What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2022-02-24 compared with 2021-02-26 · 94 added, 106 removed, 121 unchanged (62% of the section changed)

5 unchanged sentences

The Bolt operating segment primarily distributes its MRO products through a netwo rk of 14 branc hes located in Alberta, Saskatchewan, Manitoba and British Columbia, Canada.

COVID-19 Pandemic

In March 2020, the World Health Organization declared a new strain of coronavirus (“COVID-19”) a pandemic.

The COVID-19 pandemic continues to negatively impact the global economy by disrupting global supply chains and financial markets and has negatively impacted our operational and financial performance.

The continued impact of the COVID-19 pandemic on our operational and financial performance, including our ability to execute our business strategies and initiatives in the expected time frame, will depend on future developments, including the duration and spread of the pandemic and related restrictions on travel and transports, all of which remain uncertain.

An extended period of global supply chain and economic disruption could materially affect our business, sales, results of operations and financial condition.

Lawson continues to be defined as an essential business by the state of Illinois.

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 some 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 our performance.

The pandemic has negatively impacted our current operations and may negatively impact our future financial results, liquidity and overall performance.

Additionally, it is possible that estimates made in support of our financial statements may be materially and adversely impacted in the near term 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 Company experienced the most severe impacts of the COVID-19 pandemic in the second quarter 2020.

The onset of the pandemic and government regulations, including social distancing guidelines and shutdowns of nonessential businesses, led to closure of customer businesses throughout the United States and Canada, as well as substantial restrictions on the ability of Lawson MRO sales representatives to visit customer locations and perform VMI services.

Additionally government regulations also severely restricted the ability of customers to visit Bolt branch locations.

The economic climate in the third and fourth quarters improved as many nonessential businesses have reopened in both limited capacity and full capacity.

The relaxed restrictions have resulted in consistent customer visits and increased customer contact.

While business conditions improved in the third and fourth quarters, the Company expects to continue to be adversely 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, 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 or later.

We continue to take action to mitigate the potential negative impacts of COVID-19.

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

We continue to monitor our balance sheet and liquidity position and take actions to protect our cash flows from operations while at the same time managing our operating expenses in relation to current sales trends.

At December 31, 2020, we had $28.4 million of unrestricted cash and cash equivalents and an additional $66.0 million of borrowing capacity, net of outstanding letters of credit.

Our outstanding letters of credit include a letter of credit for $33.0 million to secure the remaining payment of the Partsmaster acquisition.

We will continue to closely monitor the overall economic and operating environment and we will take appropriate actions to protect the safety of our employees, customers and suppliers while continuing to meet our working capital needs and remain in compliance with our debt covenants.

While COVID-19 has negatively impacted our sales, cost control measures and ability to effectively service our customers, we have continued to generate positive cash flow that has enabled us to maintain a strong financial position.

We plan to continue to respond to pandemic developments in a prompt and disciplined manner with an emphasis on protecting our employees and maintaining our strong financial position.

Sales Drivers

3 unchanged sentences

economy which has been significantly affected by the COVID-19 pandemic.

One measure used to evaluate the strength of the industrial products market is the PMI index published by the Institute for Supply Management.

The PMI index is a composite index of economic activity in the United States manufacturing sector and is available at https://www.instituteforsupplymanagement.org .

One measure used to evaluate the strength of the industrial products market is the Purchasing Managers Index (PMI) published by the Institute for Supply Management.

The PMI is a composite index of economic activity in the United States manufacturing sector and is available at https://www.instituteforsupplymanagement.org .

A measure of that index above 50 generally indicates expansion of the manufacturing sector while a measure below 50 generally represents contraction.

The average monthly PMI (Purchasing Managers Index) was 52.5 for the year ended December 31, 2020 compared to 51.3 for the year ended December 31, 2019.

The average monthly PMI for the fourth quarter of 2020 was 59.2, which indicates expansion of the manufacturing sector compared to the previous periods.

This is compared to the fourth quarter of 2019 which was 48.1, which indicates contraction of the manufacturing sector compared to the previous periods.

One metric we use to measure our success is Average Daily Sales ("ADS") in which we calculate our total sales divided by the number of selling days, which exclude weekends and holidays.

The average monthly PMI was 60.7 for the year ended December 31, 2021 compared to 52.5 for the year ended December 31, 2020.

Our sales are also influenced by the number of sales representatives and their productivity.

One metric we use to measure sales rep productivity is Average Daily Sales ("ADS") in which we calculate our total sales divided by the number of selling days, which exclude weekends and holidays.

Our sales are affected by the number and effectiveness of sales representatives and the amount of sales each representative can generate from providing products and services to our customers, which we measure as average sal es per day per sales representative.

We had an average of 1,012 sales representatives working for us in 2020, a 2.1% increase over 2019.

Excluding the Partsmaster acquisition, we had an average of 944 sales representatives working for us in 2020.

We had an average of 1,072 sales representatives working for us in 2021 compared to an average of 1,012 in 2020, an increase of 5.9%.

This was primarily driven by the inclusion of Partsmaster sales reps for the full year of 2021 compared to the four-month post-acquisition period in 2020.

Lawson segment ADS, including Partsmaster, increased 19.8% to $1,471 million in the full year 2021 compared to $1,228 million in the prior year.

Partsmaster contributed $57.8 million of revenue and operating income of $1.6 million in the full year 2021, compared to $22.6 million of revenue and $0.8 million of operating income in the four-month post-acquisition period of 2020.

Excluding the impact of Partsmaster, Lawson segment ADS increased 9.1% in 2021 compared to the prior year, primarily driven by improved business conditions and fewer COVID-19 related restrictions compared to the full year of 2020.

We plan to continue concentrating our efforts on increasing the productivity and size of our sales team.

Supply Chain Disruptions

Along with the broader economy, we are experiencing additional pressure in our supply chain, labor shortages and inflation.

This results in challenges in acquiring and receiving inventory in a timely fashion and fulfilling customer orders, which has offset some of the sales gains we recorded in 2021 compared to 2020.

The supply chain disruptions have also led to increased product costs which have contributed to lower gross margins as a percentage of sales compared to the prior year.

We have instituted various price increases during 2021 in response to rising supplier costs, as well as increased transportation and labor costs.

Further discussion in included within the financial discussion of the Management's Discussion and Analysis of Financial Condition and Results of Operations .

Partsmaster Acquisition

In August 2020, we acquired Partsmaster, a leading Maintenance, Repair and Operations ("MRO") distributor from NCH Corporation ("NCH").

Partsmaster has approximately 200 sales representatives and serves approximately 16,000 customers throughout the United States and Canada.

We also subleased the Partsmaster distribution center located in Greenville, Texas from NCH, and we will continue to fulfill orders from this facility as we integrate Partsmaster into our MRO segment operations.

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

We paid $2.3 million at the time of the acquisition and we will pay the remaining $33.0 million in May 2021.

We plan to pay the remaining portion of the purchase price with cash on hand with any remaining portion using our existing credit facility.

Assets acquired and liabilities assumed as a result of the acquisition were accounted for at their fair value on the acquisition date.

The identified assets include $5.0 million of intangible assets for customer relationships and $2.8 million for trade names with estimated useful lives of 10 years and 5 years, respectively.

Goodwill of $15.8 million related to this acquisition reflects the purchase price less the fair market value of the identifiable assets.

The liabilities assumed include approximately $2.9 million relating to deferred employee compensation and $4.1 million of accounts payable and other accrued liabilities.

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

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

In August 2020, we acquired Partsmaster, a leading Maintenance, Repair and Operations ("MRO") distributor from NCH Corporation, with approximately 200 sales representatives and approximately 16,000 customers throughout the United States and Canada.

The purchase price of the acquisition was $35.3 million in cash and the assu mption of certain liabilities.

We paid $2.3 million at the time of the acquisition and paid the remaining $33.0 million in May 2021.

We also subleased the Partsmaster distribution center located in Greenville, TX from NCH and we currently fulfill orders from the facility.

We will move out of the Greenville, TX facility and into a new distribution facility in Dallas, TX in the first quarter of 2022.

The integration of Partsmaster into Lawson was substantially completed in July 2021.

Additional information related to the Partsmaster acquisition is provided in Note 3 - Acquisition in the notes to the consolidated financial statements.

The Partsmaster acquisition is reported in the Lawson MRO segment.

COVID-19 Pandemic

Various events related to COVID-19 may impact revenue, product sourcing, sales functions, and customers' ability to pay timely.

The onset of the COVID-19 pandemic occurred in March 2020.

This resulted in widespread closures of businesses, decreased travel and other substantial restrictions on economic activity beginning in the first quarter of 2020.

The most severe restrictions were effective in the second quarter of 2020, particularly the month of April.

These restrictions began to be relaxed subsequent to April 2020, which led to an improved business climate and increased economic activity throughout the remainder of the year.

The relaxed restrictions continued during 2021, which led to increased business activity and contributed to improved operating results compared to the prior year 2020.

We will continue to closely monitor the overall economic and operating environment and we will take appropriate actions to protect the safety of our employees, customers and suppliers.

While we believe that COVID-19 and supply chain disruptions continue to negatively impact our sales and cost control measures, our ability to effectively service our customers has continued to generate positive cash flow that has enabled us to maintain a strong financial position.

We plan to continue to respond to pandemic developments in a prompt and disciplined manner with an emphasis on maintaining our strong financial position.

Proposed Combination with TestEquity and Gexpro Services

On December 29, 2021, Lawson entered into the Merger Agreements for the combination of Lawson, TestEquity and Gexpro Services.

See “Proposed Combination with TestEquity and Gexpro Services” included in Part I.

Business, which section is incorporated herein by reference.

In addition, upon closing of the Mergers, Lawson anticipates entering into a new credit arrangement consisting of a $200 million revolving credit facility, a $250 term loan facility, and a $50 million delayed draw term loan facility, as contemplated by the debt financing commitment letter described in “Debt Financing Commitment Letter” included in Part I.

Business, which section is incorporated herein by reference.

Lawson expects to complete the Mergers in the second quarter of 2022.

RESULTS OF OPERATIONS FOR 2021 AS COMPARED TO 2020

28 unchanged sentences

Operating income was $12.0 million for 2021 inclusive of $4.8 million of stock-based compensation compared to $20.6 million in 2020 which included $2.0 million of stock-based compensation.

Excluding stock-based compensation, severance and other non-recurring items, adjusted operating income decreased to $27.4 million from $28.6 million on lower sales, offset by cost control measures enacted in response to the COVID-19 pandemic and the contribution of Partsmaster to the adjusted non-GAAP operating income of $1.7 million.

Reconciliation of GAAP Operating Income to Adjusted Non-GAAP Operating Income (Unaudited)

Excluding stock-based compensation, severance and other non-recurring items, adjusted operating income was $27.5 million in 2021 compared to the prior year of $27.4 million, driven by higher sales volume offset by lower gross margins and higher selling expenses and incentive compensation.

Reconciliation of GAAP Operating Income to Non-GAAP Adjusted Operating Income (Unaudited)

Twelve Months Ended

3 unchanged sentences

Severance expense (2)

Goodwill impairment (3)

Inventory reserves (3)

Costs related to merger agreements (4)

Acquisition related costs (5)

Adjusted non-GAAP operating Income $ 27,434 $ 28,610

Goodwill impairment (6)

Non-GAAP adjusted operating Income $ 27,461 $ 27,434

(1) Expense for stock-based compensation, of which a portion varies with the Company's stock price.

(2) Includes severance expense from actions taken in 2021 and 2020 along with 2020 severance and retention costs related to the Partsmaster acquisition.

(3) Represents the goodwill impairment related to the 2018 acquisition of Screw Products, Inc as the carrying value of the reporting unit exceeded its estimated fair value.

(4) Primarily legal and accounting costs pertaining to the Partsmaster acquisition.

(3) Includes e xpense for Partsmaster inventory rationalization plan and write-down of personal protective equipment inventory to net realizable value.

(4) Primarily costs related to the negotiation, review and execution of the merger agreements relating to Lawson’s proposed business combination with TestEquity and Gexpro Services.

(5) Primarily signing bonus costs pertaining to the acquisition of Partsmaster.

(6) Represents the goodwill impairment related to the 2018 acquisition of Screw Products, Inc.

as the carrying value of the reporting unit exceeded its estimated fair value.

Sales and Gross Profits

12 unchanged sentences

52.5 % 53.1 %

Consolidated revenue in 2020 decreased 5.2% to $351.6 million from $370.8 million in 2019.

Sales were negatively impacted by the COVID-19 pandemic and lower sales to oil and gas customers.

All customer categories have been negatively impacted by the effect of the COVID-19 pandemic.

The most acute negative impacts of the COVID-19 pandemic were experienced in the second quarter at the onset of the pandemic.

Restrictions related to the pandemic began to be relaxed in the third quarter and continued to be relaxed in the fourth quarter, which led to improved customer activity, as well as increased customer contact for Lawson MRO sales representatives and greater foot traffic for the Bolt branches compared to the second quarter.

Excluding Partsmaster, sales decreased 11.3% primarily as a result of the pandemic.

The decrease in sales was offset by the inclusion of $22.6 million of sales contributed by the Partsmaster acquisition since August 31, 2020.

Average daily sales decreased to $1.390 million in 2020 compared to $1.471 million in 2019 with one more selling day in 2020.

Excluding a foreign currency effect of $0.7 million, consolidated revenue decreased by 5.0% for the year.

Gross profit decreased to $186.5 million in 2020 from $197.4 million in 2019 driven primarily by the decrease in sales due to the COVID-19 pandemic, partially offset by the inclusion of $13.2 million of gross profit from Partsmaster.

Gross profit as a percent of sales decreased to 53.1% from 53.2% a year ago.

Gross profit as a percentage of sales generated by sales representatives acquired from the Partsmaster acquisition was 58.4% post-acquisition.

The organic Lawson MRO (excluding Bolt, Screw Products, and Partsmaster) gross margin as a percent of sales declined to 59.8% compared to the prior year organic gross margin percent of 60.7% primarily as a result of lower margin products comprising a larger portion of our sales compared to the prior year and fixed distribution costs allocated over a lower sales base.

Consolidated revenue in 2021 increased 18.8% to $417.7 million from $351.6 million in 2020.

Average daily sales increased to $1.664 million in 2021 compared to $1.390 million in 2020 with two less selling days in 2021.

The increased sales is partially driven by the inclusion of Partsmaster sales of $57.8 million for the full year of 2021 compared to $22.6 million of sales for the 2020 four-month post-acquisition period.

Excluding Partsmaster, consolidated sales improved by 9.4% on a year over year basis.

Additionally, sales in 2020 were negatively impacted by the onset of the COVID-19 pandemic, which led to widespread shutdowns of businesses and restrictions on other business activity throughout the year, particularly in the second quarter of 2020.

The improved business environment in 2021 led to increased sales to strategic, core and Kent customers in the Lawson segment, as well as increased Bolt segment sales compared to the prior year.

This was partially offset by supply chain disruptions which led to challenges of receiving inventory in a timely fashion and fulfilling customer orders, as well as lower sales among Government customers.

Excluding a foreign currency effect of $5.2 million, consolidated revenue increased by 17.3% for the year.

Gross profit increased to $219.2 million in 2021 from $186.5 million in 2020.

The increased gross profit is driven by the inclusion of Partsmaster gross profit of $36.4 million for the full year 2021 compared to $13.2 million of gross profit from the fourth month post-acquisition period of 2020.

Gross profit as a percent of sales decreased to 52.5% from 53.1% a year ago, driven primarily by increased freight and supplier costs due to supply chain disruptions.

The organic Lawson MRO (excluding Bolt, Screw Products and Partsmaster) gross margin as a percent of sales decreased to 58.3% compared to the prior year organic gross margin percent of 59.8% prior to the effect of the reclassification of service costs associated with service revenue.

This is primarily a result of additional inventory reserves of $1.4 million primarily related to the integration of Partsmaster and the impact of the supply chain disruptions previously mentioned.

Selling, General and Administrative Expenses

9 unchanged sentences

$ 110,605 $ 89,213 $ 21,392 24.0 %

Selling expenses decreased to $76.8 million in 2020 from $85.3 million in 2019 and, as a percent of sales decreased to 21.8% in 2020 from 23.0% in 2019.

The decrease in selling expense as a percent of sales was primarily driven by reduced sales compensation driven by lower sales and a reduction of travel related expenses after the onset of the COVID-19 pandemic.

These declines were partially offset by an inclusion of $6.5 million of selling expenses from the Partsmaster acquisition.

General and administrative expenses decreased to $89.2 million in 2020 from $102.9 million in 2019 primarily due to a decrease in stock-based compensation expense of $15.8 million, a portion of which varies with the Company stock price, and lower employee compensation, lower travel expense and other cost control measures in order to mitigate the negative impacts of COVID-19.

The decline was offset by the inclusion of $7.4 million of General and administrative expense from the Partsmaster acquisition and the goodwill impairment of $1.9 million related to the 2018 acquisition of Screw Products as the carrying value of the reporting unit exceeded its fair value.

Additionally the Company recorded $1.4 million under the Canada Emergency Wage Subsidy ("CEWS") as a reduction of general and administrative expenses.

Selling expenses increased to $96.6 million in 2021 from $76.8 million in 2020 and, as a percent of sales increased to 23.1% in 2021 from 21.8% in 2020.

The increased selling expense was driven by increased sales compared to the prior year, as well as the inclusion of selling expense of $21.4 million for Partsmaster for the full year 2021 compared to selling expense of $6.5 million for the 2020 four-month post-acquisition period.

As a percent of sales, the increase was driven by the inclusion of Partsmaster with a higher sales cost and the return to more normalized sales activities in 2021.

General and administrative expenses increased to $110.6 million in 2021 compared to $89.2 million in 2020 primarily due to the inclusion of Partsmaster general and administrative expense of $13.9 million for the full year 2021 compared to $7.4 million in the 2020 post-acquisition period, as well as $8.3 million of expense related to the negotiation, review and execution of the merger agreements relating to Lawson’s proposed combination with TestEquity and Gexpro Services and a $2.8 million increase in stock-based compensation expense, a portion of which varies with the Company stock price.

The remaining increase was driven to support higher sales and temporary cost reductions put in place in 2020 that were re-established in 2021.

Goodwill Impairment

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..

The impairment charge is included in General and administrative expense.

No impairment charges were recorded in 2021.

Interest Expense

Interest expenses increased $0.1 million in 2020 over the prior year, due primarily to the inclusion of imputed interest expense from our accrued acquisition liability offset by lower average outstanding balances under our credit agreement.

Interest expenses increased $0.2 million in 2021 over the prior year, due primarily to higher average outstanding balances under our credit agreement.

Other Income, Net

2 unchanged sentences

Income Tax Expense

Income tax expenses were $5.7 million resulting in a 27.3% effective tax rate for 2020 compared to income tax expense of $2.5 million and a 25.4% effective tax rate for 2019.

The higher effective tax rate in 2020 is due primarily to increases in uncertain tax positions and lower stock compensation deductions.

Income tax expense was $2.5 million resulting in a 21.1% effective tax rate for 2021 compared to income tax expense of $5.7 million and a 27.3% effective tax rate for 2020.

The lower effective tax rate in 2021 is due primarily to the release of a Canadian deferred taxes valuati on allowance of $1.2 million a nd higher stock compensation benefits.

LIQUIDITY AND CAPITAL RESOURCES

Cash provided by operating activities was $32.5 million and $9.2 million in 2020 and 2019, respectively, reflecting stronger operating results along with tightly managing its working capital.

Capital expenditures of $1.7 million and $2.0 million in 2020 and 2019 respectively, were primarily for improvements to our distribution centers and information technology.

In the third quarter of 2020, the Company paid $2.3 million in cash related to the Partsmaster acquisition.

Available cash and cash equivalents were $4.2 million on December 31, 2021 compared to $28.4 million on December 31, 2020.

The decrease in available cash is primarily due to the payment of the acquisition liability related to the purchase of Partsmaster for $33.0 million in May 2021.

Net cash provided by operating activities for the year ended December 31, 2021 was $5.4 million, primarily driven by reported operating earnings offset by increased working capital from increases in inventory and accounts receivable balances due to higher sales compared to the prior year.

Capital expenditures were $8.2 million for the full year 2021 compared to $1.7 million in 2020, primarily for improvements to our distribution centers and information technology.

Cash provided by financing activities was $10.7 million for the full year 2021, primarily due to the net proceeds of $11.9 million from our Revolving Credit Facility primarily driven by the final Partsmaster payment.

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

In the first quarter of 2020 we purchased 47,504 shares of our common stock at an average purchase price of $36.93 under the repurchase program.

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

On December 31, 2020, the Company had $4.5 million available under its repurchasing program.

Credit Agreement

At December 31, 2020, we had no borrowings under the Credit Agreement and had borrowing availability of $66.0 million.

We did not repurchase any shares of stock in 2021 under this plan.

The Company anticipates that outstanding stock performance rights with a value of $10.7 million at December 31, 2021 will be paid out within the next twelve months prior to expiration.

Revolving Credit Facility

On December 31, 2021 we had $11.9 million in outstanding borrowings and $87.1 million of borrowing availability remaining, net of outstanding letters of credit, under our Revolving Credit Facility.

Along with certain standard terms and conditions, the Credit Agreement requires the Company to comply with certain financial covenants including an EBITDA to Fixed Charges Coverage Ratio and a Total Net Leverage Ratio.

As of December 31, 2021, we were in compliance with all financial covenants.

See Note 13 - Credit Agreement for further information on the Company Credit Agreement.

In addition to other customary representations, warranties and covenants, the Credit Agreement contains certain financial covenants.

The following chart reflects the EBITDA to fixed charges ratio and total net leverage ratio covenant:

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 financial covenants as of December 31, 2020.

No cash dividends have been paid in the two years ended December, 31 2020.

Dividends are subject to certain restrictions under our Credit Agreement.

Partsmaster Acquisition Liability

As a part of the Partsmaster acquisition, payment of $33.0 million is due to the sellers in May 2021.

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

Payment will be made with cash on hand and with any remaining portion using our existing credit facility.

The $33.0 million obligation has been discounted to its present value and is recognized as a current liability of $32.7 million in our condensed consolidated balance sheet as of December 31, 2020.

While we were in compliance with the financial covenants included in our Credit Agreement for the quarter ended December 31, 2021, failure to meet the covenant requirements of the Credit Agreement in future periods could lead to higher financing costs, increased restrictions, or reduce or eliminate our ability to borrow funds and could have a material adverse effect on our business, financial condition and results of operations.

We believe cash provided by operations and funds available under our Credit Agreement are sufficient to fund our operating requirements, strategic initiatives and capital improvements, although we cannot provide assurance that events beyond our control will not have a material adverse impact on our liquidity.

See “ Debt Financing Commitment Letter ” , included in Part I.

Business, for a description of the potential new financing arrangement that will be executed in connection with the closing of the Transactions, which is incorporated herein by reference.

OFF-BALANCE SHEET ARRANGEMENTS

The majority of our operating leases were recognized as right of use assets and lease liabilities on the balance sheet upon the adoption of ASU 2016-02, Leases ("ASU 2016-02") in the first quarter of 2019.

See Note 12 - Leases for the transition to ASU 2016-02.

Also, as of December 31, 2021, we had contractual commitments to purchase approximately $40.4 million of product from our suppliers and contractors.

CRITICAL ACCOUNTING POLICIES

The contractual commitments have increased compared to prior years primarily due to supply chain disruptions.

CRITICAL ACCOUNTING ESTIMATES

We have disclosed our significant accounting policies in Note 2 to the consolidated financial statements.

1 unchanged sentence

Allowance for Doubtful Accounts — We evaluate the collectability of accounts receivable based on a combination of factors.

In circumstances where we are aware of a specific customer’s inability to meet its financial obligations (e.g.,

bankruptcy filings, substantial down-grading of credit ratings), a specific reserve for bad debts is recorded against amounts due to reduce the receivable to the amount we believe will be collected.

In circumstances where we are aware of a specific customer’s inability to meet its financial obligations (e.g., bankruptcy filings, substantial down-grading of credit ratings), a specific reserve for bad debts is recorded against amounts due to reduce the receivable to the amount we believe will be collected.

For all other customers, we recognize reserves for bad debts based on our historical experience of bad debt write-offs as a percent of accounts receivable outstanding.

2 unchanged sentences

A hypothetical change of one percent to our reserve as a percent of our gross accounts receivable would have affected our annual doubtful accounts expense by approximately $0.5 million.

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

Most of our products are not exposed to the risk of obsolescence due to technology changes.

16 unchanged sentences

If we determine that it is more likely than not that the carrying value of the reporting unit is greater than the fair value of the reporting unit, the Company will move to the next step in the process.

The Company will estimate the fair value of the reporting unit and compare it to the reporting unit's carrying value.

will estimate the fair value of the reporting unit and compare it to the reporting unit's carrying value.

If the carrying value of the reporting unit exceeds its fair value, the Company will record an impairment of goodwill equal to the amount the carrying value of the reporting unit exceeds its fair value, up to the total amount of goodwill previously recognized.

4 unchanged sentences

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 7. Management’s Discussion and Analysis