Lawson Products, Inc. and Subsidiaries
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Five Year
Selected
Financial Data
Letter to
Shareholders
Corporate
Information
Board of Directors
& Corporate
Management
Lawson
Family of
Businesses
8
Company
Profile
Five Year Selected Financial Data
The following selected financial data should be read in conjunction with the Consolidated Financial Statements of the Company and Notes
thereto included elsewhere. 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, 2005, are derived from the audited Financial Statements of the Company.
(Dollars in thousands, except per share data)
2005
Percent
Change
2004
2003
2002
2001
Net Sales1
$450,185
9.9%
$409,565
$379,561
$383,780
$376,482
Income from Continuing Operations
Before Income Taxes2
36,555
10.6%
33,047
27,796
27,421
18,251
Income from Continuing Operations
21,460
0.1%
21,444
19,480
16,679
9,896
Income (Loss) from Discontinued Operations3
5,278
278.8%
(19)
(3,284)
(4,232)
(1,109)
Net Income3 4 5
26,738
24.8%
21,425
16,196
12,447
8,787
Basic Income (Loss) Per Share of Common Stock:
Continuing Operations
Discontinued Operations
Diluted Income (Loss) Per Share of Common Stock:
Continuing Operations
Discontinued Operations
Total Assets
Noncurrent Liabilities
Stockholders’ Equity
$2.36
0.58
$2.94
$2.36
0.58
$2.94
3.5%
n/m
28.9%
4.0%
n/m
29.5%
$2.28
(0.00)
$2.28
$2.27
(0.00)
$2.27
$2.05
(0.35)
$1.71
$2.05
(0.35)
$1.70
$1.74
(0.44)
$1.30
$1.74
(0.44)
$1.30
$1.02
(0.11)
$0.91
$1.02
(0.11)
$0.91
$279,224
7.2%
$260,550
$246,943
$225,831
$234,206
41,256
10.7%
37,271
36,714
31,765
40,520
185,425
2.8%
180,332
173,350
162,343
159,898
Return on Average Equity (percent)
Return on Assets (percent)
14.9
9.6
n/m
n/m
12.1
8.2
9.6
6.6
7.7
5.5
5.4
3.8
Stockholders’ Equity Per Share6
$20.42
6.6%
$19.16
$18.26
$16.96
$16.51
Cash Dividends Declared Per Share6
0.80
11.1%
Basic Weighted Average Shares Outstanding
9,082
(3.5)%
Diluted Weighted Average Shares Outstanding
9,099
(3.5)%
0.72
9,410
9,430
0.66
9,492
9,511
0.64
9,570
9,596
0.64
9,685
9,708
1 Net sales for 2005 include the acquisition of Rutland Tool & Supply Co. in December 2005 and exclude amounts from the Company’s discontinued operations as discussed in
Note C to the 2005 financial statements.
2 Amounts for 2001 included charges of $11,881 related to the write-off of capitalized software and implementation costs related to an discontinued enterprise information
system project as well as a promotional program related to the acquisition of Premier Operations.
3 In 2005, the Company recorded a $7,495 after tax loss related to the operations and closing of its remaining UK business. Also in 2005, the Company realized an after tax gain
of $12,189 related to the sale of the Company’s investment in real estate. The loss from discontinued operations for 2003 primarily relates to a $2,789 pretax loss related to
the sale of Lawson Products Limited, the Company’s former UK MRO business. The 2002 and 2001 losses from discontinued operations primarily relate to inventory write-offs
in the Company’s UK business.
4 In 2003, income tax expense includes a $2,157 reduction to reflect the partial utilization of a capital loss generated by the sale of the Company’s former UK MRO business.
In 2003 and 2002, the Company recorded $1,477 and $421 respectively, of after tax charges for compensation arrangements related to management personnel reductions.
The Company adopted SFAS No. 142 as of January 1, 2002. Accordingly, the Company discontinued amortization of goodwill for 2002 and thereafter.
5 Net income for 2001 was reduced by $731 related to goodwill amortization. In 2001, the Company recorded 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. Together, these charges reduced net income by $7,159.
6 These per share amounts were computed using basic weighted average shares outstanding for all periods presented.
n/m not meaningful
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Dear Fellow Shareholders,
We made good progress in the Lawson Family of
Businesses last year. Lawson achieved record sales
of over $450 million, an increase of about 10%.
We saw solid growth in both our MRO (maintenance
and repair operations) and OEM (original equipment
manufacturing) business segments. An important
part of our mission is to deliver confidence to our
customers through our people, services, products
and solutions. During 2005, we extended our ability
to do so by adding a good deal of depth and breadth
to our business. Our inventoried product lines
increased substantially as did the number of
customers we serviced.
Profitability improved in 2005. Operating income
increased about 10%. Return on total assets increased
by 17% to 9.6%. The return on average stockholders’
equity grew by 23% to 14.9%. Despite the progress,
the added operating income measured as a percentage
of incremental sales did not indicate the leverage we
typically expect. We decided to use funds generated
to continue our efforts to enhance and accelerate
profitable growth by reinvesting in the business.
We did so, and we believe the results of this enhanced
investment will be borne out over the long term.
Our financial position is solid. Cash and equivalents
totaled more than $15 million at year end and the
Company was debt free. During the year, we spent
approximately $14.5 million purchasing and retiring
more than 334,000 Lawson shares. As a reflection
of the Company’s strong financial condition and its
prospects for continued growth, dividends declared
by our Board of Directors increased by more than
11% to 80¢ per share. Stockholders received
Lawson’s 127th consecutive quarterly cash dividend.
One of our continuing objectives is to increase the
number of qualified independent sales representatives.
During 2005, recently established recruiting, hiring
and education programs produced a greater number
of higher qualified sales representatives than in prior
years. The new additions more than offset turnover
we expected from retirements, illnesses, and career
changes. At the same time, the average sales volume
generated by experienced representatives increased
to record levels.
We made good progress in expanding our Call Center.
We added twenty inside sales professionals. This
was in response to the growing demands of our field
sales forces for support in turning “cold calls” into
appointments. Field agents are now requesting
assistance in providing contact with customers while
the agents are servicing the needs of other customers.
Our Call Center professionals are also expanding
our sales coverage by responding to the needs of
customers outside of geographic areas serviced
by field agents.
Interactive websites and electronic ordering
capabilities have taken a front seat at certain of our
business units. We have expanded those capabilities
at our OEM business units. At Kent Automotive, a fully
interactive website “went live” in early December and
the results have been exciting. The word has spread
to our other MRO business units. As a result, Lawson,
Drummond and Cronatron will have interactive
websites in 2006.
We accelerated investments in our information
technology and marketing areas as well. With our
increased sales, account base, inventoried items,
and rapid growth in our special order and custom
solutions businesses, the need for more sophisticated
information systems became paramount. We
responded. Our need for customer data became
greater as our marketing talent base was developed.
We again invested on an accelerated basis. We are
using information systems and our marketing
professionals to help drive our profitable growth.
A couple of years ago, we added to our distribution
facilities space sufficient to handle about $500 million
of business. That sales level is within sight and we now
anticipate the need for additional space. During the
fourth quarter, we acquired land adjacent to our Reno
distribution facility. We also are planning to establish
a distribution center in southern California to house
our newest subsidiary. It will also provide space for
distribution of fast moving products of our other
business units.
We incurred expenses to reconfigure our business in
Mexico and to discontinue operations in the United
Kingdom. We also recorded expenses to cover the
disposition of slow moving inventory throughout our
business units.
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All of these activities have focused us in our vision of
who and what we are: a customer centered, marketing
driven, multi-channel, business-to-business sales and
distribution company. It is that vision and our actions
to achieve it that have put us one year ahead of the five
year financial goals we established in the Fall of 2003.
We suffered a misstep to our progress in late December
when federal agents executed a search warrant at our
corporate offices for records relating to an ongoing
investigation. The investigation relates to whether
any of the Company’s representatives improperly
provided gifts or awards to purchasing agents
(including government purchasing agents) through
the Company’s customer loyalty programs. We have
and will continue to cooperate with the government.
We have also diligently and aggressively undertaken
our own internal investigation. At this time, we
cannot predict the outcome or effect of either
investigation, nor when either will be completed.
The outcome could result in criminal sanctions
or civil remedies. The Company’s financial condition
could be negatively affected as could the trading
price of its common stock.
This is especially painful for our Company. Lawson
was founded more than 50 years ago upon the
principles of integrity and trust in its people. I believe
the great majority of our 3,500 or more colleagues
who earn their livings in Lawson’s businesses adhere
to those principles. We are extremely proud of our
reputation for high quality and integrity in all we do.
We will take the actions necessary to protect that
reputation. We intend to continually earn the support
and confidence our customers place in us.
Also occurring near year end was an event which
has positive, long-term implications for our Company.
Lawson completed the acquisition of certain assets
of Rutland Tool & Supply Company. Headquartered
in Whittier, California, Rutland is a 50-year old,
$50 million distributor of metal working products,
supplies and machine tools. It sells through multiple
channels, including direct mail, catalogs, independent
distributors, a call center located at its headquarters,
and several of its own retail outlets. Rutland operates
retail outlets in southern California, San Jose, Phoenix,
Houston, and in the Atlanta area.
Lawson Products, Inc. and Subsidiaries
®
Becoming a member of the Family of Businesses gives
to Rutland an additional 1,800 sales representatives
to market its products. That process started on a
controlled basis during December. Early results have
exceeded our expectations. The availability of Rutland’s
80,000 item product line allowed our field sales
forces and inside sales professionals to penetrate
new departments of existing customers and sell to
new customers as well. We see many advantages from
the Rutland acquisition and will pursue them in an
orderly fashion.
On November 1, 2005, the Company completed
the sale of its partnership interest in Superior and
Sedgwick Associates. Lawson held a 98.5% limited
partner interest in that venture and realized substantial
benefits in each of the twenty years of the holding
period. The sale produced more cash for Lawson than
was needed to complete the Rutland acquisition.
The sale was a satisfactory ending to a highly profitable
venture which turned into an additional and
complimentary line of business for our Family
of Businesses.
On balance, the Lawson Family of Businesses had a
good, progressive growth year in 2005. Our financial
condition is strong and our Company is debt free.
We remain a “people” company founded on the
integrity of our colleagues and respect for them.
Lawson’s mission is to create value by delivering
services, solutions and products to ensure our
customers’ facilities, equipment and production lines
run better. That mission is accomplished through our
people delivering confidence to our customers. We
are equally confident that the investments and strategic
decisions we have made during 2005 will benefit our
Company over the long term and look forward to
further growth in 2006.
Thank you for your continued support and confidence.
Sincerely,
Robert J. Washlow
Chairman of the Board and CEO
Lawson Products, Inc.
April, 2006
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ANNUAL MEETING
The annual meeting of stockholders will be held at 10:00 a.m. Tuesday, May 9,
2006 at Corporate Headquarters.
FORM 10-K
A copy of the Company’s 2005 Annual Report on Form 10-K to the Securities
and Exchange Commission is available without charge to stockholders upon
written request to the Secretary of the Company.
CORPORATE HEADQUARTERS
Lawson Products, Inc.
1666 East Touhy Avenue • Des Plaines, Illinois 60018
847-827-9666
www.lawsonproducts.com
PROFESSIONAL SERVICES
Auditors
Ernst & Young LLP
Legal Counsel
McDermott, Will & Emery
Vedder, Price, Kaufman & Kammholz
SHARE OWNER SERVICES
EquiServe Trust Company, N.A.
P.O. Box 43023 • Providence, RI 02940-3023
Telephone: (877)498-8861
(Operators are available Monday-Friday, 8:30 a.m. to 7:00 p.m. Eastern time.
An interactive automated system is available around the clock every day.)
Internet: http://www.equiserve.com
Access your account via the internet: http://gateway.equiserve.com
NASDAQ NATIONAL MARKET
The common stock of Lawson Products is part of the NASDAQ National Market
System (Nasdaq: LAWS). Stock quotations are included in the National Market
system table in The Wall Street Journal and in leading daily newspapers across
the country. These provide the same high, low and closing transaction prices
as are shown for securities traded on the New York and other stock exchanges.
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Lawson Products, Inc. and Subsidiaries
®
BOARD OF DIRECTORS
Robert J. Washlow
Chairman of the Board
Chief Executive Officer
Lee S. Hillman
(President, Liberation
Investment Group, Investment
Advisory Firm)
Robert G. Rettig
(Consultant)
Chairman, Compensation
Committee
Sidney L. Port
Founder and Vice Chairman
of the Board of Directors
Ronald B. Port, M.D.
(Retired Physician)
Chairman, Variance Committee
James T. Brophy
(Private Investor)
Chairman, Audit Committee
Thomas S. Postek
Investments
(Geneva Investment Management
of Chicago)
Mitchell H. Saranow
(Chairman, Saranow Group LLC,
a private investment firm)
Chairman, Nominating and
Governance Committee
Wilma J. Smelcer
(Trustee of Goldman Shehs
Mutual Fund Complex
and Former Chairman,
Bank of America, Illinois)
CORPORATE MANAGEMENT
Robert J. Washlow
Chairman of the Board
Chief Executive Officer
Jeffrey B. Belford
President and
Chief Operating Officer
Thomas Neri
Executive Vice President,
Finance, Planning & Corporate
Development
Peter A. Alsberg
Senior Vice President,
Chief Information Officer
Roger F. Cannon
Executive Vice President,
Chief Officer, Field Sales Strategy
and Development
William Holmes
Vice President,
Treasurer
Neil E. Jenkins
Executive Vice President, Secretary
and General Counsel
Kenneth E. Malik
Group President,
OEM & International
Richard Schwind
Senior Vice President
Corporate Procurement
and Global Account
James J. Smith
Vice President,
Human Resources
Michael W. Ruprich
Group President,
MRO and New Channels
Scott Stephens
Senior Vice President,
Chief Financial Officer
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LAWSON PRODUCTS, DIVISION
and named subsidiaries in Canada and Mexico provide abrasives, electrical
items, fasteners, fittings, hardware, hoses, hydraulics, pneumatics, supplies
and tools, together with engineering consultations and inventory control
solutions for the maintenance and repair requirements of customers.
James W. Degnan
President
CRONATRON WELDING SYSTEMS, INC.
Provides maintenance and repair operations with metallurgical solutions,
welding equipment and supplies, wearplate, rods, polymers and powders
along with inventory control systems.
Susan J. Collins
President
DRUMMOND AMERICAN CORPORATION
Provides specialty chemical solutions and inventory control systems to
industrial and commercial maintenance and repair operations, food
service and housekeeping industries.
Roland E. Lazzaro Jr.
President
KENT AUTOMOTIVE
Offers a broad range of specialty, high performance, problem-solving
products and systems for the automotive collision and mechanical
repair aftermarket.
Thomas E. Pavlick
Vice President and General Manager
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ASSEMBLY COMPONENT SYSTEMS, INC.
Provides original equipment manufacturers with just-in-time inventories of
custom-ordered component parts using in-plant or vendor-managed inventory
systems through electronic commerce mechanisms.
Ken Malik
President and Chief Operating Officer
AUTOMATIC SCREW MACHINE PRODUCTS COMPANY, INC.
Manufacturer of specialized machined parts for the OEM and MRO
marketplaces.
Michael Selby
President
C.B. LYNN COMPANY
A custom solutions provider for obtaining special items supplemental to
those products, parts and supplies regularly inventoried by the Family
of Businesses.
Robert Blecha
Vice President and General Manager
SPECTRUM INDUSTRIAL SOLUTIONS
A customized Inventory Management Systems and Solutions provider,
servicing customers in-plant, utilizing a wide array of channel options to
support uptime goals, achieve supply chain initiatives, system efficiencies,
and to provide total cost effectiveness.
Warren Ludvigsen
Vice President
RUTLAND TOOL AND SUPPLY COMPANY
Markets and distributes a broad range of industrial tools, cutting tools,
abrasives, machinery, precision instruments, shop supplies and safety
products serving industrial machine shops, metalworking shops and
maintenance and service departments through catalogs, flyers, showrooms
and web solutions.
Andrew Verey
President
Lawson Products, Inc. and Subsidiaries
®
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Lawson Products, Inc. is an
The Company offers to customers over
international seller and distributor
900,000 products including fasteners,
of solutions, services and products
parts, chemical specialties, hardware,
to the industrial, commercial,
welding supplies, metal working
institutional and governmental
supplies, pneumatics, hydraulic and
maintenance, repair and
other flexible hose fittings, tools,
replacement marketplace. The
safety items and electrical and shop
Company also manufactures,
supplies.
sells and distributes specialized
component parts to the original
equipment marketplace including
automotive, appliance, aerospace,
construction and transportation
industries.
Customers are currently served
from seventeen strategically located
facilities by approximately 1,800 sales
representatives in the United States,
Puerto Rico, Canada and Mexico.
Lawson Products was founded in 1952
by Sidney L. Port, Vice Chairman of
the Board of Directors.
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Lawson Products, Inc. and Subsidiaries
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LAWSON PRODUCTS, INC.
CORPORATE HEADQUARTERS
1666 East Touhy Avenue
Des Plaines, Illinois 60018
www.lawsonproducts.com