segments and $1.5 million, or 2.6% in the OEM segments. The
increase for the MRO segments was attributable to the $34.9 million in sales
generated by the addition of field and inside sales representatives from the IPD
and Kent divisions of the North American business of Premier Farnell, offset by
reduced contributions from other MRO sales representatives. The sales increase
in the OEM segments was principally attributable to increased penetration of
existing accounts in Mexico and the U.S.
Gross profit increased by $16.6 million, or 7.2%, to $248.3 million during 2001
from $231.7 million in 2000. The increase was due to the MRO sales gain noted
above, partially offset by a decrease in gross profit from the OEM segments. As
a percent of net sales, gross profit decreased to 65.5% from 66.4%. In 2001, MRO
gross profit was 71.9% of sales, compared to 72.8% in 2000. This decrease in
gross profit percentage is primarily due to pricing inconsistencies on certain
Premier product lines of the MRO segments added as part of the 2001 acquisition
discussed above. The OEM gross profit in 2001 was 30.2%, compared to 33.7% in
2000. The OEM gross profit percentage in 2001 was adversely impacted by
significant pricing pressures.
S,G&A expenses increased by $33.2 million, or 17.7%, to $221.7 million in 2001
from $188.5 million in 2000. This increase resulted principally from higher
sales agent compensation relative to the sales generated by the field
representatives added as part of the Premier acquisition, higher expenses
incurred to expand the Company's national sales group, integrate approximately
400 Premier sales professionals, absorb over $1 million of transition costs to
integrate acquired inventory, and to realign existing warehouses and upgrade
information systems. Additionally, MRO results were adversely impacted by a $3.4
million non-recurring promotional program put in place to support the newly
acquired Premier business. As a percent of net sales, S,G&A expenses increased
to 58.4% from 54.0%.
Operating income decreased by $25.6 million, or 61.3%, to $16.2 million during
2001 from $41.8 million in 2000. The decrease was primarily attributable to the
higher S,G&A expenses, the $8.5 million write-off of an enterprise information
system and non-recurring promotional programs, which more than offset the higher
net sales noted above. OEM operating income decreased due to lower gross margins
resulting from significant pricing pressures, as noted above.
Investment and other income was $1.6 million in 2001 compared to $5.8 million in
2000. The 72.4% decrease is primarily attributable to a $3.5 million gain from
the sale of a partnership interest in 2000 and to a lesser extent, lower
interest income resulting from significantly lower marketable securities
balances in 2001. The Company used the proceeds from the sale of marketable
securities to partially finance the Premier acquisition.
Interest expense was $0.7 million in 2001 and was principally attributable to
the interest incurred on the $50 million unsecured line of credit entered into
in February 2001 in connection with the Premier acquisition.
The effective income tax rates were approximately 48.7% and 40.8%, respectively,
for 2001 and 2000. The increase in the effective tax rate resulted from the
increased effect of non-deductible foreign operation losses when measured
against significantly lower income before income taxes in 2001.
Net income decreased by $19.3 million, or 68.8%, to $8.8 million during 2001
from $28.1 million in 2000, while diluted income per share declined 68.1% to
$0.91 in 2001 from $2.85 in 2000. As discussed above, the principal factors
attributable to the decline in net income and diluted earnings per share were
significantly higher S,G&A expenses, the absence of a gain on sale of the
Company's partnership interest recorded last year, lower investment and other
income and a higher effective income tax rate, which more than offset the gain
in net sales. Per share net income for 2001 and 2000 was positively impacted by
the Company's share repurchase program.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows from operations and a $50 million unsecured line of credit entered
into in February 2001 have continued to be sufficient to fund operating
requirements, cash dividends and capital improvements. Such internally generated
funds and the line of credit are also expected to finance the Company's future
growth.
Cash flows provided by operations for 2002, 2001 and 2000 were $29.0 million,
$6.4 million and $22.9 million, respectively. The improvement in 2002 was due
primarily to decreasing operating assets, increasing operating liabilities, as
well as the gain in net income noted above. In 2001, cash flows from operations
were negatively impacted by the decline in net income noted above, as well as
increases in operating assets associated with the acquisition of IPD and Kent,
and lower operating liabilities. Working capital at December 31, 2002 and 2001
was approximately $98 million and $101 million, respectively. At December 31,
2002 the current ratio was 4.1 to 1 as compared to 4.0 to 1 at December 31,
2001.
Additions to property, plant and equipment were $6.0 million, $5.2 million and
$3.4 million, respectively, for 2002, 2001 and 2000. Consistent with prior
years, capital expenditures were incurred primarily for improvement of existing
facilities and for the purchase of related equipment, as well as for the
improvement of new leased facilities. Capital expenditures during 2001 primarily
reflect purchases of computer equipment and improvement of existing facilities
and purchases of related equipment. In 2000, additions to property, plant and
equipment primarily reflect purchases of computer equipment.
Future obligations and commitments to make future payments under contracts
consisted of rental commitments as of December 31, 2002 as follows:
(In thousands) 2003 2004 2005 2006 2007 2008 and thereafter Total
- -------------------------------------------------------------------------------------------------------
Total contractual
cash obligations $3,084 $2,660 $2,172 $1,890 $1,675 $4,151 $15,632
- --------------------------------------------------------------------------------------------------------
On March 30, 2001, the Company purchased certain assets of Premier
Farnell's Cleveland based North American Industrial Products and Kent Automotive
Divisions for approximately $28.4 million plus approximately $7.2 million for
related inventories. The all-cash transaction was accounted for as a purchase;
accordingly the accounts and transactions of the acquired business have been
included in the consolidated financial statements since the date of acquisition.
Under the agreement, the Company acquired the field sales, telephone sales and
customer service professionals, the customer accounts, certain administrative
executives, and use of various intellectual properties, including trademarks and
trade names of the Industrial Products and Kent Automotive divisions in certain
territories. Premier Farnell's Premier Fastener, Rotanium Products, Certainium
Alloys, CT Engineering, JI Holcomb and Kent Automotive business units in the
United States, Canada, Mexico, Central America and the Caribbean were combined
with the Company's existing operations.
The assets acquired were recorded at fair values based on actual
purchase cost of inventories and valuations of various intellectual properties,
including trademarks and trade names of the IPD and Kent divisions. This
acquisition did not require a significant investment by the Company in
facilities or equipment. The acquisition generated approximately $41.2 million
of incremental sales. The Company only acquired inventory and portions of the
IPD and Kent business, and is therefore unable to provide any meaningful pro
forma information of prior period results.
During 2002, the Company purchased 196,250 shares of its common stock for
approximately $5.6 million. Of these purchases, 193,415 shares were acquired
pursuant to the 2000 Board authorization to purchase up to 500,000 shares. The
additional 2,835 shares purchased during 2002 represented the remaining shares
authorized for purchase under the 1999 Board authorization to purchase up to
500,000 shares. In 2001, the Company purchased 84,497 shares of its own common
stock for approximately $2.2 million. These shares were acquired pursuant to the
1999 Board authorization to purchase up to 500,000 shares. In 2000, the Company
purchased 501,268 shares of its own common stock for approximately $11.9
million. Of these purchases, 412,668 shares were acquired pursuant to the 1999
Board authorization described above and 88,600 shares represented the remaining
shares authorized for purchase under the 1998 Board authorization to purchase up
to 500,000 shares. At December 31, 2002, 306,585 shares were available for
purchase pursuant to the 2000 Board authorizations. Funds to purchase these
shares were provided by investments and cash flows from operations.
CRITICAL ACCOUNTING POLICIES
The Company has disclosed its accounting policies in Note B to the consolidated
financial statements. The following provides supplemental information to these
accounting policies as well as information on the accounts requiring more
significant estimates.
ALLOWANCE FOR DOUBTFUL ACCOUNTS - METHODOLOGY
The Company evaluates the collectibility 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 (i.e., 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 by a material amount.
INVENTORIES - SLOW MOVING AND OBSOLESCENCE
The Company carries significant amounts of inventories, which is a part of the
Company's strategy as a competitive advantage in its ability to fulfill the vast
majority of our customers' orders the same day received. However, this strategy
also increases the chances that portions of the inventory have decreased in
value below their carrying cost. To reduce inventory to a lower of cost, or
market value, the Company records a reserve for slow-moving and obsolete
inventory. The Company defines obsolete as those inventory parts on hand which
the Company plans to discontinue to offer to its customers. Slow-moving
inventory is monitored by examining reports of parts which have not been sold
for extended periods. The Company records the reserve needed based on its
historical experience of how much the selling prices must be reduced to move
these obsolete and slow-moving products. If experience or market conditions
change, estimates of the reserves needed could be revised by a material amount.
IMPACT OF INFLATION AND CHANGING PRICES
The Company has continued to pass on to its customers most increases in product
costs, accordingly, gross margins have not been materially impacted. The impact
from inflation has been more significant on the Company's fixed and
semi-variable operating expenses, primarily wages and benefits, although to a
lesser degree in recent years due to moderate inflation levels.
Although the Company expects that future costs of replacing warehouse and
distribution facilities will rise due to inflation, such higher costs are not
anticipated to have a material effect on future earnings.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company, through its foreign subsidiaries, distributes products in
the United Kingdom, Canada and Mexico. As a result, the Company is from time to
time exposed to market risk relating to the impact of foreign currency exchange
rates. A hypothetical 10% adverse movement in exchange rates would increase
income by $469,000 in 2002 to offset the loss by the foreign subsidiaries.
The Company had nothing outstanding as of December 31, 2002 under its
revolving line of credit.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The following information is presented in this report:
Report of Independent Auditors
Consolidated Balance Sheets as of December 31, 2002 and 2001.
Consolidated Statements of Income for the Years ended December
31, 2002, 2001 and 2000.
Consolidated Statements of Changes in Stockholders' Equity for
the Years ended December 31, 2002, 2001 and 2000.
Consolidated Statements of Cash Flows for the Years ended
December 31, 2002, 2001 and 2000.
Notes to Consolidated Financial Statements.
Schedule II
REPORT OF INDEPENDENT AUDITORS
To the Stockholders and Board of Directors
Lawson Products, Inc.
We have audited the accompanying balance sheets of Lawson Products, Inc. as of
December 31, 2002 and 2001, and the related consolidated statements of income,
changes in stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 2002. Our audits also included the financial
statement schedule listed in the Index at Item 15(a). These financial statements
and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial statements and schedule
based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Lawson Products,
Inc. at December 31, 2002 and 2001, and the consolidated results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2002, in conformity with generally accepted accounting principles
in the United States. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
As discussed in Note H to the financial statements, in 2002 the Company changed
its method for accounting for goodwill and other intangible assets.
/s/Ernst & Young LLP
Chicago, Illinois
February 20, 2003
LAWSON PRODUCTS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
-----------------------------------------------
2002 2001
---- ----
Assets
Current assets:
Cash and cash equivalents $ 7,590,922 $ 6,986,556
Marketable securities 696,043 1,737,129
Accounts receivable, less allowance for doubtful accounts
(2002 - $1,830,112; 2001 - $1,803,179) 42,989,647 45,740,042
Inventories 63,851,013 65,542,890
Miscellaneous receivables 3,201,802 2,981,961
Prepaid expenses 7,968,600 9,027,089
Deferred income taxes 3,463,000 2,471,000
----------------------------------------------
Total Current Assets 129,761,027 134,486,667
----------------------------------------------
Property, plant and equipment, at cost, less allowances for
depreciation and amortization (2002 - $49,499,466;
2001 - $45,931,265) 39,518,838 39,059,470
----------------------------------------------
ther assets:
Investments in real estate 1,305,000 945,000
Cash value of life insurance 10,932,602 16,390,758
Deferred income taxes 11,987,000 10,679,000
Goodwill, less accumulated amortization
(2002 - $1,674,529; 2001 - $1,674,529) 28,649,216 28,649,216
Other intangible assets, less accumulated amortization
(2002 - $700,313; 2001 - $323,549) 1,999,396 2,073,080
Other 1,677,570 1,922,816
----------------------------------------------
56,550,784 60,659,870
----------------------------------------------
$ 225,830,649 $ 234,206,007
==============================================
Liabilities and Stockholders' Equity
Current liabilities:
Revolving line of credit $ -- $ 4,000,000
Accounts payable 8,085,230 6,947,987
Accrued expenses and other liabilities 23,637,677 22,839,805
----------------------------------------------
Total Current Liabilities 31,722,907 33,787,792
----------------------------------------------
Noncurrent liabilities and deferred credits:
Accrued liability under security bonus plans 20,614,050 19,296,652
Revolving line of credit -- 10,000,000
Deferred compensation and other liabilities 11,150,586 11,223,488
----------------------------------------------
31,764,636 40,520,140
----------------------------------------------
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 - 2002 - 9,494,011 shares; 2001 - 9,629,307 shares 9,494,011 9,629,307
Capital in excess of par value 2,387,456 912,921
Retained earnings 152,494,591 151,553,577
-----------------------------------------------
164,376,058 162,095,805
Foreign currency translation adjustment (2,032,952) (2,197,730)
-----------------------------------------------
Accumulated other comprehensive loss (2,032,952) (2,197,730)
-----------------------------------------------
162,343,106 159,898,075
----------------------------------------------
$ 225,830,649 $ 234,206,007
==============================================
See notes to consolidated financial statements
LAWSON PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31,
----------------------------------------------------
2002 2001 2000
---- ---- ----
Net sales $387,455,899 $379,407,075 $348,967,486
Cost of goods sold 137,129,326 131,064,519 117,256,150
----------------------------------------------------
Gross profit 250,326,573 248,342,556 231,711,336
Selling, general and administrative expenses 226,570,836 221,743,271 188,468,661
Special charges 360,112 8,496,101 --
Provision for doubtful accounts 1,585,048 1,901,379 1,419,120
----------------------------------------------------
Operating Income 21,810,577 16,201,805 41,823,555
----------------------------------------------------
Interest and dividend income 52,886 654,257 1,072,730
Interest expense (153,809) (705,756) (7,959)
Gain from sale of partnership interest -- -- 3,502,336
Other income - net 1,479,261 991,887 1,175,011
----------------------------------------------------
1,378,338 940,388 5,742,118
----------------------------------------------------
Income Before Income Taxes 23,188,915 17,142,193 47,565,673
----------------------------------------------------
Federal and state income taxes (benefit):
Current 12,919,000 10,126,000 20,012,000
Deferred (2,177,000) (1,771,000) (582,000)
----------------------------------------------------
10,742,000 8,355,000 19,430,000
----------------------------------------------------
Net Income $ 12,446,915 $ 8,787,193 $ 28,135,673
====================================================
Net Income Per Share of Common Stock:
Basic $1.30 $0.91 $2.85
====================================================
Diluted $1.30 $0.91 $2.85
====================================================
See notes to consolidated financial statements
LAWSON PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF
CHANGES IN STOCKHOLDERS' EQUITY
ACCUMULATED
COMMON CAPITAL OTHER
STOCK, IN EXCESS OF RETAINED COMPREHENSIVE COMPREHENSIVE
$1 PAR VALUE PAR VALUE EARNINGS LOSS INCOME
------------ ------------- ---------------- ---------------- --------------
Balance at January 1, 2000 $10,203,922 $717,004 $140,200,567 $ (1,081,504) $ --
Net income 28,135,673 28,135,673
Other comprehensive income, net of tax: 28,000 28,000
Unrealized gain on marketable
securities
Adjustment for foreign currency (568,000) (568,000)
-------------
translation
Other comprehensive loss for the year (540,000)
-------------
Comprehensive income for the year
$27,595,673
-------------
Cash dividends declared (5,875,305)
Stock issued under employee stock plans 3,750 80,625
Purchase and retirement of common stock (501,268) (35,904) (11,395,095)
- -----------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2000 9,706,404 761,725 151,065,840 (1,621,504)
- -----------------------------------------------------------------------------------------------------------------------------
Net income 8,787,193 $8,787,193
Other comprehensive income, net of tax:
Adjustment for foreign currency (576,226) (576,226)
-------------
translation
Other comprehensive loss for the year (576,226)
-------------
Comprehensive income for the year $8,210,967
-------------
Cash dividends declared (6,190,716)
Stock issued under employee stock plans 7,400 159,100
Purchase and retirement of common stock (84,497) (7,904) (2,108,740)
- -----------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2001 9,629,307 912,921 151,553,577 (2,197,730)
- -----------------------------------------------------------------------------------------------------------------------------
Net income $12,446,915 $12,446,915
Other comprehensive income, net of tax:
Adjustment for foreign currency 164,778 164,778
-------------
translation
Other comprehensive income for the year 164,778
-------------
Comprehensive income for the year $12,611,693
-------------
Cash dividends declared (6,115,046)
Stock issued under employee stock plans 60,954 1,150,553
Purchase and retirement of common stock (196,250) (36,018) (5,390,855)
- -----------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2002 $9,494,011 $2,387,456 $152,494,591 $(2,032,952)
- -----------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements
LAWSON PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
2002 2001 2000
Operating activities
Net income $ 12,446,915 $ 8,787,193 $ 28,135,673
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 5,505,560 5,740,752 5,986,466
Amortization 1,321,150 2,405,261 677,197
Provision for allowance for doubtful accounts 1,585,048 1,901,379 1,419,120
Deferred income taxes (2,177,000) (1,771,000) (582,000)
Deferred compensation and security bonus plans 2,703,603 3,399,366 3,922,781
Payments under deferred compensation
and security bonus plans (1,635,338) (2,395,036) (2,420,361)
Losses (Gains) from sale of marketable securities (299,611) (13,276) 803
Income from investments in real estate (600,000) (480,000) (695,000)
Gain from sale of investment in real estate -- -- (3,502,336)
Changes in operating assets and liabilities
(Exclusive of effect of acquisition):
Accounts receivable 1,165,347 (5,392,638) (1,134,140)
Inventories 1,691,877 (3,093,011) 256,152
Prepaid expenses and other assets 4,867,084 3,258,709 (3,730,055)
Accounts payable and accrued expenses 1,958,330 (2,970,360) (2,770,387)
Income taxes payable -- (2,614,768) (1,717,167)
Other 429,009 (315,698) (961,691)
----------------------------------------------------
Net Cash Provided by Operating Activities 28,961,974 6,446,873 22,885,055
----------------------------------------------------
Investing activities
Additions to property, plant and equipment (5,964,928) (5,228,929) (3,392,458)
Purchases of marketable securities (8,340,339) (13,267,926) (75,344,146)
Proceeds from sale of marketable securities 9,681,036 41,916,388 61,987,598
Proceeds from sale of investment in real estate -- -- 7,400,000
Acquisition of businesses, net of cash acquired -- (36,890,933) --
Other 456,500 240,000 200,000
---------------------------------------------------
Net Cash Used in Investing Activities (4,167,731) (13,231,400) (9,149,006)
----------------------------------------------------
Financing Activities
Proceeds from revolving line of credit 36,500,000 71,800,000 --
Payments on revolving line of credit (50,500,000) (57,800,000) --
Purchases of common stock (5,623,123) (2,201,140) (11,932,267)
Proceeds from exercise of stock options 1,571,507 166,500 84,375
Dividends paid (6,138,261) (6,105,987) (5,951,058)
----------------------------------------------------
Net Cash Provided by (Used in) Financing Activities (24,189,877) 5,859,373 (17,798,950)
----------------------------------------------------
Increase (Decrease) in Cash and Cash Equivalents 604,366 (925,154) (4,062,901)
Cash and Cash Equivalents at Beginning of Year 6,986,556 7,911,710 11,974,611
----------------------------------------------------
Cash and Cash Equivalents at End of Year $ 7,590,922 $ 6,986,556 $ 7,911,710
====================================================
See notes to consolidated financial statements
LAWSON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - DESCRIPTION OF BUSINESS
Lawson Products, Inc. and subsidiaries principally are distributors of
expendable parts and supplies for maintenance, repair and operation of
equipment.
NOTE B - SUMMARY OF MAJOR ACCOUNTING POLICIES
Principles of Consolidation: The accompanying consolidated financial
statements include the accounts and transactions of the Company and its wholly
owned and majority owned subsidiaries. All inter-company accounts and
transactions have been eliminated in consolidation.
Revenue Recognition: Sales and associated cost of goods sold are
recognized when products are shipped and title passes to customers.
Shipping and Handling Fees and Costs: Costs related to shipping and
handling fees are included on the Income Statement in the caption Selling,
general and administrative expenses and totaled $11,898,000, $11,460,000, and
$10,521,000 in 2002, 2001 and 2000, respectively. Amounts billed to customers
for shipping fees are included in net sales.
Use of Estimates: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from these
estimates.
Investment in Real Estate: The Company's investment in real estate
representing a limited partnership interest is carried on the basis of the
equity method.
Marketable Securities: Marketable equity and debt securities are
classified as available-for-sale and are carried at fair value, with the
unrealized gains and losses, net of tax, recorded in stockholders' equity.
Realized gains and losses, declines in value judged to be other-than-temporary,
and interest and dividends are included in investment income. The cost of
securities sold is based on the specific identification method.
Inventories: Inventories (principally finished goods) are stated at the
lower of cost (first-in, first-out method) or market.
Property, Plant and Equipment: Provisions for depreciation and
amortization are computed by the straight-line method for buildings using useful
lives of 20 to 30 years and by the double declining balance method for machinery
and equipment, furniture and fixtures and vehicles using useful lives of 3 to 10
years.
Investment Tax Credits: Investment tax credits on assets leased to
others (see Investment in Real Estate) are deferred and amortized over the
useful life of the related asset.
Cash Equivalents: The Company considers all highly liquid investments
with a maturity of three months or less when purchased to be cash equivalents.
Stock Options: Stock options are accounted for under Accounting
Principles Board (APB) Opinion No. 25, "Accounting For Stock Issued to
Employees." Under APB 25, the Company uses the intrinsic value method where no
compensation expense is recognized because the exercise price of the stock
options granted equals the market price of the underlying stock at the date of
grant.
The following table shows the effect on net income and earnings per
share if the Company had applied the fair value recognition provision of FASB
Statement No. 123, "Accounting for Stock-Based Compensation."
2002 2001 2000
- ----------------------------------------------------------------------------------------
Net income - as reported $12,446,915 $8,787,193 $28,135,673
Deduct: Total stock based
employee compensation
expense determined under
fair value method, net of tax (37,915) (49,193) (167,673)
- ----------------------------------------------------------------------------------------
Net income - pro forma 12,409,000 8,738,000 27,968,000
Basic and diluted earnings per share
- as reported 1.30 .91 2.85
Basic earnings per share - pro forma 1.30 .90 2.84
Diluted earnings per share - pro forma 1.29 .90 2.83
For purposes of pro forma disclosures, the estimated fair value of
options granted is amortized to expense over the option's vesting period. The
pro forma effect on net income is not representative of the pro forma effect on
net income in future years because grants made in 1996 and later years have an
increasing vesting period.
Goodwill and Other Intangibles: Goodwill represents the cost of
business acquisitions in excess of the fair value of identifiable net tangible
assets acquired. Goodwill was amortized over 20 years using the straight-line
method until the end of 2001.
In June 2001, the FASB issued Statement No. 141, "Business
Combinations" and Statement No. 142 "Goodwill and Other Intangibles," effective
for fiscal years beginning after December 15, 2001. Under the new rules,
goodwill and other intangible assets deemed to have indefinite lives will no
longer be amortized but subject to annual impairment tests. (See note H)
Foreign Currency Translation: The financial statements of foreign
entities have been translated in accordance with Statement of Financial
Accounting Standards No. 52 and, accordingly, unrealized foreign currency
translation adjustments are reflected as a component of stockholders' equity.
Realized foreign currency transaction gains and losses were not significant for
the years ended December 31, 2002, 2001 and 2000.
Income per share: Basic EPS is computed by dividing net income by the
weighted average number of common shares outstanding during the period. Diluted
EPS reflects the potential dilution from the exercise or conversion of
securities into common stock, such as stock options.
Reclassifications: Certain amounts have been reclassified in the 2001
and 2000 financial statements to conform with the 2002 presentation.
New Accounting Standards: Effective January 1, 2002, the Company
adopted Statement of Financial Accounting Standards No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which addresses the financial
accounting and reporting for the impairment of long-lived assets and supersedes
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of," and the accounting and reporting
provisions of APB Opinion No. 30, "Reporting the Results of Operations" for a
disposal of a segment of a business. The adoption of SFAS No. 144 on January 1,
2002 did not have a material impact on the Company's consolidated financial
position or results of operations.
In December 2002, the FASB issued statement No. 148 "Accounting for
Stock-Based Compensation Transactions and Disclosure". SFAS No. 148 provides
additional disclosure requirements for stock based compensation accounted for
under APB No. 25.
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable
Interest Entities," which addresses the financial reporting by companies
involved with variable interest entities. A variable interest entity is a
corporation, partnership, trust, or any other legal structure used for business
purposes that either (a) does not have equity investors with voting rights or
(b) has equity investors that do not provide sufficient financial resources for
the entity to support its activities. FIN No. 46 requires a variable interest
entity to be consolidated by a company if that company is subject to a majority
of the risk of loss from the variable interest entity's activities or entitled
to receive a majority of the entity's residual returns or both. Previously, a
company generally included an entity in its consolidated financial statements
only if it controlled the entity through voting interests. The consolidation
requirements of FIN No. 46 apply immediately to variable interest entities
created after January 31, 2003. Existing variable interest entities must be
consolidated in the first fiscal year or interim period beginning after June 15,
2003. The Company has not determined what the effect of implementing FIN. No. 46
will be on earnings and financial position of the Company.
NOTE C - BUSINESS COMBINATION
On March 30, 2001, the Company purchased certain assets of Premier
Farnell's Cleveland based North American Industrial Products (IPD) and Kent
Automotive (Kent) Divisions for approximately $28.4 million plus approximately
$7.2 million for related inventories. This all-cash transaction was accounted
for as a purchase; accordingly, the accounts and transactions of the acquired
business have been included in the consolidated financial statements since the
date of acquisition. Under the agreement, the Company acquired the field sales,
inside sales and customer service professionals, the customer accounts, certain
administrative executives, and various intellectual properties, including
trademarks and trade names of the divisions in certain territories. The
identifiable intangibles acquired in the acquisitions were recorded at an
independent appraised value of approximately $1.4 million. These intangibles are
being amortized over a weighted average estimated life of 15.1 years. The
remaining excess of purchase price over net assets acquired of approximately
$27.1 million represents goodwill. The assets acquired were recorded at fair
values as determined by the Company's management. As the Company only acquired
inventory and sales professionals of the IPD and Kent businesses, the Company is
unable to provide any meaningful pro forma information of prior period results.
Net sales attributed to the acquired division represented approximately
$41,252,000 for 2001.
NOTE D - SPECIAL CHARGES
In the fourth quarter of 2002, the Company recorded a special charge of
$568,000 for severance for several members of management. Approximately $196,000
was paid in 2002 and the remaining benefits will be paid through 2004.
In the fourth quarter of 2001, the Company wrote-off capitalized
software and implementation costs of a discontinued enterprise information
system project. This write-off represents a non-cash charge of $8,527,000
($5,138,000 net of tax benefits).
The table below shows an analysis of the company's reserves for special
charges:
Severance
Description of Item and Related Asset
(In thousands) Expenses Writedown Total
- ------------------------------------------------------------------------------
Balance December 31, 1999 $4,032 $ - $4,032
Charged to earnings 2000 - - -
Cash paid in 2000 (1,659) - (1,659)
- ------------------------------------------------------------------------------
Balance December 31, 2000 $2,373 $ - $2,373
Charged to earnings 2001 - 8,527 8,527
Cash paid in 2001 (884) - (884)
Non-cash utilization - (8,527) (8,527)
Adjustment to reserves (31) - (31)
- ------------------------------------------------------------------------------
Balance December 31, 2001 $1,458 $ - $1,458
Charged to earnings 2002 568 - 568
Cash paid in 2002 (942) - (942)
Adjustment to reserves (208) - (208)
- ------------------------------------------------------------------------------
Balance December 31, 2002 $ 876 $ - $ 876
==============================================================================
NOTE E - MARKETABLE SECURITIES
The following is a summary of the Company's investments at December 31
which are classified as available-for-sale. The contractual maturity of all
marketable securities at December 31, 2002 is less than one year.
Gross Gross Estimated
Unrealized Unrealized Fair
Cost Gain Losses Value
(In Thousands)
2002
- ------------------------------------------------------------------------------------------------------------------
Foreign government securities $ 696 $ - $ - $ 696
- ------------------------------------------------------------------------------------------------------------------
2001
- ------------------------------------------------------------------------------------------------------------------
Foreign government securities $1,737 $ - $ - $1,737
- ------------------------------------------------------------------------------------------------------------------
The gross realized gains on sales of marketable securities totaled:
$300,000, $13,000 and $1,000 in 2002, 2001 and 2000, respectively, and the gross
realized losses totaled $0, $0 and $2,000, respectively. The net adjustment to
unrealized holding gains included as a separate component of stockholders'
equity, net of taxes, totaled $28,000 in 2000.
NOTE F - PROPERTY, PLANT AND EQUIPMENT
The cost of property, plant and equipment consists of:
2002 2001
- -------------------------------------------------------------------------------
Land $ 6,607,670 $ 6,597,182
Buildings and improvements 42,090,375 40,905,512
Machinery and equipment 32,701,666 31,214,970
Furniture and fixtures 5,965,585 5,557,969
Vehicles 406,201 252,251
Construction in Progress 1,246,807 462,851
- -------------------------------------------------------------------------------
$89,018,304 $84,990,735
===============================================================================
NOTE G - INVESTMENT IN REAL ESTATE
The Company is a limited partner in a real estate limited partnership.
An officer and member of the Board of Directors of the Company has a 1.5%
interest as the general partner in this partnership. This interest is
subordinated to the Company's interests in distributable cash. The partnership
owns an office building which carries a mortgage of approximately $4.5 million
at December 31, 2002.
In the fourth quarter of 2000, the Company sold its interest in a real
estate partnership for $7,400,000 to the general partners, of which one is an
officer and member of the Board of Directors, resulting in an after-tax gain to
the Company of $2,136,000. A special committee of outside directors of the Board
of Directors approved the sales price after receiving independent appraisals of
the property sold.
NOTE H- GOODWILL AND OTHER INTANGIBLES
As discussed in Note B - Summary of Major Accounting Policies, the
Company adopted FASB statement No. 142 "Goodwill and Other Intangibles" as of
January 1, 2002. The Company performed the initial test of impairment as of
January 1, 2002 as well as the first annual impairment test during the fourth
quarter of 2002. Both tests determined the Company's goodwill was not impaired.
The Company's pro forma information for intangible assets that are no
longer being amortized effective January 1, 2002 consisted of the following:
2002 2001 2000
- ----------------------------------------------------------------------------------------------------
Net income - as reported $12,446,915 $8,787,193 $28,135,673
Goodwill amortization - 730,911 118,965
- ----------------------------------------------------------------------------------------------------
Net income - pro forma 12,446,915 $9,518,104 28,254,638
Diluted earnings per share - as reported 1.30 .91 2.85
Diluted earnings per share - pro forma 1.30 .98 2.86
Intangible assets subject to amortization were as follows:
December 31, 2002
Gross Accumulated Net Carrying
(in thousands) Balance Amortization Amount
- --------------------------------------------------------------------------------
Trademarks and tradenames $1,747 $668 $1,079
Customer lists 953 33 920
- --------------------------------------------------------------------------------
$2,700 $701 $1,999
================================================================================
December 31, 2001
Gross Accumulated Net Carrying
(in thousands) Balance Amortization Amount
- --------------------------------------------------------------------------------
Trademarks and tradenames $1,747 $324 $1,423
Customer lists 650 - 650
- --------------------------------------------------------------------------------
$2,397 $324 $2,073
================================================================================
Trademarks and tradenames are being amortized over a weighted average
15.14 years. Customer lists are being amortized over 15.23 years. Amortization
expense, all of which was included in the MRO distribution segment, for the
intangible assets was $377,000 and $137,000 in 2002 and 2001, respectively.
Amortization expense for each of the next five years is estimated as follows:
(In thousands) 2003 2004 2005 2006 2007
- --------------------------------------------------------------------------------
Amortization expense $322,000 $176,000 $143,000 $143,000 $98,000
- --------------------------------------------------------------------------------
NOTE I - ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities consist of the following:
2002 2001
- --------------------------------------------------------------------------------
Salaries, commissions and other compensation $ 5,874,674 $ 5,547,617
Accrued special charges 875,584 1.458,054
Accrued and withheld taxes, other than income
taxes 2,756,961 2,607,879
Accrued profit sharing contributions 3,269,578 2,843,621
Accrued self-insured health benefits 1,500,000 1,300,000
Cash dividends payable 1,519,042 1,540,689
Other 7,841,838 7,541,945
- --------------------------------------------------------------------------------
$23,637,677 $22,839,805
================================================================================
NOTE J - LINE OF CREDIT
On February 21, 2001, the Company entered into a $50 million unsecured
multi-currency line of credit. The Company had nothing outstanding under the
line at December 31, 2002 and $14 million outstanding under the line at December
31, 2001 at an interest rate of 3.06 percent. Amounts outstanding under the line
carried interest at 1.5% below the prime rate or .75% over the LIBOR rate as
determined by the Company. The line matures on February 21, 2006. Since the
line's interest rate floats on a variable basis with either prime or LIBOR, the
carrying value of the debt approximates fair value. The line requires the
Company to meet certain covenants, all of which were met on December 31, 2002.
The Company paid interest of $220,000 and $605,000, respectively, in 2002 and
2001.
NOTE K - STOCK PLANS
In 2002, 2001 and 2000, the Company granted Stock Performance Rights
(SPRs) pursuant to an incentive plan adopted in 2000. These SPRs have an
exercise price ranging from $24.64 to $31.00 per share. These SPRs vest at 20%
per year and entitle the recipient to receive a cash payment equal to the
difference between the SPR price and the market value of the Company's common
stock when the SPRs are surrendered. Compensation expense for the SPRs in 2002,
2001 and 2000 was $244,000, $0 and $0, respectively.
Additional information with respect to SPRs is summarized as follows:
Average SPR
Exercise Price # of SPR's
- --------------------------------------------------------------------------------
Outstanding January 1, 2000 $ -- --
Granted 26.50 71,250*
- --------------------------------------------------------------------------------
Outstanding December 31, 2000 26.50 71,250
Granted 27.08 149,000**
- --------------------------------------------------------------------------------
Outstanding December 31, 2001 26.90 220,250
Granted 30.33 15,000
- --------------------------------------------------------------------------------
Outstanding December 31, 2002 $ 27.12 235,250
================================================================================
*Includes 29,300 SPRs vested at December 31, 2002
**Includes 29,000 SPRs vested at December 31, 2002
The Incentive Stock Plan As Amended (Plan), which provides for the
issuance of shares of Common Stock to non-employee directors, officers and key
employees pursuant to stock options, SPRs, stock purchase agreements and stock
awards. 575,673 shares of Common Stock were available for issuance under the
Plan as of December 31, 2002.
The Plan permits the grant of incentive stock options, subject to
certain limitations, with substantially the same terms as non-qualified stock
options. Non-employee directors are not eligible to receive incentive stock
options. Stock options are not exercisable within six months from date of grant
and may not be granted at prices less than the fair market value of the shares
at the dates of grant. Benefits may be granted under the Plan through December
16, 2006.
Additional information with respect to the Plan is summarized as
follows:
Average Price Option Shares
- --------------------------------------------------------------------------------
Outstanding January 1, 2000 $24.18 270,190
Granted 23.56 11,000
Exercised 22.50 (3,750)
Canceled or expired 27.50 (97,050)
- --------------------------------------------------------------------------------
Outstanding December 31, 2000 22.86 180,390
Granted -- --
Exercised 22.50 (7,400)
Canceled or expired -- --
- --------------------------------------------------------------------------------
Outstanding December 31, 2001 22.87 172,990
Granted -- --
Exercised 22.73 (50,954)
Canceled or expired -- --
- --------------------------------------------------------------------------------
Outstanding December 31, 2002 $22.93 122,036
================================================================================
Exercisable options at
December 31, 2002 $22.90 114,286
December 31, 2001 $22.79 157,990
December 31, 2000 $22.71 157,890
As of December 31, 2002, the Company had the following outstanding options:
Exercise Price $22.44 - $23.56 $26.75 $27.00
- --------------------------------------------------------------------------------
Options Outstanding 112,536 9,000 500
Weighted Average Exercise Price $22.60 $26.75 $27.00
Weighted Average Remaining Life 3.8 5.3 4.7
Options Exercisable 104,786 9,000 500
Weighted Average Exercise price $22.55 $26.75 $27.00
Disclosure of pro forma information regarding net income and net income
per share is required by FASB Statement No. 123, "Accounting for Stock-Based
Compensation," and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement. The fair
value of these options was estimated at the date of grant using the
Black-Scholes options pricing model.
No options were granted in 2002 or 2001. The Company's weighted average
fair value of options granted in 2000 and assumptions used, were as follows:
2000
- --------------------------------------------------------------------
Risk-free interest rate 5.22%
Dividend yield 2.00%
Stock price volatility factor 0.19
Weighted average expected life (years) 8
Weighted average fair value of options granted $6.25
NOTE L - PROFIT SHARING AND SECURITY BONUS PLANS
The Company and certain subsidiaries have a profit sharing plan for
office and warehouse personnel. The amounts of the companies' annual
contributions are determined by the respective boards of directors subject to
limitations based upon current operating profits (as defined) or participants'
compensation (as defined).
The plan also has a 401(k) defined contribution saving feature. This
feature, available to all participants, was provided to give employees a pre-tax
investment vehicle to save for retirement. The Company does not match the
contributions made by plan participants.
The Company and its subsidiaries also have in effect security bonus
plans for the benefit of their regional managers and independent sales
representatives, under the terms of which participants are credited with a
percentage of their yearly earnings (as defined). Of the aggregate amounts
credited to participants' accounts, 25% vests after five years and an additional
5% vests each year thereafter. For financial reporting purposes, amounts are
charged to operations over the vesting period.
Provisions for profit sharing and security bonus plans aggregated
$5,689,000, $5,363,000 and $5,222,000 for the years ended December 31, 2002,
2001 and 2000, respectively.
NOTE M - INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. In addition,
deferred income taxes include net operating loss carryforwards of a foreign
subsidiary which do not expire. The valuation allowance has been provided since
there is no assurance that the benefit of the net operating loss carryforwards
will be realized. Significant components of the Company's deferred tax assets
and liabilities as of December 31 are as follows:
Deferred Tax Assets: 2002 2001
- --------------------------------------------------------------------------------
Compensation and benefits $13,128,000 $11,938,000
Inventory 3,258,000 2,363,000
Net operating loss carryforwards of subsidiary 6,587,000 5,106,000
Accounts receivable 591,000 557,000
Other 1,095,000 1,183,000
- --------------------------------------------------------------------------------
Total Deferred Tax Assets 24,659,000 21,147,000
Valuation allowance for deferred tax assets (6,587,000) (5,106,000)
- --------------------------------------------------------------------------------
Net Deferred Tax Assets 18,072,000 16,041,000
- --------------------------------------------------------------------------------
Deferred Tax Liabilities:
- --------------------------------------------------------------------------------
Property, plant & equipment 676,000 675,000
Investment in real estate 1,560,000 1,767,000
Other 386,000 449,000
- --------------------------------------------------------------------------------
Total Deferred Tax Liabilities 2,622,000 2,891,000
- --------------------------------------------------------------------------------
Total Net Deferred Tax Assets $15,450,000 $13,150,000
================================================================================
Net deferred tax assets include the tax impact of items in
comprehensive income of $1,095,000 and $1,183,000 at December 31, 2002 and 2001,
respectively.
Income (loss) before income taxes for the years ended December 31, consisted of
the following:
2002 2001 2000
- --------------------------------------------------------------------------------
United States $27,905,741 $18,522,707 $49,259,320
Foreign (4,716,826) (1,380,514) (1,693,647)
- --------------------------------------------------------------------------------
$23,188,915 $17,142,193 $47,565,673
================================================================================
The provisions for income taxes for the years ended December 31, consisted of
the following:
2002 2001 2000
- --------------------------------------------------------------------------------
Current:
Federal $10,972,000 $ 8,348,000 $16,945,000
State 1,947,000 1,778,000 3,067,000
- --------------------------------------------------------------------------------
12,919,000 10,126,000 20,012,000
Deferred benefit (2,177,000 (1,771,000) (582,000)
- --------------------------------------------------------------------------------
$10,742,000 $ 8,355,000 $19,430,000
================================================================================
The reconciliation between the effective income tax rate and the statutory
federal rate is as follows:
2002 2001 2000
- --------------------------------------------------------------------------------
Statutory federal rate 35.0% 35.0% 35.0%
Increase (decrease) resulting from:
State income taxes, net of
federal income tax benefit 5.5 6.7 4.2
Foreign losses 9.3 5.1 1.5
Other items, net (3.5) 1.9 .1
- --------------------------------------------------------------------------------
Provision for income taxes 46.3% 48.7% 40.8%
================================================================================
Income taxes paid for the years ended December 31, 2002, 2001, and 2000
amounted to $11,370,000, $13,399,000 and $21,212,000, respectively.
NOTE N - COMMITMENTS
The Company's minimum rental commitments, principally for equipment,
under noncancelable leases in effect at December 31, 2002, amounted to
approximately $15,632,000. Such rentals are payable as follows: 2003 -
$3,084,000; 2004 - $2,660,000; 2005 - $2,172,000; 2006 - $1,890,000; 2007 -
$1,675,000; and 2008 and thereafter - $4,151,000.
Total rental expense for the years ended December 31, 2002, 2001 and
2000 amounted to $3,669,000, $3,090,000 and $2,783,000, respectively.
NOTE O - INCOME PER SHARE
The computation of basic and diluted earnings per share consisted of
the following:
Year ended December 31,
(In thousands, except per share data) 2002 2001 2000
- --------------------------------------------------------------------------------
Numerator:
Net income $12,447 $8,787 $28,136
================================================================================
Denominator:
Denominator for basic income per
share - weighted average shares 9,570 9,685 9,860
Effect of dilutive securities:
Stock option plans 26 23 14
- --------------------------------------------------------------------------------
Denominator for diluted
income per share -
adjusted weighted average shares 9,596 9,708 9,874
================================================================================
Basic income per share $1.30 $0.91 $2.85
================================================================================
Diluted income per share $1.30 $0.91 $2.85
================================================================================
NOTE P - SEGMENT REPORTING
The Company has four reportable segments: Maintenance, Repair and
Replacement (MRO) distribution, Original Equipment Manufacturer (OEM)
distribution and manufacturing, International Maintenance, Repair and
Replacement (INTLMRO) distribution in Canada and International Original
Equipment Manufacturer (INTLOEM) distribution in Mexico and the United Kingdom.
Prior to 2002, the Company combined the results of INTLMRO and INTLOEM in one
reportable segment. The Company has reclassified 2001 and 2000 presentation to
conform to the 2002 presentation. The operations of the Company's MRO and
INTLMRO distribution segments distribute a wide range of MRO parts to repair and
maintenance organizations by the Company's force of independent sales agents.
The operations of the Company's OEM segment manufacture and distribute component
parts to large OEM manufacturers through a network of independent sales agents
as well as internal sales employees.
The INTLMRO distribution segment distributes component parts to large
OEM manufacturers through a network of independent sales agents as well as
internal sales employees.
The Company's reportable segments are distinguished by the nature of
products distributed and sold, types of customers, and geographical location.
The Company evaluates performance and allocates resources to reportable
segments primarily based on operating income. The accounting polices of the
reportable segments are the same as those described in the summary of
significant policies except that the Company records its federal and state
deferred tax assets and liabilities at corporate. Intersegment sales are not
significant.
Financial information for the Company's reportable segments consisted of the
following:
Year Ended December 31,
2002 2001 2000
- ------------------------------------------------------------------------------------------------
Net sales
MRO distribution $306,862,751 $306,917,045 $283,969,540
OEM distribution 55,546,938 52,350,227 52,001,028
International MRO distribution 16,504,952 13,998,416 7,980,367
International OEM distribution 8,541,258 6,141,387 5,016,551
- ------------------------------------------------------------------------------------------------
Consolidated total $387,455,899 $379,407,075 $348,967,486
- ------------------------------------------------------------------------------------------------
Operating Income (loss)
MRO distribution $23,828,009 $15,167,119 $39,336,157
OEM distribution 2,490,409 2,165,731 4,052,210
International MRO distribution 1,050,523 870,255 341,257
International OEM distribution (5,558,364) (2,001,300) (1,906,069)
- ------------------------------------------------------------------------------------------------
Consolidated total $21,810,577 $16,201,805 $41,823,555
- ------------------------------------------------------------------------------------------------
Capital expenditures
MRO distribution $3,941,080 $4,496,163 $2,761,755
OEM distribution 868,480 683,937 570,225
International MRO distribution 944,109 39,976 46,812
International OEM distribution 211,259 8,853 13,666
- ------------------------------------------------------------------------------------------------
Consolidated total $5,964,928 $5,228,929 $3,392,458
- ------------------------------------------------------------------------------------------------
Depreciation and amortization
MRO distribution $5,649,831 $6,553,422 $5,176,344
OEM distribution 798,582 1,060,392 1,130,394
International MRO distribution 120,992 278,437 100,790
International OEM distribution 257,305 253,762 256,135
- ------------------------------------------------------------------------------------------------
Consolidated total $6,826,710 $8,146,013 $6,663,663
- ------------------------------------------------------------------------------------------------
Total assets
MRO distribution $155,439,382 $166,440,355 $160,169,065
OEM distribution 32,573,417 34,183,609 32,181,862
International MRO distribution 13,988,741 15,033,073 13,639,261
International OEM distribution 8,379,109 5,398,970 5,662,278
- ------------------------------------------------------------------------------------------------
Segment total 210,380,649 221,056,007 211,652,466
- ------------------------------------------------------------------------------------------------
Corporate 15,450,000 13,150,000 11,069,000
- ------------------------------------------------------------------------------------------------
Consolidated total $225,830,649 $234,206,007 $222,721,466
- ------------------------------------------------------------------------------------------------
Goodwill
MRO distribution $22,103,856 $22,103,856 $ -
OEM distribution 2,251,247 2,251,247 2,251,247
International MRO distribution 4,294,113 4,294,113 -
International OEM distribution - - -
- ------------------------------------------------------------------------------------------------
Consolidated total $28,649,216 $28,649,216 $2,251,247
================================================================================================
The reconciliation of segment profit to consolidated income before income taxes
consisted of the following:
Year Ended December 31,
2002 2001 2000
- ------------------------------------------------------------------------------------------------
Total operating income for
reportable segments $21,810,577 $16,201,805 $41,823,555
Interest and dividend income 52,886 654,257 1,072,730
Interest expense (153,809) (705,756) (7,959)
Gain from sale of partnership - - 3,502,336
interest
Other - net 1,479,261 991,887 1,175,011
- ------------------------------------------------------------------------------------------------
Income before income taxes $23,188,915 $17,142,193 $47,565,673
================================================================================================
Financial information related to the Company's operations by geographic area
consisted of the following:
Year Ended December 31,
2002 2001 2000
- ------------------------------------------------------------------------------------------------
Net sales
United States $362,409,689 $359,267,272 $335,970,568
Canada 16,504,952 13,998,416 7,980,367
Other foreign countries 8,541,258 6,141,387 5,016,551
- ------------------------------------------------------------------------------------------------
Consolidated total $387,455,899 $379,407,075 $348,967,486
================================================================================================
Year Ended December 31,
2002 2001 2000
- ------------------------------------------------------------------------------------------------
Long-lived assets
United States $60,677,605 $61,012,500 $39,155,963
Canada 7,129,149 6,300,247 2,154,539
Other foreign countries 361,300 395,939 525,444
- ------------------------------------------------------------------------------------------------
Consolidated total $68,168,054 $67,708,686 $41,835,946
================================================================================================
Net sales are attributed to countries based on the location of
customers. Long-lived assets consist of total property, plant and equipment and
intangible assets such as goodwill.
NOTE Q - SUMMARY OF UNAUDITED QUARTERLY RESULTS OF OPERATIONS
Unaudited quarterly results of operations for the years ended December 31, 2002
and 2001 are summarized as follows:
Quarter ended
2002 Mar. 31 Jun. 30 Sept. 30 Dec.31(1),(2)
- ------------------------------------------------------------------------------------------------------
(In thousands, except per share data)
Net sales(4) $95,746 $99,890 $98,474 $93,346
Cost of goods sold(4) 33,704 35,343 35,211 32,871
Income before income taxes(4) 6,410 8,056 6,628 2,095
Provision for income taxes 2,578 3,360 2,869 1,935
Net income 3,832 4,696 3,759 160
Net income per share of common stock
Basic and Diluted .40 .49 .39 .02
Diluted weighted average shares
outstanding 9,657 9,643 9,576 9,526
Quarter ended
2001 Mar. 31 Jun. 30 Sept. 30 Dec. 31(1),(3)
- ------------------------------------------------------------------------------------------------------
(In thousands, except per share data)
Net sales(4) $83,650 $98,980 $100,000 $96,777
Cost of goods sold(4) 29,937 33,888 35,256 31,984
Income (loss) before income taxes(4),(5) 5,825 6,927 5,838 (1,448)
Provision for income taxes 2,587 2,939 2,525 304
Net income (loss) 3,238 3,988 3,313 (1,752)
Net income (loss) per share of common
stock
Basic and Diluted .33 .41 .34 (.18)
Diluted weighted average shares
outstanding 9,730 9,740 9,715 9,652
1 Inventories and cost of goods sold during interim periods are determined
through the use of estimated gross profit rates. The difference between
actual and estimated gross profit rates used for interim periods is
adjusted in the fourth quarter. This adjustment increased net income by
approximately $1,955,000 and $2,055,000 in 2002 and 2001, respectively.
2 The fourth quarter included $421,000 of restructuring charges for
compensation arrangements related to management personnel reductions.
3 The fourth quarter included non-recurring charges for the write-off of
capitalized software and implementation costs of an enterprise information
system project which the Company decided to discontinue as well as a
non-recurring promotional program related to the acquisition of Premier
operations. These charges reduced net income by $5,138,000 and $2,021,000,
respectively.
4 The Company acquired the business of Premier as of March 30, 2001. The
results of the acquisition are included in the quarterly results since the
date of the acquisition.
5 The Company adopted SFAS No. 142 as of January 1, 2002. Therefore, the
Company discontinued amortization of goodwill for all quarters of 2002.
Pre-tax income included goodwill amortization of $45,000, $388,000,
$388,000, and $388,000 for the respective quarters in 2001.
SCHEDULE II
LAWSON PRODUCTS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT CHARGED TO COSTS DEDUCTIONS - BALANCE AT END
DESCRIPTION BEGINNING OF PERIOD AND EXPENSES DESCRIBE (A) OF PERIOD
----------- ------------------- ------------ ------------ ---------
Allowance deducted from assets
to which it applies:
Allowance for doubtful
accounts:
Year ended December 31, 2002 $1,803,179 $1,585,048 $1,558,115 $1,830,112
Year ended December 31, 2001 1,658,585 1,901,379 1,756,785 1,803,179
Year ended December 31, 2000 1,601,649 1,419,120 1,362,184 1,658,585
Note A - Uncollected receivables written off, net of recoveries.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
a. Directors
---------
The information required by this Item is set forth in the Company's
Proxy Statement for the Annual Meeting of Stockholders to be held on May 13,
2003, under the caption "Election of Directors," which information is
incorporated herein by reference.
b. Executive Officers
------------------
The information required by this Item is set forth in Item 1 - Business
under "Executive Officers of the Registrant."
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Item is set forth in the Company's
Proxy Statement for the Annual Meeting of Stockholders to be held on May 13,
2003, under the caption "Remuneration of Executive Officers," which information
is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this Item is set forth in the Company's
Proxy Statement for the Annual Meeting of Stockholders to be held on May 13,
2003 under the captions "Securities Beneficially Owned by Principal Stockholders
and Management," and "Equity Compensation Plan", which information is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item is set forth in the Company's
Proxy Statement for the Annual Meeting of stockholders to be held on May 13,
2003 under the caption "Election of Directors," which information is
incorporated herein by reference.
ITEM 14. CONTROLS AND PROCEDURES
The Company's Chief Executive Officer and Chief Financial Officer have
concluded, based on their evaluation within 90 days of the filing date of this
report, that the Company's disclosure controls and procedures (as defined in
Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934) are
effective for gathering, analyzing and disclosing the information the Company is
required to disclose in its reports filed under the Securities Exchange Act of
1934. There have been no significant changes in the Company's internal controls
or in other factors that could significantly affect these controls subsequent to
the date of the previously mentioned evaluation.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) (1) Financial Statements
--------------------
The following information is presented in this report:
Consolidated Balance Sheets as of December 31, 2002 and 2001.
Consolidated Statements of Income for the Years ended December
31, 2002, 2001 and 2000.
Consolidated Statements of Changes in Stockholders' Equity for
the Years ended December 31, 2002, 2001 and 2000.
Consolidated Statements of Cash Flows for the Years ended
December 31, 2002, 2001 and 2000.
Notes to Consolidated Financial Statements.
(2) Financial Statement Schedule
----------------------------
The following consolidated financial statement schedule of Lawson
Products, Inc. and subsidiaries is included in Item 15(d):
Schedule II - Valuation and Qualifying Accounts is submitted with this report.
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not submitted because
they are not applicable or are not required under Regulation S-X or because the
required information is included in the financial statements or notes thereto.
(3) Exhibits.
--------
3(a) Certificate of Incorporation of the Company, as amended,
incorporated herein by reference to Exhibit 3(a) to the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1988.
3(b) Amended and Restated By-laws of the Company, incorporated
herein by reference to Exhibit 3(b) to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31,
2001.
*10(c)(1) Lawson Products, Inc. Incentive Stock Plan, incorporated
herein by reference to Appendix A to the Company's Proxy
Statement for the Annual Meeting of Stockholders held on May
11, 1999.
*10(c)(2) Salary Continuation Agreement between the Company and Mr.
Sidney L. Port dated January 7, 1980 incorporated herein by
reference from Exhibit 10(c)(2) to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31,
1991.
*10(c)(3) Employment Agreement between the Company and Mr. Jerome
Shaffer, incorporated herein by reference from Exhibit
10(c)(9) to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1985.
*10(c)(3.1) First Amendment to Employment Agreement dated as of August 1,
1996, incorporated herein by reference from Exhibit
10(c)(6.1) to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1996.
- --------
*Indicates management employment contracts or compensatory plans or
arrangements.
*10(c)(4) Employment Agreement between the Company and Jeffrey B.
Belford dated March 10, 1983, incorporated herein by
reference from Exhibit 10(c)(5) to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31,
1999.
*10(c)(5) Amended and Restated Executive Deferral Plan, incorporated
herein by reference from Exhibit 10(c)(7) to the Company's
Annual Report on Form 10-K for the fiscal year ended December
31, 1995.
*10(c)(6) Employment Agreement dated July 21, 1994 between the Company
and Roger F. Cannon, incorporated herein by reference to
Exhibit 10(c)(8) to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1998.
*10(c)(7) Agreement between the Company and Bernard Kalish dated July
31, 1999, incorporated herein by reference from Exhibit
10(c)(8) to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1999.
10(c)(8) Lawson Products, Inc. Stock Performance Plan, incorporated
herein by reference from Exhibit 10(c)(8) to the Company's
Annual Report on Form 10-K for the fiscal year ended December
31, 2000.
10(c)(9) Lawson Products, Inc. 2002 Stock Equivalents Plan for Non
Employee Directors.
21 Subsidiaries of the Company.
23 Consent of Ernst & Young LLP.
99.1 Certification pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
-------------------
No reports on Form 8-K were filed during the fourth quarter
of the fiscal year covered by this Report.
(c) Exhibits
--------
See item 15(a)(3) above for a list of exhibits to this
report.
(d) Schedules
---------
See item 15(a)(2) above for a list of schedules filed with
this report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: March 26, 2003 By /s/ Robert J. Washlow
------------------------------
Robert J. Washlow, Chairman of
the Board and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below this 26th day of March, 2003, by the following
persons on behalf of the registrant and in the capacities indicated.
SIGNATURE TITLE
/s/ Robert J. Washlow Chairman of the Board, Chief Executive
- ---------------------------------
Robert J. Washlow Officer and Director
(principal executive officer)
/s/ Joseph L. Pawlick Chief Financial Officer
- ---------------------------------
Joseph L. Pawlick (principal financial officer)
/s/ Victor G. Galvez Controller
- ---------------------------------
Victor G. Galvez (principal accounting officer)
/s/ Jerome Shaffer Vice President, Treasurer and Director
- ---------------------------------
Jerome Shaffer
/s/ James T. Brophy Director
- ---------------------------------
James T. Brophy
/s/ Bernard Kalish Director
- ---------------------------------
Bernard Kalish
/s/ Robert M. Melzer Director
- ---------------------------------
Robert M. Melzer
/s/ Ronald B. Port Director
- ---------------------------------
Ronald B. Port
/s/ Sidney L. Port Director
- ---------------------------------
Sidney L. Port
/s/ Robert G. Rettig Director
- ---------------------------------
Robert G. Rettig
/s/ Mitchell H. Saranow Director
- ---------------------------------
Mitchell H. Saranow
CERTIFICATIONS
--------------
I, Robert J. Washlow, certify that:
1. I have reviewed this annual report on Form 10-K of Lawson Products, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 26, 2003
/s/ Robert J. Washlow
- ---------------------
Robert J. Washlow
Chairman of the Board and Chief Executive Officer
CERTIFICATIONS
--------------
I, Joseph L. Pawlick, certify that:
1. I have reviewed this annual report on Form 10-K of Lawson Products, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 26, 2003
/s/ Joseph L. Pawlick
---------------------
Joseph L. Pawlick
Chief Financial Officer
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------ ----------------------
3(a) Certificate of Incorporation of the Company, as amended,
incorporated herein by reference to Exhibit 3(a) to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1988.
3(b) Amended and Restated By-laws of the Company, incorporated herein
by reference to Exhibit 3(b) to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 2001.
10(c)(1) Lawson Products, Inc. Incentive Stock Plan, incorporated herein
by reference to Appendix A to the Company's Proxy Statement for
the Annual Meeting of Stockholders held on May 11, 1999.
10(c)(2) Salary Continuation Agreement between the Company and Mr. Sidney
L. Port, dated January 7, 1980, incorporated herein by reference
from Exhibit 10(c)(2) to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1991.
10(c)(3) Employment Agreement between the Company and Mr. Jerome Shaffer,
incorporated herein by reference from Exhibit 10(c)(9) to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1985.
10(c)(3.1) First Amendment to Employment Agreement dated as of August 1,
1996, incorporated herein by reference from Exhibit 10(c)(6.1)
to the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1996.
10(c)(4) Employment Agreement between the Company and Jeffrey B. Belford
dated March 10, 1983, incorporated herein by reference to
Exhibit 10(c)(5) to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1999.
10(c)(5) Amended and Restated Executive Deferral Plan, incorporated
herein by reference from Exhibit 10(c)(7) to the Company's
Annual Report on Form 10-K for the fiscal year ended December
31, 1995.
10(c)(6) Employment Agreement dated July 21, 1994 between the Company and
Roger F. Cannon, incorporated herein by reference to Exhibit
10(c)(8) to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1998.
10(c)(7) Agreement between the Company and Bernard Kalish dated July 31,
1999, incorporated herein by reference from Exhibit 10(c)(8) to
the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1999.
10(c)(8) Lawson Products, Inc. Stock Performance Plan, incorporated
herein by reference from Exhibit 10(c)(8) to the Company's
Annual Report on Form 10-K for the fiscal year ended December
31, 2000.
10(c)(9) Lawson Products, Inc. 2002 Stock Equivalents Plan for Non
Employee Directors.
21 Subsidiaries of the Company.
23 Consent of Ernst & Young LLP.
99.1 Certification pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002