What changed in this filing

/stocks — the workspaceLOADING

Item 8. Financial Statements and Supplementary Data

2021-02-26 compared with 2020-02-27 · 434 added, 296 removed, 527 unchanged (58% of the section changed)

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Consolidated Balance Sheets as of December 31, 2 0 20 and 2 0 19

Consolidated Statements of Income and Comprehensive Income for the Years ended December 31, 2019 and 201 8

Consolidated Statements of Income and Comprehensive Income for the Years ended December 31, 2 0 20 a nd 20 19

Consolidated Statements of Changes in Stockholders’ Equity for the Years ended December 31 , 2020 and 2 019

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We have audited the accompanying consolidated balance sheets of Lawson Products, Inc.

(the “Company”) and subsidiaries as of December 31, 2019 and 2018 , the related consolidated statements of income and comprehensive income, changes in stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2019 , and the related notes and financial statement schedule listed in the accompanying index (collectively referred to as the “consolidated financial statements”).

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company and subsidiaries at December 31, 2019 and 2018 , and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2019 , in conformity with accounting principles generally accepted in the United States of America.

(the “Company”) as of December 31, 2020 and 2019, the related consolidated statements of income and comprehensive income, changes in stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2020, and the related notes and financial statement schedule listed in the accompanying index (collectively referred to as the “consolidated financial statements”).

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2020 , in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company's internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and our report dated February 26, 2021 expressed an unqualified opinion thereon.

Change in Accounting Method Related to Leases

As discussed in Notes 2 and 4 to the consolidated financial statements, the Company has changed its method of accounting for leases during the year ended December 31, 2019 due to the adoption of Accounting Standards Codification Topic 842, Leases.

Basis for Opinion

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We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that:

(i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments.

The communication of the critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing a separate opinion on the critical audit matters or on the accounts or disclosures to which they relate.

Goodwill Impairment Assessment - Bolt Reporting Unit

As described in Note 8 to the consolidated financial statements, the Company’s consolidated goodwill balance as of December 31, 2020 was $35.2 million.

At December 31, 2020, the Bolt reporting unit’s (“Bolt”) goodwill balance was $13.8 million.

The Company tests for impairment annually on a reporting unit basis or more often when impairment indicators exist.

As a result of the COVID-19 pandemic and its impact on Bolt’s revenue and earnings during the first quarter of 2020, the Company performed interim goodwill impairment tests of Bolt.

The Company prepared a valuation of Bolt using both a market approach and an income approach.

The determination of the fair value of the reporting unit requires management to make significant estimates and assumptions related to forecasts of future revenue and earnings.

We identified the valuation of Bolt during the interim impairment assessment of goodwill as a critical audit matter.

The principal considerations for our determination are:

(i) Bolt’s excess fair value over book value was less than 10% in the first quarter of 2020, as such, management’s estimates were more sensitive to the assumptions and judgments used, (ii) inherent uncertainties exist related to the Company’s forecasts and how various economic and other factors including the projected impact from the COVID-19 pandemic, could affect the Company’s forecasted assumptions of revenue and earnings included in the income approach, and (iii) the appropriateness and relative weighting of valuation methods, and the appropriateness of the selected comparable companies and market multiples used in the market approach.

Auditing these elements involved especially challenging auditor judgment due to the nature and extent of audit effort required to address these matters, including the extent of specialized skill or knowledge needed.

The primary procedures we performed to address this critical audit matter included:

• Evaluating the reasonableness of assumptions used in management’s income approach analysis by independently comparing the forecasts to:

(i) historical results, and (ii) market trends by obtaining multiple independent publicly available market reports and assessing the projected impact of the COVID-19 pandemic and the forecasted recovery period for the industry.

• Assessing the appropriateness of the market approach and evaluating the reasonableness of the comparable companies and market multiples selected.

• Utilizing personnel with specialized knowledge and skill in valuation to assist in:

(i) testing the underlying source information utilized in the market approach, (ii) assessing the appropriateness and relative weighting of valuation methods, (iii) evaluating the reasonableness of selected comparable companies and market multiples used in the market approach, and (iv) testing the mathematical accuracy of the Company’s calculations.

Business Combination- Partsmaster Intangible Assets Valuation

As described in Note 3 to the consolidated financial statements, the Company completed the acquisition of Partsmaster on August 31, 2020 for $35.3 million in cash plus assumed liabilities, which resulted in $7.7 million of intangible assets.

The Company applied significant judgment in estimating the fair value of the intangible assets acquired which involved the use of significant estimates and assumptions with respect to expected future cash flows and discount rates.

We identified the valuation of the intangible assets acquired in the Partsmaster business combination as a critical audit matter.

Management was required to make significant judgments and assumptions, including forecasted cash flows and discount rates, in determining the fair values of the intangible assets acquired which were identified as customer relationships and trade names.

The primary procedures we performed to address this critical audit matter included:

• Evaluating the reasonableness of the forecasted cash flows through:

(i) evaluating historical results of Partsmaster (ii) assessing forecasted performance against market trends and guideline companies, and (iii) testing the mathematical accuracy of the Company’s calculations.

• Utilizing personnel with specialized knowledge and skill in valuation to assist in:

(i) evaluating the appropriateness of the selected comparable companies, (ii) evaluating the reasonableness of the discount rate used, and (iii) testing the mathematical accuracy of the Company’s calculations.

/s/BDO USA, LLP

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Cash and cash equivalents

$ 28,393 $ 5,495

Restricted cash

Accounts receivable, less allowance for doubtful accounts of $ 654 and $ 593 , respectively

44,515 38,843

Inventories, net

61,867 55,905

Miscellaneous receivables and prepaid expenses

Total current assets

143,062 106,422

Property, plant and equipment, less accumulated depreciation and amortization 15,800 16,546

Deferred income taxes 18,482 21,711

Goodwill 35,176 20,923

Cash value of life insurance 16,185 14,969

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Right of use assets 8,764 11,246

Other assets 332 277

$ 256,304 $ 204,429

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:

Revolving lines of credit

Accrued acquisition liability $ 32,673 $ —

Accounts payable

22,262 13,789

Lease obligation

Accrued expenses and other liabilities

38,492 39,311

Total current liabilities

97,995 56,930

Revolving line of credit

Security bonus plan

11,262 11,840

Lease obligation

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Deferred tax liability

Deferred rent liability

Other liabilities

Total liabilities

133,882 96,428

Commitments and contingencies – Note 16

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Preferred stock, $ 1 par value:

Authorized - 500,000 shares, issued and outstanding - None

Authorized - 500,000 shares, issued and outstanding - No ne

Common stock, $ 1 par value:

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Capital in excess of par value

19,841 18,077

Retained earnings

101,609 86,496

Treasury stock – 226,586 and 146,400 shares held, respectively

Accumulated other comprehensive loss

( 9,015 ) ( 5,761 )

Accumulated other comprehensive income (loss) 699 ( 1 )

Total stockholders’ equity

122,422 108,001

Total liabilities and stockholders’ equity

$ 256,304 $ 204,429

See notes to Consolidated Financial Statements

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Year Ended December 31,

Product revenue

Service revenue

Total revenue

Product cost of goods sold

Revenue 351,591 370,785

Cost of goods sold 165,053 173,431

Gross profit 186,538 197,354

Operating expenses:

Selling expenses

76,775 85,342

General and administrative expenses

89,213 102,946

Operating expenses

165,988 188,288

Operating income

Interest expense

Other income (expenses), net

( 654 ) ( 603 )

Other income, net 889 1,211

Income before income taxes

Income tax expense

$ 15,113 $ 7,221

Basic income per share of common stock

$ 1.68 $ 0.81

Diluted income per share of common stock

$ 1.62 $ 0.77

Weighted average shares outstanding:

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Comprehensive income

Other comprehensive income (loss), net of tax:

$ 15,113 $ 7,221

Other comprehensive income, net of tax:

Adjustment for foreign currency translation

Comprehensive income

$ 15,813 $ 8,780

See notes to Consolidated Financial Statements

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(Dollars in thousands)

Outstanding Shares

Capital in Excess of Par Value

Retained Earnings

Treasury Stock

Accumulated Other Comprehensive Income (Loss)

Total Stockholders' Equity

Outstanding Shares $ 1 Par Value

Capital in Excess of Par Value Retained Earnings Treasury Stock Accumulated Other Comprehensive Income (Loss) Total Stockholders' Equity

Balance at January 1, 2019 8,955,930 $ 9,006 $ 15,623 $ 77,338 $ ( 1,234 ) $ ( 1,560 ) $ 99,173

Change in accounting principle (1)

— — — 1,937 — — 1,937

— — — 7,221 — — 7,221

Adjustment for foreign currency translation

— — — — — 1,559 1,559

Stock-based compensation

— — 2,638 — — — 2,638

Shares issued

184,455 184 ( 184 ) — — — —

Shares repurchased held in treasury

( 96,614 ) — — — ( 4,527 ) — ( 4,527 )

Balance at December 31, 2019 9,043,771 9,190 18,077 86,496 ( 5,761 ) ( 1 ) 108,001

Change in accounting principle (2)

— — — 15,113 — — 15,113

Adjustment for foreign currency translation

— — — — — 700 700

Stock-based compensation

— — 1,847 — — — 1,847

Shares issued

97,454 98 ( 83 ) — — — 15

Shares repurchased held in treasury

( 80,186 ) — — — ( 3,254 ) — ( 3,254 )

Balance at December 31, 2020 9,061,039 $ 9,288 $ 19,841 $ 101,609 $ ( 9,015 ) $ 699 $ 122,422

The Company adopted the ASU No.

2014-09, Revenue from Contracts with Customers (ASU 2014-09) on January 1, 2018 using the modified retrospective approach.

See Note 3 - Revenue Recognition for further details.

(1) The Company adopted the ASC No.842, Leases (ASC 842) on January 1, 2019 using the modified retrospective approach.

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Operating activities

$ 15,113 $ 7,221

Adjustments to reconcile net income to net cash provided by operating activities:

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Deferred income taxes

( 167 ) 2,169

Goodwill impairment 1,918 —

Changes in operating assets and liabilities, net of effect of acquired businesses:

Accounts receivable

1,762 ( 1,380 )

2,100 ( 2,308 )

Miscellaneous receivables, prepaid expenses and other assets

( 2,899 ) ( 3,890 )

Accounts payable and other liabilities

5,788 ( 3,230 )

Net cash provided by operating activities

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Purchases of property, plant and equipment

( 1,687 ) ( 2,028 )

Business acquisition, net of acquired cash

Net cash used in investing activities

( 3,987 ) ( 2,028 )

Financing activities

Net payments on revolving lines of credit

( 2,271 ) ( 8,552 )

Shares repurchased held in treasury

( 3,254 ) ( 4,527 )

Payment of financing fees

Payment of financing lease principal

( 257 ) ( 271 )

Proceeds from stock option exercises

Business acquisition payment

Net cash used in financing activities

( 5,767 ) ( 13,890 )

Effect of exchange rate changes on cash and cash equivalents

Increase (decrease) in cash and cash equivalents and restricted cash

23,094 ( 6,386 )

Cash, cash equivalents and restricted cash at beginning of year

Cash, cash equivalents and restricted cash at end of year

$ 29,391 $ 6,297

Cash and cash equivalents $ 28,393 $ 5,495

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Total cash, cash equivalents and restricted cash

$ 29,391 $ 6,297

Supplemental disclosure of cash flow information

Net noncash financing liability related to acquisition ( 32,673 ) —

Net cash paid for income taxes

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(“Lawson” or the “Company”) is a North American distributor of products and services to the industrial, commercial, institutional and government maintenance, repair and operations (“MRO”) marketplace.

The Company has two operating segments.

The Lawson operating segment distributes MRO products to customers primarily through a network of sales representatives offering vendor managed inventory ("VMI") service to customers throughout the United States and Canada.

The Bolt operating segment distributes MRO products primarily through its 14 branches located in Western Canada.

In October 2018, the Company acquired Screw Products, Inc.

("SPI"), a regional distributor of bulk industrial products to manufacturers and job shops.

The Company has two reportable segments.

The Lawson reportable segment distributes MRO products to customers primarily through a network of sales representatives offering vendor managed inventory ("VMI") servic e to customers throughout the United States and Canada.

The Bolt reportable segment distributes MRO products primarily through its 14 bran ches located in Western Canada.

On August 31, 2020, the Company acquired Partsmaster, a distributor of MRO products.

Partsmaster is included in the Lawson reportable segment.

Note 2 - Summary of Significant Accounting Policies

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The Company does not bill product sales and services separately.

The total revenue billed is allocated between revenue from product sales and revenue from services for reporting purposes based upon the estimated selling price of such products and services.

A portion of selling expenses is allocated to cost of sales for reporting purposes based upon the estimated time spent on such services.

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A portion of service revenue and cost of service is deferred, as not all services are performed in the same period as billed.

The Company also operates as a lessor and recognizes lease revenue on a straight-line basis over the life of each lease.

The Company has adopted the practical expedient not to separate the non-lease components that would be within the scope of ASC 606 from the associated lease component as the relevant criteria under ASC 842 are met.

Cash Equivalents — The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.

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If circumstances change (e.g., higher than expected defaults or an unexpected material adverse change in a major customer's ability to meet its financial obligations), the estimates of the recoverability of amounts due the Company could be revised.

Inventories — Inventories principally consist of finished goods stated at the lower of cost or net realizable value using the first-in-first-out method for the Lawson segment and weighted average for the Bolt segment.

To reduce the cost basis of inventory to a lower of cost or net realizable value, a reserve is recorded for slow-moving and obsolete inventory based on historical experience and monitoring of current inventory activity.

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Capitalized software is amortized over estimated useful lives of 3 to 5 years using the straight-line method.

Amortization expense of capitalized software was $0.6 million and $1.1 million for 2019 and 2018 respectively.

Amortization expense of capitalized software was $ 0.6 million for 2020 and 2019 respectively.

Cash Value of Life Insurance — The Company has invested funds in life insurance policies on certain current and former employees.

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These adjustments are the changes in contractual value of the individual plans and are recorded as a component of General and administrative expenses.

On August 31, 2020, the Company acquired Partsmaster from NCH Corporation, and assumed certain liabilities, including non-qualified deferred compensation plans related to Partsmaster employees.

Effective December 31, 2020, Lawson accepted sponsorship of the portions of the non-qualified plans related to Partsmaster employees.

The plans were frozen effective January 1, 2021.

Stock-Based Compensation — Compensation based on the share value of the Company’s common stock is valued at its fair value at the grant date and the expense is recognized over the vesting period.

Fair value is re-measured each reporting period for liability-classified awards that may be redeemable in cash.

We account for forfeitures of stock-based compensation in the period which they occur.

We account for forfeitures of stock-based compensation in the period in which they occur.

Goodwill — The Company had $ 35.2 million and $ 20.9 million of goodwill in 2020 and 2019, respectively.

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Goodwill is allocated to the appropriate reporting unit as reviewed by the Company’s segment managers.

The Company has four reporting units;

Lawson MRO, Bolt, Screw Products, and Partsmaster.

The Company reviews goodwill for potential impairment annually on December 1st, or when an event or other circumstances change that would more likely than not reduce the fair value of the asset below its carrying value.

The first step in the multi-step process to determine if goodwill has been impaired and to what degree is to review the relevant qualitative factors that could cause the fair value of the reporting unit to decrease below the carrying value of the reporting unit.

After reviewing the qualitative factors relevant to the reporting units, including conditions surrounding the industry we operate in compared to when the acquisitions were completed, the financial performance of the reporting units compared to our projected results, and macroeconomic conditions as a whole, we have determined that it is more likely than not that the fair value of the reporting units exceed their carrying value, therefore goodwill has not been impaired and no further steps need to be taken.

During the first and second quarter of fiscal 2020, the Company identified a triggering event due to adverse changes in the business climate related to COVID-19.

As a result, the Company performed interim quantitative impairment tests as of March 31, 2020 and June 30, 2020 on the goodwill in its Bolt reporting unit, which is also the Bolt reportable segment.

The Company compared the estimated fair value using the income approach and the market approach of the reporting unit with its estimated book value.

Based on the evaluation performed, the Company determined that goodwill was not impaired as the fair value of the reporting unit exceeded its respective carrying amounts.

The income approach calculations are dependent on several subjective factors including forecasts of future revenue and earnings and the discount rate.

The market approach is based on financial multiples of comparable companies.

After reviewing the financial performance of the reporting units compared to our projected results, as well as macroeconomic conditions as a whole including the effect of the COVD-19 pandemic, we determined that it is more likely than not that the fair value of the goodwill generated by the acquisition of Screw Products, which reporting unit is a part of the Lawson reportable segment, had been impaired.

As a result, we performed a quantitative impairment test as of December 1, 2020.

The Company bases its measurement of the fair value of the reporting unit using the income approach.

The income approach calculations are dependent on several subjective factors, including forecasts of future revenue and earnings and the discount rate.

Related to the Lawson MRO, Bolt, and Partsmaster reporting units, the Company performed a qualitative assessment as of December 1, 2020 and determined that it was more likely than not the fair value of the reporting units exceeded the carrying value of the reporting units.

Intangible Assets — The Company's intangible assets consist of trade names, and customer relationships.

Intangible assets are amortized over weighted average 15 and 11 year estimated useful lives for trade names and customer relationships, respectively.

Intangible assets are amortized over a weighted aver age of 12 and 11 year estimated useful lives for trade names and customer relationships, respectively.

The Company amortizes trade name intangible assets on a straight-line basis and customer relationship intangible assets on a basis consistent with their estimated economic benefit.

Impairment of Long-Lived Assets — The Company reviews its long-lived assets, including property, plant and equipment and definite life intangibles, for impairment whenever events or changes in circumstances indicate that the carrying amounts of these assets may not be recoverable.

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If such assets are considered to be impaired, the impairment to be recognized is measured based on the amount by which the carrying amount of the asset exceeds its fair value.

No triggering events or impairments occurred in 2019.

In 2018 the Company determined that a triggering event had occurred when it determined that it would most likely exercise its put option on a building of a previously discontinued operation in Decatur, Alabama.

Accordingly, the Company recorded an impairment charge of $0.2 million in 2018 based upon the anticipated proceeds less its carrying value.

No impairments occurred in 2019 or 2020.

Income Taxes — Deferred tax assets or liabilities reflect temporary differences between amounts of assets and liabilities for financial and tax reporting.

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Additionally, valuation allowances related to deferred tax assets can be impacted by changes to tax laws.

Significant judgment is required in determining

income tax provisions as well as deferred tax asset and liability balances, including the estimation of valuation allowances and the evaluation of tax positions.

Significant judgment is required in determining income tax provisions as well as deferred tax asset and liability balances, including the estimation of valuation allowances and the evaluation of tax positions.

Earnings from the Company's foreign subsidiaries are considered to be indefinitely reinvested.

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Each financing lease ROU asset is amortized on a straight line basis over the lease period.

Prior to acquisition, Partsmaster participated in a leasing program where they actively leased parts washer machines to customers.

The Company will continue the leasing program for the foreseeable future.

These leases are classified as operating leases.

The leased machines are recognized as fixed assets on the Company's consolidated balance sheet and the leasing revenue is recognized on a straight line basis.

Earnings per Share — Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding during the period.

Diluted earnings per share reflect the potential dilution from the exercise or conversion of outstanding stock options, market stock units and restricted stock awards into common stock.

For the year ended December 31, 2019 no options to purchase shares of common stock were excluded from the computation of diluted earnings per share because all of the options were in the money.

For the year ended December 31, 2018 stock options to purchase 46,067 of the Company's common stock were excluded from the computation of diluted earnings per share because the options’ exercise price was greater than the average market price of the common stock.

For the years ended December 31, 2020 and December 31, 2019 no options to purchase shares of common stock were excluded from the computation of diluted earnings per share because all of the options were in the money.

Foreign Currency — The accounts of foreign subsidiaries are measured using the local currency as the functional currency.

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Gains and losses resulting from the effect of exchange rate changes on transactions denominated in currencies other than the functional currency are included as a component of net income or loss upon settlement of the transaction.

Gains and losses resulting from intercompany transactions are included as a component of net income or loss each reporting period unless the transactions are of a long-term-investment nature and settlement is not planned or anticipated in the foreseeable future, in which case the gains and losses are recorded as a component of accumulated other comprehensive income or loss in the consolidated balance sheets.

Treasury Stock —The Company repurchased 32,362 of its common stock in 2019 through its previously announced stock repurchase plan.

The Company repurchased 64,252 and 16,512 shares of its common stock in 2019 and 2018 , respectively from employees upon the vesting of restricted stock to offset the income taxes owed by those employees.

Gains and losses resulting from foreign intercompany transactions are included as a component of net income or loss each reporting period unless the transactions are of a long-term-investment nature and settlement is not planned or anticipated in the foreseeable future, in which case the gains and losses are recorded as a component of accumulated other comprehensive income or loss in the consolidated balance sheets.

Treasury Stock — The Company repurchas ed 47,504 and 32,362 of its common stock in 2020 and 2019, respectively, th rough its previously announced stock repurchase plan.

The Company repurc hased 32,682 an d 64,252 shares of its common stock i n 2020 an d 2019, respectively from employees upon the vesting of restricted stock to offset the income taxes owed by

those employees.

The Company accounts for treasury stock using the cost method and includes treasury stock as a component of stockholders’ equity.

The cost of the common stock repurchased and held in treasury was $4.5 million and $0.5 million in 2019 and 2018 , respectively.

The cost of the common stock repurchased and held in treasury wa s $ 3.3 million and $ 4.5 million in 2020 and 2019, respectively.

Acquisitions — The Company recognizes identifiable assets acquired and liabilities assumed at their acquisition date fair values.

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As a result, during the measurement period, which may be up to one year from the acquisition date, the Company may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill.

service cost, allowance for doubtful accounts, inventory reserves, goodwill and intangible assets valuation, and income taxes in the consolidated financial statements and accompanying notes.

Use of Estimates — Preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported for service revenue, service cost, allowance for doubtful accounts, inventory reserves, goodwill and intangible assets valuation, and income taxes in the consolidated financial statements and accompanying notes.

Actual results could differ from these estimates.

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The Company is still evaluating the effect the adoption of the new standard will have on its financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases (“ASU 2016-02”) in order to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet for those leases classified as operating leases under previous GAAP.

Subsequently, the FASB has issued additional ASUs which further clarify this guidance.

Under the new guidance, at the lease commencement date, a lessee recognizes a right-of-use (“ROU”) asset representing its right to use the underlying asset and a lease liability which is initially measured at the estimated present value of the future lease payments.

These amounts represent the estimated economic benefit the Company will receive over the term of the lease.

For results of operations purposes, leases are classified as either operating or finance leases.

For operating leases, lease expense is recognized on a straight line basis.

For finance leases, the lease liability and interest on the lease liability is recognized using the Company's incremental borrowing rate.

The amortization of the ROU asset is recognized over the useful life of the asset.

The Company adopted ASU 2016-02 on January 1, 2019 using the modified retrospective method.

The Company elected a package of practical expedients, which included the decision to not reassess certain direct costs for existing leases at the date of implementation.

These direct costs included certain items such as commissions, legal and documentation preparation fees and payments to incentivize existing tenants to terminate its lease.

These direct costs are capitalized for new leases entered into after January 1, 2019.

The Company elected that, as a practical expedient, it will not separate lease components from non-lease components for certain types of leases.

The effect on the Company’s results of operations in subsequent periods is not significant.

The impact of ASU 2016-02 is non-cash in nature and does not affect the Company’s cash flows.

Upon transition to ASU 2016-02, the Company removed the financing lease for the building associated with the McCook distribution facility.

The Company then reassessed the land and building at the McCook distribution facility as an operating lease.

Additional quantitative and qualitative presentations and disclosures related to the Company's leases are provided in Note 4 - Leases .

Note 3 - Acquisition

On August 31, 2020, the Company acquired Partsmaster from NCH Corporation.

Partsmaster is a leading maintenance, MRO solutions provider that serves approximately 16,000 customers with approximately 200 sales representatives.

The acquisition was made primarily to expand the Company's sales coverage, expand product lines, add experienced sales representatives, and leverage the Company's infrastructure.

The purchase price was $ 35.3 million in cash plus the assumption of certain liabilities.

The Company paid $ 2.3 million of the purchase price in cash at closing and will pay the remaining $ 33.0 million in May 2021.

The payment obligation has been discounted to its present value and was recognized as an accrued acquisition liability of $ 32.4 million at the time of acquisition.

As of December 31, 2020, the discounted present value of the $ 33.0 million due in May 2021 is $ 32.7 million and is recorded in the Company's consolidated balance sheet as an accrued acquisition liability.

P ayment has been guaranteed under the Purchase Agreement, and includes the issuance of a $ 33.0 million irrevocable standby letter of credit.

The Company will satisfy the payment obligation with cash on hand with any remaining portion using its existing credit facility.

The purchase price of the acquisition was allocated to the fair value of Partsmasters' assets and liabilities on the acquisition date.

The fair market value appraisals of the majority of the assets and liabilities was determined by a third party valuation firm using management estimates and assumptions including intangible assets of $ 5.0 million for customer relationships and $ 2.8 million for trade names, and their estimated useful lives of 10 and 5 years, respectively.

The $ 15.8 million allocated to goodwill reflects the purchase price less the fair market value of the identifiable net assets.

The goodwill is attributable to the workforce of the acquired business and the significant synergies expected to arise after Lawson's acquisition of Partsmaster.

The entire amount of goodwill is expected to be deductible for tax purposes.

The appropriate fair values of the assets acquired and liabilities assumed are based on estimates and assumptions.

The Company continues to review preliminary estimates of various assets and liabilities including, but not limited to, pre-acquisition employee compensation liabilities and potential adjustments of certain accounts receivable balances as defined under the purchase agreement.

These preliminary estimates and assumptions could change during the purchase price measurement period as the Company finalizes the valuations of the assets acquired and liabilities assumed.

The Company recorded the fair value of accounts receivable after consideration of an estimate of cash flows not expected to be collected which was $ 0.4 million.

Partsmaster contributed $ 22.6 million of revenue and $ 0.8 million of operating income in the four months of 2020 post-acquisition.

A summary of the initial purchase price allocation of the acquisition is as follows (Dollars in thousands):

Cash paid and payable and liabilities assumed

Cash paid and payable $ 34,523

Accounts payable and accrued expenses 4,086

Lease obligation 620

Deferred compensation 2,938

Fair value of assets acquired

Goodwill $ 15,816

Inventories 7,797

Accounts receivable 7,706

Customer relationships 4,961

Trade names 2,775

Property, plant and equipment 2,121

Right of use asset 620

Other assets 371

The following table contains unaudited pro forma revenue and net income for Lawson Products assuming the Partsmaster acquisition closed on January 1, 2019.

Pro Forma Year Ended December 31,

Revenue 396,679 435,486

Net Income 16,535 7,277

The pro forma disclosures in the table above include adjustments for amortization of intangible assets, implied interest expense and acquisition costs to reflect results as if the acquisition of Partsmaster had closed on January 1, 2019 rather than on the actual acquisition date.

This pro forma information utilizes certain estimates, is presented for illustrative purposes only and is not intended to be indicative of the actual results of operation.

In addition, future results may vary significantly from the results reflected in the pro forma information.

The unaudited pro forma financial information does not reflect the impact of future positive or negative events that may occur after the acquisition, such as anticipated cost savings from operating synergies.

Note 4 - Revenue Recognition

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products and services.

As a result, the Company reports two separate revenue streams and two separate costs of revenues.

Under the definition of a contract as defined by ASC 606, the Company considers contracts to be created at the time an order to purchase product is agreed upon regardless of whether or not there is a written contract.

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The Company does not commit to long-term contracts to sell customers a certain minimum quantity of products.

The Lawson segment offers a VMI service proposition to its customers.

The Lawson segment, including the Partsmaster acquisition, offers a VMI service proposition to its customers.

A portion of these services, primarily related to stocking of product and maintenance of the MRO inventory, is provided a short period of time after control of the purchased product has been transferred to the customer.

Since some components of VMI service have not been provided at the time the

control of the product transfers to the customer, that portion of expected consideration is deferred until the time that those services have been provided.

Since some components of VMI service have not been provided at the time the control of the product transfers to the customer, that portion of expected consideration is deferred until the time that those services have been provided.

The Bolt Supply segment does not provide VMI services for its customers or provide services in addition to product sales to customers.

Revenue is recognized at the time that control of the product has been transferred to the customer which is either upon delivery or shipment depending on the terms of the contract.

Accounting Policy Elections

The Company treats shipping and handling costs after the control of the product has been transferred to the customer as a fulfillment cost.

Sales taxes that are imposed on our sales and collected from customers are excluded from revenues.

The Company expenses sales commissions when incurred as the amortization period is one year or less.

Certain Judgments

The Company employs certain judgments to estimate the dollar amount of revenue, and related expenses, allocated to the sale of product and service.

These judgments include, among others, the percentage of customers that take advantage of the VMI services offered, the amount of revenue to be allocated to the VMI service based on the value of the service to its customers, and the amount of time after control of the product passes to the customer that the VMI service obligation is completed.

It is assumed that any customer who averages placing orders at a frequency of longer than 30 days does not take advantage of the available VMI services offered.

The estimate of the cost of sales is based on the estimated time spent on such activities applied to the expenses directly related to sales representatives that provide VMI services to the customer.

In previous financial statements, the Company presented the disaggregated components of total revenue:

product revenue and service revenue, along with the cost of sales associated with each of these revenue streams as the service revenues exceeded 10% of consolidated sales.

Since the Company qualifies as a smaller reporting company, the Company has elected to discontinue disclosure of the disaggregated components of revenue and cost of sales in its consolidated statements of income and comprehensive income and in the related notes to the consolidated financial statements.

For the twelve months ended December 31, 2019, service revenue of $ 40.1 million was reported as service revenue which have now been combined as reported within total revenue.

Disaggregated revenue by product type follows:

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Cutting tools and abrasives 14 % 13 %

Fluid power 13 % 15 %

Specialty chemicals 11 % 11 %

Electrical 10 % 11 %

Aftermarket automotive supplies 7 % 8 %

Safety 6 % 5 %

Welding and metal repair 2 % 2 %

Note 4 - Leases

In February 2016, the FASB established Topic ASC 842, Leases, by issuing Accounting Standards Update 2016-02.

Lawson adopted ASC 842 as of January 1, 2019.

The Company leases property used for distribution centers, office space, and Bolt branch locations throughout the U.S.

and Canada, along with various equipment located in distribution centers and corporate headquarters.

The Company is also a lessor of its Decatur, Alabama property previously used in conjunction with a discontinued operation, and was a sublessor of a portion of its corporate headquarters.

Lawson Operating Leases

Lawson MRO primarily has two types of leases:

leases for real estate and leases for equipment.

Operating real estate leases that have a material impact on the operations of the Company are related to the Company's distribution network and headquarters.

The Company possesses several additional property leases that are month to month basis and are not material in nature.

Lawson MRO does not possess any leases that have residual value guarantees.

Several property leases include renewal clauses which vary in length and may not include specific rent renewal amounts.

The Company will revise the value of the right of use assets and associated lease liabilities when the Company is reasonably certain it will renew a lease or terminate a lease.

The key change commencing on January 1, 2019 for the Company is the recognition of assets and liabilities of operating leases with lease terms longer than twelve months that were not previously capitalized on the balance sheet.

The value of the Right Of Use ("ROU") assets and associated lease liabilities is calculated using the total cash payments over the course of the lease, discounted to the present value using the appropriate discount rate.

The right of use asset will be amortized over its useful life.

Similar to deferred rent under ASC 840, the lease liability is reduced in conjunction with the lease payments made, with adjustments made to the lease liability in order to account for non-straight line cash payments through the life of the lease.

Bolt primarily leases the real estate for its branch locations as well as its distribution center in Calgary, Alberta.

Bolt possesses additional property leases that are month to month and not material in nature.

Bolt property leases include renewal clauses which vary in length and may not include specific rent renewal amounts.

The Company will revise the value of the right of use asset and associated lease liability when the Company is reasonably certain it will renew a lease or terminate a lease.

Lease of McCook Distribution Facility

Upon adoption of ASC 842, the previously capitalized financing asset and lease liability for the McCook distribution facility was removed from the balance sheet and re-established as a ROU asset and a lease liability as an operating lease.

The Company did not include the lease renewal periods in its assessment of the McCook lease as it did not meet the reasonably certain threshold required under ASC 842.

Changes in the value of the assets and liabilities associated with the property due to adoption of ASC 842 have been accounted for as an adjustment to 2019 beginning retained earnings of $1.9 million .

Accounting Policy Elections

As part of the transition to ASC 842, the Company elected the following practical expedients:

The transitional package of practical expedients as prescribed by ASC 842.

Per the practical expedient for the transition to ASC 842, the Company did not reassess expired leases, existing lease classifications or initial indirect costs for existing leases in the calculation of the right to use asset and lease liability.

The Company elected the modified retrospective method of transition, which resulted in no restatement of prior period results with the adoption impact being recorded to opening retained earnings.

The Company did not capitalize short term leases, for all asset classes defined as leases with a term of shorter than twelve months, on the balance sheet.

These leases have not been transitioned to ASC 842.

As a practical expedient, the Company did not reassess the accounting for initial direct costs of current leases.

The Company elected not to use the hindsight practical expedient in determining the lease term.

The Company recognizes certain lease components and non-lease components together and not as separate parts of a lease for real estate leases.

The Company will exercise this practical expedient in the future by asset class.

Significant Assumptions

The Company is required to determine a discount rate for the present value of lease payments.

If the rate is not included in the lease or cannot be readily determined, the Company must estimate the incremental borrowing rate to be used for the discount rate.

The Company will discount the present value of the total payments for the operating and financing leases using the incremental borrowing rate at the inception of the lease.

The incremental borrowing rate will be reviewed and updated as needed.

The expenses and income generated by the leasing activity of Lawson as lessee for the year ended December 31, 2019 were as follows (Dollars in thousands):

Classification

Expense / (Income)

Consolidated Operating Lease Expense (1)

Operating expenses

Consolidated Financing Lease Amortization

Operating expenses

Consolidated Financing Lease Interest

Interest expense

Consolidated Financing Lease Expense

Sublease Income (2)

Operating expenses

Net Lease Cost

(1) Includes variable lease payments and short term lease expenses

(2) Sublease income from sublease of a portion of the Company headquarters.

The sublease was terminated in June 2019 and the Company has no other subleases

The Company recorded $3.3 million of operating lease expenses for the year ended December 31, 2018 .

The value of the net assets and liabilities generated by the leasing activity of Lawson as lessee as of December 31, 2019 were as follows (Dollars in thousands):

Total ROU operating lease assets (1)

Total ROU financing lease assets (2)

Total lease assets

Total current operating lease obligation

Total current financing lease obligation

Total current lease obligations

Total long term operating lease obligation

Total long term financing lease obligation

Total long term lease obligation

(1) Operating lease assets are recorded net of accumulated amortization of $1.2 million as of December 31, 2019

(2) Financing lease assets are recorded net of accumulated amortization of $0.2 million as of December 31, 2019

The value of the lease liabilities generated by the leasing activities of Lawson as lessee as of December 31, 2019 were as follows (Dollars in thousands):

Year Ended December 31,

Operating Leases

Financing Leases

Total lease payments

Present value of lease liabilities

Of the $13.9 million future minimum operating lease commitments outstanding at December 31, 2019 , $3.2 million relates to a lease for the Company's headquarters which expires in March 2023

The Company has an operating lease for the McCook Facility which expires in June 2022 and includes future minimum lease payments of $4.2 million

The Company's future minimum lease commitments, principally for facilities and equipment, as of December 31, 2018 were as follows:

(Dollars in thousands)

Year ended December 31,

Minimum lease payments exclude payments to landlord for real estate taxes and common area maintenance

On January 1, 2019, t he Company elected the modified retrospective method of transition to adopt the new lease standard ASC 842, which resulted in no restatement of prior period results.

At December 31, 2018, prior to adoption of the new lease standard, operating lease obligations were not included as a liability on the balance sheet.

Therefore, the operating lease obligations are included in the table for comparative purposes only and the total lease liability is not included as it is not applicable

The $5.1 million minimum lease obligation attributable to the McCook lease that was classified as a financing lease on December 31, 2018 was reclassified as an operating lease under the new accounting standard adopted on January 1, 2019

Lease obligations classified as capital leases on December 31, 2018 were reclassified as financing leases under the new lease standard adopted on January 1, 2019

The weighted average lease terms and interest rates of the leases held by Lawson as of December 31, 2019 are as follows:

Weighted Average Term in Years

Weighted Average Interest Rate

Operating Leases

Financing Leases

The cash outflows of the leasing activity of Lawson as lessee for the year ending December 31, 2019 are as follows (Dollars in thousands):

Cash Flow Source

Classification

Operating cash flows from operating leases

Operating activities

Operating cash flows from financing leases

Operating activities

Financing cash flows from financing leases

Financing activities

Subsequent to the adoption of ASC 842 in 2019 the Company recorded a non-cash transaction to establish $1.7 million of operating ROU assets, for which $1.7 million of operating lease liabilities were incurred.

Also, in 2019 the Company recorded a non-cash transaction to establish $0.4 million of financing ROU assets, for which $0.4 million of financing lease liabilities were incurred.

Other 15 % 11 %

Lawson as Lessor

Prior to acquisition, Partsmaster leased parts washer machines to customers through its Torrents leasing program.

The Torrents leasing program comprised a minor portion of the Partsmaster business.

The Company will continue the leasing program for the foreseeable future.

These leases are classified as operating leases.

The leased machines are recognized as fixed assets on the Company's consolidated balance sheet and the leasing revenue is recognized on a straight line basis.

The Torrents machine leasing program generated $ 0.9 million of revenue in 2020 post-acquisition.

Note 5 — Restricted Cash

The Company has agreed to maintain $ 0.8 million in a money market account as collateral for an outside party that is providing certain commercial card processing services for the Company.

The Company has also agreed to maintain $ 0.2 million in a guaranteed investment certificate as collateral for an outside party that is providing certain commercial credit card services for Bolt.

The Company is restricted from withdrawing this balance without the prior consent of the outside party during the term of the agreement.

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Reserve for obsolete and excess inventory

( 5,270 ) ( 4,595 )

Inventories, net $ 61,867 $ 55,905

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(Dollars in thousands)

Land $ 2,650 $ 2,625

Buildings and improvements 15,765 15,356

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Furniture and fixtures 5,725 5,673

McCook facility

Capital leases

Vehicles 151 155

Construction in progress 752 683

74,870 71,137

Accumulated depreciation and amortization

Assets relating to the McCook facility and capital leases are now accounted for as lease right of use assets.

See Note 4 - Leases for transition to ASU 2016-02.

( 59,070 ) ( 54,591 )

$ 15,800 $ 16,546

Note 8 - Goodwill

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(Dollars in Thousands)

Beginning balance

Goodwill By Reportable Segment

Lawson Bolt Total

Beginning balance January 1, 2019 $ 7,174 $ 12,905 $ 20,079

Impact of foreign exchange 205 649 854

Acquisition (1)

Adjustment to prior year allocation ( 10 ) — ( 10 )

Ending balance

The $2.1 million addition to goodwill in 2018 was due to the allocation of costs to acquire Screw Products.

The reduction of $0.2 million in 2018 resulted from an adjustment to goodwill created by the Bolt acquisition in 2017.

Balance at December 31, 2019

7,369 $ 13,554 20,923

Impact of foreign exchange 85 270 355

Acquisition (1)

15,816 — 15,816

Impairment (2)

( 1,918 ) — ( 1,918 )

Balance at December 31, 2020

$ 21,352 $ 13,824 $ 35,176

(1) The $ 15.8 million addition to goodwill in 2020 was due to the preliminary allocation of the purchase price to acquire Partsmaster.

(2) The Company performed a quantitative goodwill impairment analysis as of December 1, 2020 for the Screw Products reporting unit.

The Company engaged a third party valuation firm to determine the value of the Screw Products reporting unit, and determined that the carrying value of the net assets exceeded the fair value of the reporting unit, and accordingly, recognized an impairment charge of $ 1.9 million.

Although the Company believes the projected future operating results and cash flows and related estimates regarding the values were based on reasonable assumptions, it is reasonably possible that estimates made may be materially and adversely impacted in the future as a result of the COVID-19 pandemic, including impairment losses related to goodwill.

Note 9 - Intangible assets

The gross carrying amount and accumulated amortization by intangible asset class were as follows:

(Dollars in thousands)

December 31, 2019

December 31, 2018

Gross Carrying Amount

Accumulated Amortization

Net Carrying Value

Gross Carrying Amount

Accumulated Amortization

Net Carrying Value

(Dollars in thousands) (Dollars in thousands)

December 31, 2020 December 31, 2019

Gross Carrying Amount Accumulated Amortization Net Carrying Value Gross Carrying Amount Accumulated Amortization Net Carrying Value

Trade names $ 11,289 $ ( 2,733 ) $ 8,556 $ 8,422 $ ( 2,020 ) $ 6,402

Customer relationships 12,349 ( 2,402 ) 9,947 7,337 ( 1,404 ) 5,933

$ 23,638 $ ( 5,135 ) $ 18,503 $ 15,759 $ ( 3,424 ) $ 12,335

Amortization expense of $ 1.7 million and $ 1.3 million related to intangible assets was recorded in General and administrative expenses for 2020 and 2019 , respectively.

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(Dollars in thousands)

Year Amortization

Thereafter 6,811

Note 10 – Income Taxes

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United States

$ 16,226 $ 5,418

$ 20,785 $ 9,674

Provision (benefit) for income taxes from operations for the years ended December 31, consisted of the following:

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Current income tax expense:

$ 5,856 $ 427

Deferred income tax expense (benefit):

$ 236 $ 2,012

( 472 ) ( 289 )

$ ( 184 ) $ 2,026

Total income tax expense (benefit):

$ 4,094 $ 2,012

$ 5,672 $ 2,453

The reconciliation between the effective income tax rates and the statutory federal rates for operations are as follows:

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Statutory Federal rate

21.0 % 21.0 %

Increase (decrease) resulting from:

Change in valuation allowance - current period activity

( 2.2 ) ( 4.5 )

Change in valuation allowance - reversal

Stock compensation

( 2.0 ) ( 11.5 )

Compensation deduction limitation

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Provision to return differences

Foreign currency loss

Alternative minimum tax

Other items, net

Provision for income taxes

27.3 % 25.4 %

At December 31, 2020, the Company had $ 7.2 million of U.S.

federal net operating loss carryforwards which are subject to expiration beginning in 2030 and $ 7.7 million of various state net operating loss carryforwards which expire at varying dates through 2034.

Primarily due to the cumulative losses that were incurred over several years, management determined in 2012 that it was more likely than not that the company would not be able to utilize its deferred tax assets to offset future taxable income.

Valuation allowances ("VA’s") were recorded against virtually all the gross deferred tax assets at that time.

At each reporting date since 2012, Lawson management has considered new evidence, both positive and negative, that could impact management’s view

with regard to the realization of its deferred tax assets and the reversal of the corresponding valuation allowances.

If the company was able to demonstrate that it can consistently generate income it may lead to a determination that there is sufficient positive evidence to conclude that it is more likely than not that the company will be able to utilize its deferred tax assets to offset future taxable income.

In 2017 we had continued to generate pre-tax profits and had utilized some of our net operating loss carryforwards over the previous two years and were in a three year cumulative income position in the U.S.

Based on available evidence, including the utilization of $13.0 million of net operating loss carryforwards in 2017, we reached a point of increased confidence in our ability to sustain profit levels and we believed it was more likely than not that we would be able to utilize a substantial amount of our deferred tax assets to offset future taxable income.

Therefore, a large portion of our U.S.

valuation allowances were released in 2017.

Certain valuation allowances mostly pertaining to the deferred tax assets related to our foreign operations will remain.

The Company will continue to monitor all positive and negative evidence related to the remaining valuation of deferred tax assets on a quarterly basis.

The Tax Cuts and Jobs Act was enacted into law on December 22, 2017.

Subsequent to this, the Securities and Exchange Commission ("SEC") issued SAB 118 (Income Tax Accounting Implications of the Tax Cuts and Jobs Act) which allows registrants to record provisional amounts during a measurement period.

The SAB allows a company to recognize provisional amounts when it does not have the necessary information prepared in reasonable detail to calculate the effect of the change in tax law.

Per the SAB, a company should report provisional amounts when the accounting is not complete, but for which a reasonable estimate can be determined.

Lawson included in its 2017 taxable income calculation a provisional amount of approximately $8.4 million representing previously untaxed foreign earnings and profits.

The Company did not accrue any federal income tax on this amount as the company was able to utilize federal net operating losses to offset the income.

The Company recently finalized the foreign earnings and profit calculation in conjunction with the finalization of the 2017 federal income tax return when all required necessary information was more readily available.

A lower final foreign earnings and profits inclusion of $3.9 million resulted in a tax benefit which has a beneficial impact on the effective tax rate for the year ending December 31, 2018.

Certain valuation allowances pertaining to the deferred tax assets related to our Canadian operations remain as of December 31, 2020.

Lawson's Canadian operations have recently moved into a three-year cumulative income position.

Based on the history of our Canadian operations and their multi-year pre-tax losses through 2018, the Company does not believe there is sufficient positive evidence at this time to consider reversing the $ 1.2 million valuation allowance.

While forecasts may show future positive pre-tax income, future projected income is the least objective of the positive sources of evidence as

the projections are inherently subjective and not yet demonstrated.

The uncertainty of the continuing pandemic may further affect our Canadian business.

Based on this, the Company will maintain its valuation allowances related to Canada as of December 31, 2020.

The Company will continue to monitor all positive and negative evidence regarding the Canadian operations and will re-assess our position on a regular basis.

As a result of acquisitions completed in recent years, the Company recorded $ 35.2 million of tax deductible goodwill that may result in a tax benefit in future periods.

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Net operating loss carryforward

$ 5,431 $ 7,786

Compensation and benefits

1 unchanged sentence

Accounts receivable reserve

Capital loss carryforward

Leased assets 1,061 3,326

Total deferred tax assets

19,740 22,946

Deferred tax liabilities:

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Net deferred tax assets before valuation allowance

16,898 16,758

Valuation allowance

( 1,257 ) ( 1,235 )

Net deferred tax assets $ 15,641 $ 15,523

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Lapse of statute of limitations

( 984 ) ( 475 )

Balance at end of year $ 3,686 $ 3,242

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Accrued stock-based compensation (stock performance rights)

$ 14,437 $ 14,908

Accrued compensation

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Accrued health benefits

Environmental remediation accrual

Financing lease obligation (1)

Liabilities relating to financing lease obligations are now accounted for as lease obligations.

See Note 4 - Leases for transition to ASU 2016-02.

$ 38,492 $ 39,311

Note 12 - Leases

The Company leases property used for distribution centers, office space, and Bolt branch locations throughout the U.S.

and Canada, along with various equipment located in distribution centers and corporate headquarters.

The expenses and income generated by the leasing activity of Lawson as lessee for the years ended December 31, 2020 and December 31, 2019 were as follows:

(Dollars in Thousands)

Year Ended December 31,

Lease Type Classification 2020 2019

Consolidated Operating Lease Expense (1)

Operating expenses $ 4,999 $ 4,729

Consolidated Financing Lease Amortization Operating expenses 226 206

Consolidated Financing Lease Interest Interest expense 28 30

Consolidated Financing Lease Expense 254 236

Sublease Income (2)

Operating expenses — ( 160 )

Net Lease Cost

$ 5,253 $ 4,805

(1) Includes short term lease expense, which is immaterial

(2) Sublease income from sublease of a portion of the Company headquarters.

The sublease was terminated in June 2019 and the Company has no other subleases

The value of the net assets and liabilities generated by the leasing activity of Lawson as lessee as of December 31, 2020 were as follows:

(Dollars in Thousands)

Year Ended December 31,

Lease Type 2020 2019

Total ROU operating lease assets (1)

$ 8,246 $ 10,592

Total ROU financing lease assets (2)

Total lease assets

$ 8,764 $ 11,246

Total current operating lease obligation $ 4,360 $ 3,591

Total current financing lease obligation 208 239

Total current lease obligations

$ 4,568 $ 3,830

Total long term operating lease obligation $ 5,498 $ 9,133

Total long term financing lease obligation 240 371

Total long term lease obligation

$ 5,738 $ 9,504

(1) Operating lease assets are recorded net of accumulated amortization of $ 5.9 million and $ 1.2 million as of December 31, 2020 and December 31, 2019, respectively

(2) Financing lease assets are recorded net of accumulated amortization of $ 0.4 million and $ 0.2 million as of December 31, 2020 and December 31, 2019, respectively

The value of the lease liabilities generated by the leasing activities of Lawson as lessee as of December 31, 2020 were as follows (Dollars in thousands):

Year Ended December 31, Operating Leases Financing Leases Total

2021 $ 4,719 $ 219 $ 4,938

2022 3,212 143 3,355

2023 1,471 89 1,560

2024 509 25 534

2025 168 — 168

Thereafter 462 — 462

Total lease payments

10,541 476 11,017

Interest 683 28 711

Present value of lease liabilities

$ 9,858 $ 448 $ 10,306

(1) Of the $ 10.5 million future minimum operating lease commitments outstanding at December 31, 2020, $ 2.2 million relates to a lease for the Company's headquarters which expires in March 2023

(2) The Company has an operating lease for the McCook Facility which expires in June 2022 and includes future minimum lease payments of $ 2.6 million

The weighted average lease terms and interest rates of the leases held by Lawson as of December 31, 2020 are as follows:

Lease Type Weighted Average Term in Years Weighted Average Interest Rate

Operating Leases 2.9 5.2 %

Financing Leases 2.5 5.3 %

The cash outflows of the leasing activity of Lawson as lessee for the year ending December 31, 2020 are as follows (Dollars in thousands):

Cash Flow Source Classification Amount

Operating cash flows from operating leases Operating activities $ 4,256

Operating cash flows from financing leases Operating activities 28

Financing cash flows from financing leases Financing activities 257

McCook Lease Adjustment

Subsequent to the adoption of ASC 842 in 2019 the Company recorded a non-cash transaction to establish $ 1.7 million of operating ROU assets, for which $ 1.7 million of operating lease liabilities were incurred.

Also, in 2019 the Company recorded a non-cash transaction to establish $ 0.4 million of financing ROU assets, for which $ 0.4 million of financing lease liabilities were incurred.

Lawson as Lessor

Prior to acquisition, Partsmaster leased parts washer machines to customers through its Torrents leasing program.

The Torrents leasing program comprised a minor portion of the Partsmaster business.

The Company will continue the leasing program for the foreseeable future.

These leases are classified as operating leases.

The leased machines are recognized as fixed assets on the Company's consolidated balance sheet and the leasing revenue is recognized on a straight line basis.

The Torrents machine leasing program generated $ 0.9 million of revenue in 2020 post-acquisition.

The Company has adopted the practical expedient not to separate non-lease components that would be within the scope of ASC 606 from the associated lease components as the relevant criteria under ASC 842 are met.

Note 13 – Credit Agreement

New Credit Agreement

In October, 2019, the Company entered into a Credit Agreement (the "Credit Agreement") with J.P.

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The Credit Agreement also includes events of default for, among others, non-payment of obligations under the Credit Agreement, change of control, cross default to other indebtedness in an aggregate amount in excess of $ 5.0 million, failure to comply with covenants, and insolvency.

At December 31, 2019 , the Company had $2.3 million outstanding balance under its revolving line of credit facility and additional borrowing availability of $96.7 million .

At December 31, 2020, the Company had no outstanding balances under its revolving line of credit facility and additional borrowing availability of $ 66.0 million.

The carrying amount of the Company’s debt at December 31, 2020 approximates its fair value.

The weighted average interest rate was 2.65 % in 2020.

The Company had $1.1 million of outstanding letters of credit as of December 31, 2019 .

The Company had $ 34.0 million of outstanding letters of credit as of December 31, 2020 primarily related to the acquisition of Partsmaster.

In addition to other customary representations, warranties and covenants, the results of the financial covenants are provided below:

Quarterly Financial Covenants

Quarterly Financial Covenants Requirement Actual

EBITDA to fixed charges ratio 1.15 :

Total net leverage ratio 3.25 :

The Company was in compliance with all covenants as of December 31, 2019.

Previous Credit Agreements

Prior to October 2019, Lawson had a Loan and Security Agreement (“Loan Agreement”) with CIBC Bank USA which consisted of a $40.0 million revolving line of credit facility.

The borrowing capacity of the Loan Agreement was subject to certain limitations including the amount of the Company's eligible accounts receivable and inventory value.

The interest rate was based on the Prime rate or LIBOR and the Company's debt to EBITDA ratio.

The Loan Agreement was secured by a first priority perfected security interest in substantially all existing assets of the Company.

Dividends were restricted to amounts not to exceed $7.0 million annually.

Prior to October 2019, Bolt Supply had a Commitment Letter ("Commitment Letter") with BMO Bank of Montreal which allowed Bolt Supply to access up to $5.5 million Canadian dollars in the form of either an overdraft facility or as commercial letters of credit.

The Commitment Letter was secured by substantially all of Bolt Supply’s assets and carried an interest rate based on the bank's prime rate.

The new Credit Agreement that was entered into in October 2019 replaced the Loan Agreement and the Commitment Letter.

The Company was in compliance with all covenants associated with these agreements at the time of payoff.

The Company was in compliance with all financial covenants as of December 31, 2020.

In the third quarter of 2020, the Company entered into an amendment to the Credit Agreement which among other items increased the letter of credit basket from $ 15.0 million to $ 40.0 million until August 31, 2021 and authorized the Company to incur indebtedness in an amount up to $ 36.0 million for the acquisition of Partsmaster.

Note 14 – Accrued Acquisition Liability

On August 31, 2020, Lawson acquired Partsmaster from NCH Corporation.

As part of the purchase price the Company agreed to pay $ 33.0 million in May 2021.

The payment obligation has been discounted to its present value using an implied interest rate of 1.8 % and is recognized as a current liability of $ 32.7 million in the Company's consolidated balance sheet.

Payment has been guaranteed under the Purchase Agreement which includes the issuance of a $ 33.0 million irrevocable standby letter of credit.

The accrued acquisition liability is included as outstanding debt in the quarterly financial covenants.

See Note 13 - Credit Agreement for further details.

Note 15 – Reserve for Severance

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Charged to earnings

( 1,735 ) ( 1,206 )

Ending balance

$ 1,251 $ 909

The majority of remaining severance liabilities outstanding as of December 31, 2020 will be paid by the end of 2021, and are included in accrued expenses and other liabilities on the accompanying Consolidated Balance Sheets.

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The injection process was completed in the first quarter of 2019 and the environmental consulting firm is monitoring the affected area.

The Company made payments of $1.3 million in 2019 for services rendered by the environmental consulting firm.

These payments were applied to the previously accrued environmental remediation liability.

The Company believes the remaining environmental remediation liability classified within Accrued expenses and other liabilities on the accompanying Consolidated Balance Sheet, will be sufficient to cover the remaining cost of the plan.

At December 31, 2020 the Company has less than $ 0.1 million accrued for potential monitoring costs.

The Company does not expect to capitalize any amounts related to the remediation plan.

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The Company has a security bonus plan which was previously created for the benefit of its independent sales representatives, under the terms of which participants are credited with a percentage of their annual net commissions.

The aggregate amounts

credited to participants’ accounts vest 25% after five years, and an additional 5% vests each year thereafter upon qualification for the plan.

The aggregate amounts credited to participants’ accounts vest 25 % after five years, and an additional 5 % vests each year thereafter upon qualification for the plan.

On January 1, 2013, the Company converted all of its U.S.

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The security bonuses for those converted employees continue to vest, but their accounts are no longer credited with a percentage of net commissions.

For financial reporting purposes, amounts are charged to operations over the vesting period.

For financial reporting purposes, amounts are charged to operations

over the vesting period.

Expenses incurred for the security bonus plan were $ 0.3 million and $ 0.5 million for the years ended December 31, 2020 and 2019, respectively.

The security bonus plan is partially funded by a $ 6.9 million investment in the cash surrender value in life insurance of certain employees.

Of the $12.0 million total liability, $0.2 million is classified as a current liability and the remaining $11.8 million is classified as long-term.

Of the $ 11.5 million total liability, $ 0.3 million is classified as a current liability as of December 31, 2020, and the remaining $ 11.3 million is classified as long-term.

Note 18 – Stock-Based Compensation Plans

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Risk-free rate of return

0.1 % to 0.2 %

Expected term (in years)

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The estimated annual dividend was based on the recent dividend payout trend.

Compensation expenses of $14.9 million and $4.8 million were recorded in General and administrative expenses for the years ended December 31, 2019 and 2018 , respectively.

Cash in the amount of $13.4 million and $0.1 million was paid out for SPR exercises in 2019 and 2018 , respectively.

A liability of $14.9 million reflecting the estimated fair value of future pay-outs has been included as a component of Accrued expenses and other liabilities on the consolidated balance sheets.

A compensation benefit of less than $0.1 million was recorded as a reduction to General and administrative expense for the year ended December 31, 2020.

Compensation expenses of $ 14.9 million was recorded in General and administrative expenses for the year ended December 31, 2019.

Cash in the amount of $ 0.5 million and $ 13.4 million was paid for SPR exercises in 2020 and 2019, respectively.

A liability of $ 14.4 million reflecting the estimated fair value of future pay-outs is included as a component of Accrued expenses and other liabilities on the consolidated balance sheets.

Activity related to the Company’s SPRs during the year ended December 31, 2020 was as follows:

Number of SPRs

Weighted Average Exercise Price

Number of SPRs Weighted Average Exercise Price

Outstanding on December 31, 2019 599,861 $ 26.56

( 18,861 ) 16.48

Outstanding on December 31, 2020 581,000 26.88

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The value of the MSUs was determined using a geometric brownian motion model that, based on certain variables, generates a large number of random trials simulating the price of the common stock over the measurement period.

Expenses of $1.2 million related to MSUs were recorded in General and administrative expenses in both of the years ended December 31, 2019 and 2018 .

Expenses of $ 0.7 million and $ 1.2 million related to MSUs were recorded in General and administrative expenses in the years ended December 31, 2020 and 2019, respectively.

Activity related to the Company’s MSUs during the year ended December 31, 2020 was as follows:

Number of Market Stock Units

Maximum Shares Potentially Issuable

Number of Market Stock Units Maximum Shares Potentially Issuable

Outstanding on December 31, 2019 139,643 199,303

21,648 32,472

Exchanged for stock

( 24,035 ) ( 36,052 )

Outstanding on December 31, 2020 137,256 195,723

Difference between 150% of common stock that was potentially realizable for MSUs when originally granted and the actual amount of common stock that was earned on the vesting date.

Stock Options

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Expense related to stock options was $ 0.1 million in both 2020 and 2019.

Unrecognized compensation at December 31, 2019 was $0.1 million .

There was no unrecognized compensation related to stock options as of December 31, 2020 as all compensation plans that included stock options were fully vested.

Upon vesting, stock options are recognized as a component of equity.

Activity related to stock options during the year ended December 31, 2019 was as follows:

Number of Stock Options

Weighted average exercise price

Outstanding on December 31, 2018

Outstanding on December 31, 2019

There were 80,000 stock options outstanding on December 31, 2020 with a weighted average exercise price of $ 27.70 .

Performance Awards ("PAs")

The Company issued 10,852 PAs to key employees that cliff vest on December 31, 2022.

PAs are exchangeable for the Company's common stock ranging from zero to 16,278 , or the equivalent amount in cash, based upon the achievement of certain financial performance metrics.

Expenses of $ 0.1 million related to the PAs were recorded in General and administrative expenses for the year ended December 31, 2020.

Note 19 – Segment Information

The Company operates in two separate reportable segments because of differences in the businesses financial characteristics and the methods they employ to deliver product to customers.

The operating segments are reviewed by the Company’s chief operating decision maker responsible for reviewing operating performance and allocating resources.

The Company's operating segments, Lawson and Bolt, also represent its reportable segments because of differences in the businesses' financial characteristics and the methods they employ to deliver product to customers.

The results of the Company's operating segments are reviewed by the Company’s chief operating decision maker responsible for reviewing operating performance and allocating resources.

The Lawson segment primarily relies on its large network of sales representatives to visit the customer at the customers' location and produce sales orders for product that is then shipped to the customer and also provides VMI services.

The Bolt segment primarily sells product to customers when the customers visit one of Bolt's 14 branch locations and the product is delivered to the customers at the point of sale.

The Bolt segment primarily sells product to customers when the customers visit one of Bolt's 14 b ranch locations and the product is delivered to the customers at the point of sale.

The Bolt segment total assets include the value of the acquired intangibles and the related amortization within its operating income.

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Year Ended December 31,

Lawson $ 312,803 $ 329,367

Bolt 38,788 41,418

Consolidated total $ 351,591 $ 370,785

$ 171,258 $ 181,567

15,280 15,787

Consolidated total

$ 186,538 $ 197,354

Operating Income

Lawson $ 17,715 $ 6,483

Bolt 2,835 2,583

Consolidated total 20,550 9,066

Interest expense ( 654 ) ( 603 )

Other income (expense), net

Other income, net 889 1,211

Income before income taxes $ 20,785 $ 9,674

Capital expenditures

Lawson $ 1,529 $ 1,522

Consolidated total $ 1,687 $ 2,028

Depreciation and amortization

Lawson $ 5,343 $ 4,757

Bolt 1,358 1,136

Consolidated total $ 6,701 $ 5,893

Lawson $ 221,490 $ 168,803

Bolt 43,533 44,174

Investment in Subsidiary

( 8,719 ) ( 8,548 )

Consolidated total $ 256,304 $ 204,429

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United States

$ 283,261 $ 295,675

68,330 75,110

Consolidated total

$ 351,591 $ 370,785

Long-lived assets (2)

United States

$ 44,395 $ 25,478

34,180 35,849

Consolidated total

$ 78,575 $ 61,327

(1) Net sales are attributed to countries based on the location of customers.

(2) Long-lived assets primarily consist of property, plant and equipment, goodwill, intangibles, right of use assets and other assets.

Note 18 - Acquisitions

The Company did not make any acquisitions in 2019.

The Company completed the acquisition of Screw Products, Inc.

in October 2018 for approximately $5.2 million .

The purchase price was funded with cash on hand and utilization of the Company's existing credit facility.

Screw Products, Inc.

is a distributor of bulk industrial products to large manufacturers and job shops.

The Company allocated $2.6 million of the purchase price to an intangible asset for customer relationships and $0.5 million for intangible asset for trade names.

These amounts were determined by a third party valuation firm with estimated useful lives of 10 and 15 years, respectively.

The excess of the purchase price over the fair values of the identifiable assets and liabilities was recorded as goodwill and represents the expected future benefit to the Company from the acquisition of Screw Products.

The Company's Lawson operating segment includes revenues of approximately $2.6 million and $0.6 million from Screw Products in 2019 and 2018, respectively.

The following table contains unaudited pro forma net sales and net income for Lawson Products assuming the Screw Products acquisition closed on January 1, 2017.

(Dollars in thousands)

Year Ended December 31,

Pro forma (unaudited)

The pro forma disclosures in the table above include adjustments for, amortization of intangible assets, interest expense, tax expenses and the impact of pro forma adjustments and acquisition costs to reflect results that are more representative of the combined results of the transactions as if the Screw Products acquisition closed on January 1, 2017.

This pro forma information utilizes certain estimates, is presented for illustrative purposes only and may not be indicative of the results of operation that would have actually occurred.

In addition, future results may vary significantly from the results reflected in the pro forma information.

The unaudited pro forma financial information does not reflect the impact of future events that may occur after the acquisition, such as anticipated cost savings from operating synergies.

Note 20 – Stock Repurchase Program

In the second quarter of 2019, our Board of Directors authorized a program in which the Company may repurchase up to $7.5 million of the Company's common stock from time to time in open market transactions, privately negotiated transactions or by other methods.

In 2019, the Company purchased 32,362 shares of common stock at an average purchase price of $38.13 under the repurchase program.

In 2019, the Company's Board of Directors authorized a program in which the Company may repurchase up to $ 7.5 million of the Company's common stock from time to time in open market transactions, privately negotiated transactions or by other methods.

In 2020 and 2019, the Company purchased 47,504 and 32,362 shares of common stock at an average purchase price of $ 36.93 and $ 38.13 , respectively, under the repurchase program.

At December 31, 2020, the Company had approximately $ 4.5 million available under the repurchase plan.

Note 21 – Related Party Transact ions

During the twelve months ended December 31, 2020 the Company purchased approximately $ 0.9 million of inventory from a company owned by an immediate relative of a Board member at fair market value.

The Company paid substantially all of the amount owed in the third and fourth quarters and therefore immaterial remaining liabilities exist as of December 31, 2020.

Note 22 – COVID-19 Risks and Uncertainties

There is substantial uncertainty as to the overall effect the COVID-19 pandemic will have on the results of the Company for 2021 and beyond.

Various events related to COVID-19 have resulted in lost revenue to our Company, limitations on our ability to source high demand products, limitations on our sales force to perform certain functions due to state or federal stay-at-home orders, slow-down of customer demand for our products and limitations of some customers to pay us on a timely basis.

On March 27, 2020, Congress enacted the Coronavirus Aid, Relief, and Economic Security ("CARES") Act to provide certain relief as a result of the COVID-19 outbreak.

The Company has elected to defer the employer side social security payments in accordance with the CARES Act.

The total amount deferred is $ 3.5 million, with $ 1.7 million expected to be paid in 2021 and the remainder in 2022.

The Company will continue to evaluate how the provisions of the CARES Act will impact its financial position, results of operations and cash flows.

The Company has also utilized the Canadian Emergency Wage Subsidy ("CEWS") Act for both Lawson Canada and Bolt for assistance with hourly employee costs.

The CEWS is a program that provides a subsidy of certain eligible wages commencing March 15, 2020 through December 31, 2020 subject to meeting certain criteria.

During 2020 the Company recorded $ 1.4 million in subsidies from the CEWS program which is recognized as a reduction to selling, general and administrative expenses in the consolidated statement of income and comprehensive income.

In the first quarter of 2020, the government of the state of Illinois defined essential businesses, allowing Lawson to operate during the pandemic.

A change in this status could result in the temporary closure of our business.

Additionally the COVID-19 pandemic could result in a temporary closure of any or all of our distribution facilities or the Bolt branch locations, which would negatively impact our operations.

Other disruptions to our supply chain such as reduced capacity or temporary shutdowns of freight carriers could also negatively impact Company performance.

The pandemic is negatively impacting sales and operations currently and may negatively impact future financial results, liquidity and overall performance of the Company.

Additionally, it is reasonably possible that estimates made in the financial statements may be materially and adversely impacted in the future as a result of these conditions, including delay in payment of receivables, impairment losses related to goodwill and other long-lived assets, and inability to utilize deferred tax assets.

The Lawson MRO business model relies upon customer interaction as well as a consistent schedule of onsite visits by our sales representatives to customer locations.

The Bolt business model relies on foot traffic in its branch locations.

The onset of the COVID-19 pandemic, as well as social distancing guidelines and government mandated shelter in place orders, have negatively impacted the ability of our sales reps to visit our customers and for foot traffic to return to our Bolt branch locations, resulting in an overall negative impact on our business.

The second quarter 2020 financial performance of the Company was substantially negatively impacted as state and local governments throughout the United States and Canada imposed strict COVID-19 related restrictions, including shutdowns of nonessential businesses and stay-at-home orders, particularly in April.

These restrictions were relaxed in May and June, and were further relaxed throughout the third quarter.

The economic climate in the third quarter improved as non-essential businesses reopened in both limited capacity and full capacity.

The relaxed restrictions resulted in increased customer contact and more consistent customer visits for Lawson MRO sales representatives, as well as increased customer visits to Bolt

branch locations.

The relaxed restrictions continued in the fourth quarter as well, which allowed for continued sequential improvement in operating and financial performance.

Despite the improved economic climate, the Company continues to be negatively impacted by the COVID-19 pandemic and the various federal, state and local restrictions enacted to combat the pandemic.

In the fourth quarter of 2020, the U.S.

Food and Drug Administration approved certain vaccines that have demonstrated effectiveness in preventing the spread of the COVID-19 virus.

However, it is projected that the production, distribution and administration of the vaccine to a sufficient percentage of the population to significantly minimize the future effect of the pandemic will not be reached until mid-2021.

The Company has taken several steps to mitigate the potential negative impacts of COVID-19.

The actions taken included, but are not limited to, furloughing employees, reducing base salaries for a period of time, canceling travel and award trips, temporarily consolidating its Suwanee distribution center operations into the McCook facility, eliminating non-critical capital expenditures and eliminating various positions throughout the Company.

In the third and fourth quarters the Company brought back various previously furloughed employees.

The Company reopened the Suwanee distribution center in a reduced capacity in the third quarter as overall business activity increased.

The Company will continue to closely monitor the operating environment and will take appropriate actions to protect the safety for its employees, customers and suppliers.

Lawson Products, Inc.

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(Dollars in thousands)

Balance at Beginning of Period

Charged to Costs and Expenses

Balance at End of Period

Description Balance at Beginning of Period Charged to Costs and Expenses Deductions Balance at End of Period

Allowance for doubtful accounts:

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Year ended December 31, 2019

$ 549 $ 623 $ ( 579 ) $ 593

Valuation allowance for deferred tax assets:

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Year ended December 31, 2019

$ 2,569 $ — $ ( 1,334 ) $ 1,235

(1) Deductions reflect uncollected receivables written off, net of recoveries and translation adjustments.

1 unchanged sentence

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 8. Financial Statements and Supplementary Data