Lawson Products, Inc. and Subsidiaries
®
At the Lawson Family of Businesses we believe that our competitive edge centers on
our ability to deliver confidence to customers through:
People who have the knowledge, experience and commitment to meet customer needs.
Services which anticipate customer needs and make it easy to do business with our company.
Solutions which add value and improve our customers’ businesses.
Products of the best quality to keep the operations of customers up and running.
Table of Contents
1
2
5
Five Year Selected Financial Data
Letter to Shareholders
Corporate Information
7 Board of Directors & Corporate Management
8
Lawson Family of Businesses
10 Company Profile
Lawson Products, Inc. and Subsidiaries
®
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 in the Annual Report on Form 10-K. The income statement data and balance sheet data are for, and as of the end of each
of, the years in the five-year period ended December 31, 2006, and are derived from the audited Financial Statements of the Company.
(Dollars in thousands, except per share data)
2006
Percent
Change
2005
2004
2003
2002
Net Sales1
$518,177
15.1%
$450,185
$409,565
$379,561
$383,780
Income from Continuing Operations
Before Income Taxes and
Cumulative Effect of Accounting Change
24,403
(33.2)%
36,555
33,047
27,796
27,421
Income from Continuing Operations
Before Cumulative Effect of Accounting Change2
12,985
(39.5)%
Income (Loss) from Discontinued Operations3
(12)
(100.2)%
Income Before Cumulative Effect of Accounting Change 12,973
(51.5)%
Cumulative Effect of Accounting Change
(361)
n/m
21,460
5,278
26,738
—
21,444
19,480
(19)
(3,284)
21,425
16,196
—
—
16,679
(4,232)
12,447
—
Net Income2,4
12,612
(52.8)%
26,738
21,425
16,196
12,447
Basic Income (Loss) Per Share of Common Stock:
Continuing Operations Before Cumulative Effect
of Accounting Change
Discontinued Operations
Cumulative Effect of Accounting Change
Diluted Income (Loss) Per Share of Common Stock:
Continuing Operations Before Cumulative Effect
of Accounting Change
Discontinued Operations
Cumulative Effect of Accounting Change
Total Assets
Noncurrent Liabilities
Stockholders’ Equity
Return on Average Equity (percent)
Return on Assets (percent)
Stockholders’ Equity Per Share5
Cash Dividends Declared Per Share5
Basic Weighted Average Shares Outstanding
Diluted Weighted Average Shares Outstanding
$1.46
(0.00)
(0.04)
$1.42
$1.46
(0.00)
(0.04)
$1.42
(38.1)%
n/m
n/m
(51.7)%
(38.1)%
n/m
n/m
(51.7)%
$2.36
0.58
—
$2.94
$2.36
0.58
—
$2.94
$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
$278,883
(0.1)%
$279,224
$260,550
$246,943
$225,831
45,139
9.4%
41,256
37,271
36,714
31,765
170,317
(8.1)%
185,425
180,332
173,350
162,343
6.8
4.5
$19.18
0.80
8,878
8,880
(54.4)%
(53.1)%
(6.1)%
0.0 %
(2.2)%
(2.4)%
14.9
9.6
12.1
8.2
9.6
6.6
7.7
5.5
$20.42
$19.16
$18.26
$16.96
0.80
9,082
9,099
0.72
9,410
9,430
0.66
9,492
9,511
0.64
9,570
9,596
Net sales for 2006 and 2005 include the acquisition of Rutland Tool & Supply Co. (“Rutland”) completed in December 2005 and exclude amounts from the Company’s
1
discontinued operations as discussed in Note C to the 2006 financial statements. Rutland accounted for $54.8 million and $4.1 million of net sales in 2006 and 2005,
respectively.
2 In 2006, includes $3.2 million of legal fees related to the previously disclosed investigation, $1.9 million of compensation expense related to stock performance rights (“SPRs”),
$1.9 million of increased income tax expense related to the elimination of tax deductions associated with the Company’s customer loyalty and promotions programs in its
MRO business for tax years 2005, 2004 and 2003, (many of the customer loyalty and promotion programs in place for these years were terminated or replaced early in 2006)
and $0.8 million for a loss on the sale of equipment.
3 In 2005, the Company recorded a $7.5 million 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 $12.2 million related to operating income and the gain on the sale of the Company’s investment in real estate. The loss from discontinued operations for 2003
primarily relates to a $2.8 million pretax loss related to the sale of Lawson Products Limited, the Company’s former UK MRO business. The 2002 losses from discontinued
operations primarily relate to inventory write-offs in the Company’s UK business.
4 In 2003, income tax expense includes a $2.2 million benefit 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 $1.5 million and $0.4 million respectively, of after tax charges for compensation arrangements related to management personnel
reductions.
5 These per share amounts were computed using basic weighted average shares outstanding for all periods presented.
n/m not meaningful
1
Dear Fellow Shareholders,
The year 2006 was a progressive year
for the Lawson Family of Businesses.
Lawson realized a substantial increase
in revenue and undertook significant
improvements in its operating systems
and distribution capabilities. Lawson’s
revenue increased over 15%.
Our Company enjoyed revenue growth
in its MRO and OEM groups, including
its Rutland Tool & Supply unit, acquired
in December, 2005. Rutland added
80,000 stock keeping units to our
product offering and serves customers
through catalogs and branch stores.
Its products are now available through
our field sales forces, our inside sales
team, and through our OEM sales
mechanisms.
Compared to the previous year, reported
income for 2006 declined as a result of
several factors, including the profitable
disposition of a long-term investment
during 2005. Charges relating to
modifications in business processes,
accruals for long-term performance
incentives, stock price based
compensation, and severance
arrangements also contributed to the
decline. Costs related to the previously
disclosed government and to our own
internal investigation of discontinued
customer loyalty programs, and the
departure of a number of people
relating to that circumstance, also
affected Lawson’s revenue and
reported income.
During 2006, we made additional
investments in marketing talent and
systems, in information systems, supply
chain initiatives, and in our distribution
facilities. Each of those is designed to
help increase revenue or decrease
operating expenses as we continue
to move forward. Some of those
investments are being funded from
cost savings and process improvements.
“ Today, Lawson is a
stronger company –
a company of people
who believe in
and follow the path
of the highest
ethical conduct.”
The year 2006 was a year of learning.
Our sales and marketing managers
throughout our organization
developed an array of new mechanisms
and knowledge systems. Implementation
is underway. Our sales representatives
have worked harder than ever to meet
and exceed the requirements of our
customers and to achieve established
benchmarks. Good progress was made.
Our operations and distribution people
have endured a great deal of process
improvements and moved more
products and services through our
facilities and systems than ever before.
That progress was all due to Our People
and the effort they put forth. It is our
people, their commitment to Lawson,
and the corresponding trust and
confidence we have in them, who have
grown our businesses during this
complicated period.
Our progress during 2006 as a Family
of Businesses is reflected in a number
of accomplishments. We broke through
the $500 million revenue milestone,
achieving $518 million of sales revenue
in 2006. That’s a $68 million increase
compared to 2005. When we looked a
bit deeper, we found that our MRO and
OEM business units added a great deal
of new business to our revenue streams.
Our veteran sales agents again achieved
substantial increases in their average
sales volumes and our inside sales
teams grew revenue at double-digit
levels. This effort generated more
revenue for the Company to reinvest
in its future and to build value for its
shareholders. We did so while
maintaining our strong balance sheet.
Toward the end of 2006, Lawson
acquired nearly 500,000 shares of its
stock, bringing outstanding shares to
about 8,500,000. We finished the year
with no long-term or short-term debt.
Recruiting, orientation, and education
programs at the sales agent and sales
management levels, combined with
valuable assistance from our inside
sales representatives, have helped to
increase new agent success ratios in
the form of revenue, earning power
and retention. We accelerated the
enhancement of Lawson’s information
technology capacities to better serve
our sales and operational needs and
better capture potential market
opportunities. Together with our
marketing professionals, our IT team
developed improved websites and
e-ordering mechanisms.
2
Lawson Products, Inc. and Subsidiaries
®
“ Fully servicing our
customers - on time,
all the time - through
knowledgeable
representatives with
high quality products... ”
production lines flowing - that’s what
builds customers’ confidence in the
Lawson Family of Businesses. That is
what differentiates Lawson from its
competition - the highest level of
superior service in our industry.
We thank our customers for their
continued confidence. We thank our
employees and sales representatives
for their continued efforts. We
thank our shareholders for their
continued support.
Sincerely,
Robert J. Washlow
Chairman of the Board &
Chief Executive Officer
Lawson Products, Inc.
April, 2007
We commenced major investments
in our distribution facilities,
including the re-organization of our
facility in Suwanee, Georgia, and the
single largest facility expansion in our
history in Reno, Nevada. These are
significant steps in allowing us to
provide same day or one day service
throughout the North American
markets for all products of all of
our business units.
Organizational changes were completed
at several levels, including the planned
retirement of our President and Chief
Operating Officer, Jeff Belford, our
friend and colleague of nearly 30 years.
With Jeff’s help and guidance, Tom Neri,
the originator and driver of our strategic
planning process, has succeeded Jeff
as our President and COO, effective
January 5, 2007.
In that process, Tom and his team
have reallocated responsibilities.
Ken Malik assumed many operational
responsibilities at corporate in
addition to overseeing our OEM group
of businesses. Mike Ruprich has
become group head of our MRO
units, including Lawson, Cronatron,
Drummond and Kent. Michelle Russell
has done excellent work in creating
and implementing our Ethics &
Compliance Committee, its charter,
policies and handbook to help guide
us in our activities. Michelle has also
focused on process improvements in
several areas of our business.
business units to coordinate our
product purchasing activities and
inventory controls. And, Scott Stephens,
who joined us in accounting and finance
a few years ago, has become our Chief
Financial Officer.
Those people in their new roles, and
others already in position, form the
corporate management team led by
Tom, and will drive Lawson forward
in the coming years. Today, Lawson is
a stronger company – a company of
people who believe in and follow the
path of the highest ethical conduct.
Lawson is a company having more
depth and knowledge of our market
opportunities than ever before and
more talent to capture those market
opportunities than ever before.
We are a Company of better qualified
sales representatives and sales
managers, business unit managers
and corporate officers than ever before.
And, we believe we are a Company well
positioned to guide ourselves into our
future and to win in our markets.
Lawson’s future comes down to being
all about its customers. Being all about
customers means providing and doing
everything in our power to assure that
the customer’s business runs better and
at the lowest overall cost. Everything
our sales teams do and everything our
distribution and operations teams do is
directed to better serving the needs of
each customer.
Stewart Howley is leading our
cross-corporate marketing efforts and
also has oversight of Rutland Tool &
Supply. Dick Schwind has made
progress in partnering with our
Fully servicing our customers - on time,
all the time - through knowledgeable
representatives with high quality
products engineered specifically to keep
machinery and equipment running and
3
Corporate Information
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
FORM 10-K
A copy of the Company’s 2006 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.
SHARE OWnER SERVICES
Computershare Trust Company, N.A.
P.O. Box 43078 • Providence, RI 02940-3078
Telephone: (877)282-1168
(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.computershare.com
Access your account via the internet: http://gateway.
computershare.com
nASDAQ STOCK MARKET LLC
The common stock of Lawson Products is part of
the NASDAQ Global Select Market (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.
5
Lawson Products, Inc. and Subsidiaries
®
BOARD OF DIRECTORS
Robert J. Washlow
Chairman of the Board
Chief Executive Officer
Lee S. Hillman
Chairman, Compensation Committee
(Executive Chairman and Chief Executive
Officer, Power Plate International and
President, Liberation Investment
Advisory Group)
Robert G. Rettig
(Consultant)
Sidney L. Port
Founder and Vice Chairman
of the Board of Directors
Ronald B. Port, M.D.
Chairman, Variance Committee
(Retired Physician)
Mitchell H. Saranow
Chairman, Nominating and
Governance Committee
(Chairman, Saranow Group LLC,
a private investment firm)
James T. Brophy
(Private Investor)
Thomas S. Postek
Chairman, Audit Committee
(Geneva Investment Management
of Chicago)
Wilma J. Smelcer
Chairwoman, Management
Development Committee
(Former Trustee of Goldman Sachs
Mutual Fund Complex and Former
Chairman, Bank of America, Illinois)
CORPORATE MAnAGEMEnT
Robert J. Washlow
Chairman of the Board
Chief Executive Officer
Peter A. Alsberg
Senior Vice President,
Chief Information Officer
Thomas J. neri
President and
Chief Operating Officer
Stewart A. Howley
Senior Vice President,
Chief Marketing Officer
neil E. Jenkins
Executive Vice President, Secretary
and General Counsel
Kenneth E. Malik
Group President,
OEM & International
Richard J. Schwind
Senior Vice President
Corporate Procurement
and Global Account
James J. Smith
Vice President,
Human Resources
Roger F. Cannon
Executive Vice President, Chief Officer,
Field Sales Strategy and Development
William G. Holmes
Vice President,
Treasurer
Michael W. Ruprich
Group President, MRO
Scott F. Stephens
Senior Vice President,
Chief Financial Officer
7
Lawson Products, Inc. and Subsidiaries
®
LAWSON PRODUCTS, DIVISION
Provides 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.
R. Stephen Broome
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
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.
Kenneth E. Malik
Group President, OEM & International
“ The Family of Businesses is getting closer to their customers, helping them
to achieve their goals through new avenues in web technology and inventory
management control.”
- Kenneth E. Malik
Group President, OEM & International
8
8
Lawson Products, Inc. and Subsidiaries
®
“ Focusing more on the customer, our newly implemented Market Knowledge
Center enables us to perform complex market analytics and make more
fact-based decisions. This allows us to identify trends in the market and
focus resources and investments on the most critical issues and most
profitable opportunities.”
- Stewart A. Howley
Senior Vice President and
Chief Marketing Officer
AUTOMATIC SCREW MACHINE PRODUCTS COMPANY, INC.
Manufacturer of specialized machined parts for the OEM and MRO marketplaces.
Michael L. 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.
Richard J. Schwind
Senior Vice President
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 S. Verey
President
“ Rutland made significant gains and did it in the first year after being acquired.
They accomplished this even with significant changes in their leadership team.
No small task.”
- Michael W. Ruprich
Group President, MRO
9
Lawson Products, Inc. and Subsidiaries
®
Delivering Confidence
Through People,
Services, Solutions
& Products
Lawson Products, Inc. is an
The Company offers to customers over
international seller and distributor
900,000 products including fasteners,
of services, solutions 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
Company also manufactures,
shop 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.
10