Distribution Solutions Group, Inc. 10-Q

ITEM 1 - FINANCIAL STATEMENTS Lawson Products, Inc. Condensed Consolidated Balance Sheets (Dollars in thousands, except share data) March 31, December 31, 2022 2021 ASSETS (Unaudited) Current assets: Cash and cash equivalents $ 5,534 $ 4,181 Restricted cash 200 198 Accounts receivable, less allowance for doubtful accounts of $ 830 and $ 798 , respectively 54,940 47,031 Inventories, net 77,297 73,849 Miscellaneous receivables and prepaid expenses 7,954 7,517 Total current assets 145,925 132,776 Property, plant and equipment, less accumulated depreciation and amortization 19,165 18,828 Goodwill 35,510 35,313 Deferred income taxes 18,556 20,111 Intangible assets, net 15,613 16,165 Cash value of life insurance 18,025 18,573 Right of use assets 17,571 14,045 Other assets 348 346 Total assets $ 270,713 $ 256,157 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 31,726 $ 21,089 Lease obligation 4,855 4,467 Accrued expenses and other liabilities 34,516 46,688 Total current liabilities 71,097 72,244 Revolving line of credit 15,566 11,900 Security bonus plan 10,353 10,578 Deferred compensation 11,321 11,962 Lease obligation 13,908 10,841 Deferred tax liability 1,689 1,671 Other liabilities 4,047 3,954 Total liabilities 127,981 123,150 Stockholders’ equity: Preferred stock, $ 1 par value: Authorized - 500,000 shares, issued and outstanding — None — — Common stock, $ 1 par value: Authorized - 35,000,000 shares Issued - 9,368,463 and 9,363,093 shares, respectively Outstanding - 9,120,167 and 9,115,584 shares, respectively 9,368 9,363 Capital in excess of par value 22,424 22,118 Retained earnings 120,001 111,015 Treasury stock – 248,296 and 247,509 shares, respectively ( 10,066 ) ( 10,033 ) Accumulated other comprehensive income 1,005 544 Total stockholders’ equity 142,732 133,007 Total liabilities and stockholders’ equity $ 270,713 $ 256,157 See notes to Condensed Consolidated Financial Statements 5 Table of Contents Lawson Products, Inc. Condensed Consolidated Statements of Income and Comprehensive Income (Dollars in thousands, except per share data) (Unaudited) Three Months Ended March 31, 2022 2021 Revenue $ 117,877 $ 103,556 Cost of goods sold 57,379 48,996 Gross profit 60,498 54,560 Operating expenses: Selling expenses 26,310 23,802 General and administrative expenses 22,112 25,948 Operating expenses 48,422 49,750 Operating income 12,076 4,810 Interest expense ( 95 ) ( 323 ) Other income, net 204 372 Income before income taxes 12,185 4,859 Income tax expense 3,199 1,263 Net income $ 8,986 $ 3,596 Basic income per share of common stock $ 0.99 $ 0.40 Diluted income per share of common stock $ 0.96 $ 0.39 Weighted average shares outstanding: Basic weighted average shares outstanding 9,121 9,063 Effect of dilutive securities outstanding 236 265 Diluted weighted average shares outstanding 9,357 9,328 Comprehensive income Net income $ 8,986 $ 3,596 Other comprehensive income, net of tax: Adjustment for foreign currency translation 461 631 Comprehensive income $ 9,447 $ 4,227 See notes to Condensed Consolidated Financial Statements 6 Table of Contents Lawson Products, Inc. Condensed Consolidated Statements of Changes in Stockholders’ Equity (Dollars in thousands) (Unaudited) Common Stock Capital in Excess of Par Value Accumulated Other Comprehensive Income Total Stockholders' Equity Outstanding Shares $ 1 Par Value Retained Earnings Treasury Stock Balance at December 31, 2021 9,115,584 $ 9,363 $ 22,118 $ 111,015 $ ( 10,033 ) $ 544 $ 133,007 Net income — — — 8,986 — — 8,986 Adjustment for foreign currency translation — — — — — 461 461 Stock-based compensation — — 311 — — — 311 Shares issued 4,583 5 ( 5 ) — — — — Shares repurchased held in treasury — — — — ( 33 ) — ( 33 ) Balance at March 31, 2022 9,120,167 $ 9,368 $ 22,424 $ 120,001 $ ( 10,066 ) $ 1,005 $ 142,732 See notes to Condensed Consolidated Financial Statements 7 Table of Contents Lawson Products, Inc. Condensed Consolidated Statements of Changes in Stockholders’ Equity (Dollars in thousands) (Unaudited) Common Stock Capital in Excess of Par Value Accumulated Other Comprehensive Income Total Stockholders' Equity Outstanding Shares $ 1 Par Value Retained Earnings Treasury Stock Balance at December 31, 2020 9,061,039 $ 9,288 $ 19,841 $ 101,609 $ ( 9,015 ) $ 699 $ 122,422 Net income — — — 3,596 — — 3,596 Adjustment for foreign currency translation — — — — — 631 631 Stock-based compensation — — 422 — — — 422 Shares issued 5,776 5 ( 5 ) — — — — Shares repurchased held in treasury ( 268 ) — — ( 13 ) — ( 13 ) Balance at March 31, 2021 9,066,547 $ 9,293 $ 20,258 $ 105,205 $ ( 9,028 ) $ 1,330 $ 127,058 See notes to Condensed Consolidated Financial Statements 8 Table of Contents Lawson Products, Inc. Condensed Consolidated Statements of Cash Flows (Dollars in thousands) (Unaudited) Three Months Ended March 31, 2022 2021 Operating activities Net income $ 8,986 $ 3,596 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization 2,089 1,935 Stock-based compensation ( 8,623 ) 944 Deferred income taxes 1,565 ( 320 ) Reserve for obsolete and excess inventory 438 1,224 Changes in operating assets and liabilities Accounts receivable ( 7,915 ) ( 4,426 ) Inventories ( 3,665 ) 91 Miscellaneous receivables, prepaid expenses and other assets 96 ( 1,148 ) Accounts payable and other liabilities 6,886 ( 3,733 ) Other ( 68 ) 361 Net cash used in operating activities ( 211 ) ( 1,476 ) Investing activities Purchases of property, plant and equipment ( 2,057 ) ( 849 ) Business acquisition, net of acquired cash — 188 Net cash used in investing activities ( 2,057 ) ( 661 ) Financing activities Net proceeds on revolving lines of credit 3,666 — Shares repurchased held in treasury ( 33 ) ( 13 ) Payment of financing lease principal ( 43 ) ( 58 ) Net cash provided by (used in) financing activities 3,590 ( 71 ) Effect of exchange rate changes on cash and cash equivalents 33 111 Increase (decrease) in cash, cash equivalents and restricted cash 1,355 ( 2,097 ) Cash, cash equivalents and restricted cash at beginning of period 4,379 29,391 Cash, cash equivalents and restricted cash at end of period $ 5,734 $ 27,294 Cash and cash equivalents $ 5,534 $ 26,293 Restricted cash 200 1,001 Total cash, cash equivalents and restricted cash $ 5,734 $ 27,294 Supplemental disclosure of cash flow information Net cash paid for income taxes 680 378 Net cash paid for interest 98 134 Additions of property, plant and equipment included in accounts payable 149 70 9 Table of Contents See notes to condensed consolidated financial statements. 10 Table of Contents Notes to Condensed Consolidated Financial Statements Note 1 — Summary of Significant Accounting Policies and Other Information Basis of Presentation and Consolidation The accompanying unaudited condensed consolidated financial statements of Lawson Products, Inc. (“Lawson” or the “Company”) have been prepared in accordance with generally accepted accounting principles for interim financial information, the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not contain all disclosures required by generally accepted accounting principles. Reference should be made to the Company’s Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2021. In the opinion of the Company, all normal recurring adjustments have been made that are necessary to present fairly the results of operations for the interim periods. Operating results for the three month period ended March 31, 2022 is not necessarily indicative of the results that may be expected for the year ending December 31, 2022. The Company has two reportable segments. The Lawson reportable segment distributes maintenance, repair and operations (“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 Supply House Ltd. (“Bolt Supply” or “Bolt”) reportable segment distributes MRO products primarily through its 14 branches located in Western Canada. Summary of Significant Accounting Policies See Note 2 of the 2021 Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for further details of the significant accounting policies of the Company. Recent Events On December 29, 2021, Lawson entered into: • an Agreement and Plan of Merger (the “TestEquity Merger Agreement”) by and among (i) LKCM TE Investors, LLC, a Delaware limited liability company (the “TestEquity Equityholder”), (ii) TestEquity Acquisition, LLC, a Delaware limited liability company and a wholly-owned subsidiary of the TestEquity Equityholder (“TestEquity”), (iii) Lawson and (iv) Tide Sub, LLC, a Delaware limited liability company and a wholly-owned subsidiary of Lawson (“Merger Sub 1”), pursuant to the terms and subject to the conditions of which the parties agreed, among other things, that Merger Sub 1 would merge with and into TestEquity, with TestEquity surviving the merger as a wholly-owned subsidiary of Lawson (the “TestEquity Merger”); and • an Agreement and Plan of Merger (the “Gexpro Services Merger Agreement” and, together with the TestEquity Merger Agreement, the “Merger Agreements”) by and among (i) 301 HW Opus Investors, LLC, a Delaware limited liability company (the “Gexpro Services Stockholder”), (ii) 301 HW Opus Holdings, Inc., a Delaware corporation and a wholly-owned subsidiary of the Gexpro Services Stockholder (“Gexpro Services”), (iii) Lawson and (iv) Gulf Sub, Inc., a Delaware corporation and a wholly-owned subsidiary of Lawson (“Merger Sub 2”), pursuant to the terms and subject to the conditions of which the parties agreed, among other things, that Merger Sub 2 would merge with and into Gexpro Services, with Gexpro Services surviving the merger as a wholly-owned subsidiary of Lawson (the “Gexpro Services Merger” and, together with the TestEquity Merger, the “Mergers”). Completion of the TestEquity Merger On April 1, 2022, (the “Closing Date”), the TestEquity Merger was consummated pursuant to the TestEquity Merger Agreement. In accordance with the TestEquity Merger Agreement, Merger Sub 1 merged with and into TestEquity, with TestEquity surviving as a wholly-owned subsidiary of Lawson. TestEquity is a distributor of parts and services to the industrial, commercial, institutional and governmental electronics manufacturing and test and measurement market. TestEquity operates through three brands, TestEquity, Jensen Tools and Techni-Tool. In accordance with and under the terms of the TestEquity Merger Agreement, in connection with the closing of the TestEquity Merger on the Closing Date, Lawson: (i) issued to the TestEquity Equityholder 3,300,000 shares of Lawson common stock, (ii) on behalf of TestEquity, paid certain indebtedness of TestEquity and (iii) on behalf of TestEquity, paid certain transaction expenses of TestEquity. 11 Table of Contents The TestEquity Merger Agreement provides that an additional 700,000 shares of Lawson common stock (the “TestEquity Holdback Shares”) (which were not issued at the closing of the TestEquity Merger) shall be held by Lawson until released to the TestEquity Equityholder or forfeited in accordance with two earnout provisions of the TestEquity Merger Agreement. The amount of TestEquity Holdback Shares issuable under the first earnout opportunity is based on, among other factors, the consummation of a certain additional acquisition by TestEquity during the period beginning after December 29, 2021 and ending 90 days after the closing of the TestEquity Merger. If any TestEquity Holdback Shares remain after the calculation of the first earnout opportunity, there is a second earnout opportunity based on, among other factors, the increase in TestEquity EBITDA (as defined in the TestEquity Merger Agreement) in calendar year 2022 over calendar year 2021 subject to the calculations within the TestEquity Merger Agreement. Completion of the Gexpro Services Merger On April 1, 2022, (the “Closing Date”), the Gexpro Services Merger was consummated pursuant to the Gexpro Services Merger Agreement. In accordance with the Gexpro Services Merger Agreement, Merger Sub 2 merged with and into Gexpro Services, with Gexpro Services surviving as a wholly-owned subsidiary of Lawson. Gexpro Services is a provider of supply chain solutions, specializing in developing and implementing Vendor Managed Inventory (VMI) and kitting programs to high-specification manufacturing customers. Gexpro Services provides critical products and services to customers throughout the lifecycle of highly technical Original Equipment Manufacturer (OEM) products. In accordance with and under the terms of the Gexpro Services Merger Agreement, in connection with the closing of the Gexpro Services Merger on the Closing Date, Lawson: (i) issued to the Gexpro Services Stockholder 7,000,000 shares of Lawson common stock, (ii) on behalf of Gexpro Services, paid certain indebtedness of Gexpro Services and (iii) on behalf of Gexpro Services, paid certain specified transaction expenses of Gexpro Services. The Gexpro Services Merger Agreement provides that an additional 1,000,000 shares of Lawson common stock (the “Gexpro Services Holdback Shares”) (which were not issued at the closing of the Gexpro Services Merger) shall be held by Lawson until released to the Gexpro Services Stockholder or forfeited in accordance with two earnout provisions of the Gexpro Services Merger Agreement. The amount of Gexpro Services Holdback Shares issuable under the first earnout opportunity is based on, among other factors, the consummation of one or more of three certain additional acquisitions by Gexpro Services during the period beginning after December 29, 2021 and ending 90 days after the closing of the Gexpro Services Merger. If any Gexpro Services Holdback Shares remain after the calculation of the first earnout opportunity, there is a second earnout opportunity based on, among other factors, the increase in Gexpro Services EBITDA (as defined in the Gexpro Services Merger Agreement) in calendar year 2022 over calendar year 2021 subject to the calculations within the Gexpro Services Merger Agreement. Note 2 - Business Combinations Subsequent to quarter end, on April 1, 2022, the Company completed its business combination with TestEquity and Gexpro Services in all-stock merger transactions. Pursuant to the Merger Agreements, Lawson issued an aggregate of 10.3 million shares of Lawson common stock to the former owners of TestEquity and Gexpro Services. An additional 1.7 million shares of Lawson common stock remain potentially issuable upon meeting the conditions of certain earnout provisions. Refer to Note 1 - Summary of Significant Accounting Policies and Other Information, for further information on the Mergers. TestEquity is a distributor of parts and services to the industrial, commercial, institutional and governmental electronics manufacturing and test and measurement market. TestEquity operates through three brands, TestEquity, Jensen Tools and Techni-Tool. Gexpro Services is a provider of supply chain solutions, specializing in developing and implementing Vendor Managed Inventory (VMI) and kitting programs to high-specification manufacturing customers. Gexpro Services provides critical products and services to customers throughout the lifecycle of highly technical Original Equipment Manufacturer (OEM) products. The combination of Lawson, TestEquity and Gexpro Services is intended to bring together three complementary distribution businesses under a holding company structure. Due to the timing of the consummation of the Mergers on April 1, 2022, the initial accounting for the Mergers is incomplete. As such, the Company is not able to disclose certain information relating to the Mergers, including the preliminary fair value of assets acquired and liabilities assumed. In addition, the financial results of TestEquity and Gexpro Services are not 12 Table of Contents included in the reported results of Lawson Products for the three months ended March 31, 2022 as it would be impracticable to do so. Note 3 - Revenue Recognition As part of the Company's revenue recognition analysis, it concluded that it has two separate performance obligations, and accordingly, two separate revenue streams: products and services. 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 and services is agreed upon regardless of whether or not there is a written contract. Performance Obligations Lawson has two operating segments; the Lawson segment and the Bolt Supply segment. The Lawson segment has two distinct performance obligations offered to its customers: a product performance obligation and a service performance obligation. Although the Company has identified that it offers its customers both a product and a service obligation, the customer only receives one invoice per transaction with no price allocation between these obligations. The Company does not price its offerings based on any allocation between these obligations. Lawson generates revenue primarily from the sale of MRO products to its customers. Revenue related to product sales is recognized at the time that control of the product has been transferred to the customer; either at the time the product is shipped or the time the product has been received by the customer. 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. 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. 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. The Company has elected not to disclose 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. Disaggregated revenue by geographic area follows: Three Months Ended March 31, (Dollars in thousands) 2022 2021 United States $ 95,684 $ 84,985 Canada 22,193 18,571 Consolidated total $ 117,877 $ 103,556 13 Table of Contents Disaggregated revenue by product type follows: Three Months Ended March 31, Product Category 2022 2021 Fastening Systems 23.5 % 21.0 % Cutting Tools and Abrasives 14.2 % 14.9 % Fluid Power 13.8 % 13.4 % Electrical 10.5 % 10.6 % Specialty Chemicals 9.3 % 9.7 % Aftermarket Automotive Supplies 8.1 % 6.8 % Safety 4.8 % 4.9 % Welding and Metal Repair 1.5 % 1.7 % Other 14.3 % 17.0 % Consolidated Total 100.0 % 100.0 % Activities as lessor Lawson leases parts washer machines to customers through its Torrents leasing program. These leases are classified as operating leases. The leased machines are recognized as a component of Property, plant, and equipment in the Condensed Consolidated Balance Sheet and the leasing revenue is recognized on a straight line basis. The Torrents machine leasing program generated $ 1.2 million and $ 0.7 million of revenue for the three months ended March 31, 2022 and 2021, respectively. The carrying value of the Torrents leasing assets as of March 31, 2022 is $ 1.2 million. 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. Note 4 — Restricted Cash The Company has 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. Note 5 — Inventories Inventories, net, consisting primarily of purchased goods which are offered for resale, were as follows: (Dollars in thousands) March 31, 2022 December 31, 2021 Inventories, gross $ 85,455 $ 81,569 Reserve for obsolete and excess inventory ( 8,158 ) ( 7,720 ) Inventories, net $ 77,297 $ 73,849 Note 6 - Goodwill Goodwill activity for the first three months of 2022 is included in the table below: (Dollars in thousands) Goodwill By Reportable Segment Lawson Bolt Total Beginning balance December 31, 2021 $ 21,384 $ 13,929 $ 35,313 Impact of foreign exchange rates 48 149 197 Balance at March 31, 2022 $ 21,432 $ 14,078 $ 35,510 14 Table of Contents Note 7 - Intangible Assets The gross carrying amount and accumulated amortization by intangible asset class were as follows: (Dollars in thousands) March 31, 2022 December 31, 2021 Gross Carrying Amount Accumulated Amortization Net Carrying Value Gross Carrying Amount Accumulated Amortization Net Carrying Value Trade names $ 10,465 $ ( 3,155 ) $ 7,310 $ 11,388 $ ( 3,866 ) $ 7,522 Customer relationships 11,714 ( 3,411 ) 8,303 12,427 ( 3,784 ) 8,643 $ 22,179 $ ( 6,566 ) $ 15,613 $ 23,815 $ ( 7,650 ) $ 16,165 Amortization expense of $ 0.6 million related to intangible assets was recorded in General and administrative expenses for both the three months ended March 31, 2022 and 2021, respectively. Note 8 - Leases Activities as Lessee The Company leases property used for distribution centers, office space, and Bolt Supply branch locations throughout the U.S. and Canada, along with various equipment located in distribution centers and corporate headquarters. The expenses generated by the leasing activity of Lawson for the three months ended March 31, 2022 and 2021 were as follows: (Dollars in thousands) Three Months Ended March 31, Lease Type Classification 2022 2021 Consolidated Operating Lease Expense (1) Operating expenses $ 1,556 $ 1,493 Consolidated Financing Lease Amortization Operating expenses 33 58 Consolidated Financing Lease Interest Interest expense 1 5 Consolidated Financing Lease Expense 34 63 Net Lease Cost $ 1,590 $ 1,556 (1) Includes short term lease expense, which is immaterial 15 Table of Contents The value of the net assets and liabilities generated by the leasing activity of Lawson as lessee as of March 31, 2022 and December 31, 2021 are as follows: (Dollars in thousands) Lease Type March 31, 2022 December 31, 2021 Total Right Of Use (“ROU”) operating lease assets (1) $ 17,221 $ 13,662 Total ROU financing lease assets (2) 350 383 Total lease assets $ 17,571 $ 14,045 Total current operating lease obligation $ 4,712 $ 4,313 Total current financing lease obligation 143 154 Total current lease obligations $ 4,855 $ 4,467 Total long term operating lease obligation $ 13,814 $ 10,713 Total long term financing lease obligation 94 128 Total long term lease obligation $ 13,908 $ 10,841 (1) Operating lease assets are recorded net of accumulated amortization of $ 9.0 million and $ 8.0 million as of March 31, 2022 and December 31, 2021, respectively (2) Financing lease assets are recorded net of accumulated amortization of $ 0.6 million and $ 0.6 million as of March 31, 2022 and December 31, 2021, respectively The value of the lease liabilities generated by the leasing activities of Lawson as lessee as of March 31, 2022 were as follows (Dollars in thousands): Maturity Date of Lease Liabilities Operating Leases Financing Leases Total Year one $ 5,273 $ 146 $ 5,419 Year two 4,152 78 4,230 Year three 3,392 18 3,410 Year four 1,790 3 1,793 Year five 1,276 2 1,278 Subsequent years 4,708 — 4,708 Total lease payments (1) 20,591 247 20,838 Less: Interest 2,065 10 2,075 Present value of lease liabilities $ 18,526 $ 237 $ 18,763 (1) Minimum lease payments exclude payments to landlord for real estate taxes and common area maintenance $ 0.4 million The weighted average lease terms and interest rates of the leases held by Lawson as of March 31, 2022 are as follows: Lease Type Weighted Average Term in Years Weighted Average Interest Rate Operating Leases 5.8 4.18 % Financing Leases 1.9 4.78 % The cash outflows of the leasing activity for the three months ended March 31, 2022 are as follows (Dollars in thousands): Cash Flow Source Classification Amount Operating cash flows from operating leases Operating activities $ 1,169 Operating cash flows from financing leases Operating activities 1 Financing cash flows from financing leases Financing activities 43 16 Table of Contents In March 2022 the Company signed a new lease for the Calgary distribution center. The lease created a right of use asset of $ 4.5 million and a lease liability of $ 4.5 million. Refer to Note 3 - Revenue Recognition for a discussion on Lawson activities as lessor. Note 9 — Credit Agreement 2019 Credit Agreement In October 2019, Lawson entered into a Credit Agreement (as amended through March 31, 2022, the “2019 Credit Agreement”) by and among Lawson, certain subsidiaries of Lawson, the lenders party thereto and JPMorgan Chase Bank, N.A., as administrative agent. The 2019 Credit Agreement provided for a revolving credit facility (the “Old Revolving Credit Facility”) with a maturity date of October 11, 2024 and with $ 100.0 million of revolving commitments. Net of outstanding letters of credit, the Company had $ 83.4 million of borrowing availability under the Old Revolving Credit Facility as of March 31, 2022 and $ 87.1 million as of December 31, 2021. The weighted average interest rate for the three months ended March 31, 2022 was 2.23 %. There were no balances outstanding for the three months ended March 31, 2021. Fees are reported as interest expense and include customary charges relating to letters of credit and an unused commitment fee ranging from 0.15 % to 0.30 %, depending on the Total Net Leverage Ratio as defined in the 2019 Credit Agreement. Fees for both the three months ended March 31, 2022 and March 31, 2021 were less than $ 0.1 million and $ 0.1 million, respectively. In connection with the Old Revolving Credit Facility originated in 2019, deferred financing costs of $ 0.6 million were incurred. Deferred financing costs are amortized over the life of the debt instrument and reported as interest e xpense. As of March 31, 2022 and December 31, 2021 deferred financing costs net of accumulated amortization were $ 0.3 million, respectively, and are included in Other assets in the Condensed Consolidated Balance Sheets. Borrowings were designated as alternate base rate loans, Canadian prime rate loans, Eurodollar loans, and Canadian dollar offered rate loans. Interest rates varied by the type of borrowing and Total Net Leverage Ratio as defined in the 2019 Credit Agreement of the most recent fiscal quarter. The 2019 Credit Agreement included customary financial covenants, representations and warranties. The Company was in compliance with all financial covenants as of March 31, 2022. Amended and Restated Credit Agreement - April 1, 2022 Subsequent to quarter end, on April 1, 2022 (the “Closing Date”), Lawson and certain of its subsidiaries entered into an Amended and Restated Credit Agreement (the “Amended and Restated Credit Agreement”), by and among Lawson, certain subsidiaries of Lawson as borrowers or guarantors, the lenders party thereto and JPMorgan Chase Bank, N.A., as administrative agent. Pursuant to the Amended and Restated Credit Agreement, the 2019 Credit Agreement was amended and restated in its entirety. The Amended and Restated Credit Agreement provides for (i) a $ 200 million senior secured revolving credit facility, with a $ 25 million letter of credit subfacility and a $ 10 million swingline loan subfacility, (ii) a $ 250 million senior secured initial term loan facility and (iii) a $ 50 million senior secured delayed draw term loan facility. In addition, the Amended and Restated Credit Agreement permits Lawson to increase the commitments under the Amended and Restated Credit Agreement from time to time by up to $ 200 million in the aggregate, subject to, among other things, the receipt of additional commitments from existing and/or new lenders and pro forma compliance with the financial covenants in the Amended and Restated Credit Agreement. The revolving credit facility is available to be drawn in U.S. dollars, Canadian dollars and any other additional currencies that may be agreed. As of the Closing Date, there were $ 250 million of initial term loan facility loans outstanding and approximately $ 86 million of revolving credit facility loans outstanding under the Amended and Restated Credit Agreement. These borrowings were used, among other things, to repay certain existing indebtedness of TestEquity and Gexpro Services and their respective subsidiaries and to pay fees and expenses in connection with the Mergers and the Amended and Restated Credit Agreement. The Amended and Restated Credit Agreement requires that the proceeds of any revolving credit facility loans be used for working capital and general corporate purposes (including, without limitation, permitted acquisitions). The Amended and Restated Credit Facility requires that the proceeds of any delayed draw term loan facility be used solely to finance the payment of consideration for (i) the potential acquisition by TestEquity of a certain business that had been previously identified to Lawson as a potential acquisition candidate by TestEquity prior to the date of the TestEquity Merger Agreement and (ii) 17 Table of Contents other acquisitions permitted under the Amended and Restated Credit Agreement, and for any fees, costs and expenses incurred in connection therewith. The loans under the Amended and Restated Credit Agreement bear interest, at Lawson’s option, at a rate equal to (i) the Alternate Base Rate or the Canadian Prime Rate (each as defined in the Amended and Restated Credit Agreement), plus, in each case, an additional margin ranging from 0.0 % to 1.75 % per annum, depending on the total net leverage ratio of Lawson and its restricted subsidiaries as of the most recent determination date under the Amended and Restated Credit Agreement or (ii) the Adjusted Term SOFR Rate or the CDOR Rate (each as defined in the Amended and Restated Credit Agreement), plus, in each case, an additional margin ranging from 1.0 % to 2.75 % per annum, depending on the total net leverage ratio of Lawson and its restricted subsidiaries as of the most recent determination date under the Amended and Restated Credit Agreement. The Amended and Restated Credit Agreement further provides that the additional margin for the period from the Closing Date until Lawson’s delivery of its financial statements and compliance certificate for the first full quarter ending after the Closing Date shall be 1.5 % per annum for Alternate Base Rate or Canadian Prime Rate loans and 2.5 % per annum for all other loans. Certain closing fees, arrangement fees, administration fees, commitment fees and letter of credit fees are payable to the lenders and the agents under the Amended and Restated Credit Agreement, including a commitment fee on the daily unused amount of the revolving credit facility that will accrue at a rate ranging from 0.15 % to 0.35 % per annum, depending on the total net leverage ratio of Lawson and its restricted subsidiaries as of the most recent determination date under the Amended and Restated Credit Agreement. The Amended and Restated Credit Agreement further provides that such commitment fee for the period from the Closing Date until Lawson’s delivery of its financial statements and compliance certificate for the first full quarter ending after the Closing Date shall accrue at a rate of 0.3 % per annum. In addition, the delayed draw term loan facility shall accrue a ticking fee at a rate ranging from 0.15 % to 0.35 % per annum, depending on the total net leverage ratio of Lawson and its restricted subsidiaries as of the most recent determination date under the Amended and Restated Credit Agreement, which ticking fee shall be payable during the period from the Closing Date to the date on which the lenders’ delayed draw term loan facility commitments terminate. The Amended and Restated Credit Agreement further provides that the ticking fee for the period from the Closing Date until Lawson’s delivery of its financial statements and compliance certificate for the first full quarter after the Closing Date shall accrue at a rate of 0.3 % per annum. Each of the loans under the Amended and Restated Credit Agreement mature on April 1, 2027, at which time all outstanding loans, together with all accrued and unpaid interest, must be repaid and the revolving credit facility commitments will terminate. In addition, the lenders’ commitments under the delayed draw term loan facility expire on October 1, 2022, and no additional delayed draw term loans may be made on or after such date. Lawson is required to repay principal on the term loans each quarter in the following amounts (subject to potential adjustment): (i) $ 3,125,000 , in the case of the initial term loan facility, and (ii) an amount equal to 1.25 % of the funded delayed draw term loan facility, in the case of the delayed draw term loan facility. Lawson is also required to prepay the term loans with the net cash proceeds from any disposition of certain assets (subject to reinvestment rights) or from the incurrence of any unpermitted debt. Lawson may borrow, repay and reborrow the revolving loans until April 1, 2027, prepay any of the term loans, and terminate any of the commitments, in whole or in part, at any time without premium or penalty, subject to certain conditions and the reimbursement of certain lender costs in the case of prepayments of certain types of loans. Subject to certain exceptions as set forth in the Amended and Restated Credit Agreement, the obligations of Lawson and its U.S. subsidiaries under the Amended and Restated Credit Agreement are guaranteed by Lawson and certain of Lawson’s U.S. subsidiaries and the obligations of each of Lawson’s Canadian subsidiaries under the Amended and Restated Credit Agreement are guaranteed by Lawson and certain of its U.S. and Canadian subsidiaries. Subject to certain exceptions as set forth in the Amended and Restated Credit Agreement, the obligations under the Amended and Restated Credit Agreement are secured by a first priority security interest in and lien on substantially all assets of Lawson, each other borrower and each guarantor. The Amended and Restated Credit Agreement contains various affirmative covenants, including financial maintenance covenants requiring Lawson to maintain compliance with a consolidated minimum interest coverage ratio and a maximum total net leverage ratio, each determined in accordance with the terms of the Amended and Restated Credit Agreement. The Amended and Restated Credit Agreement contains various events of default (subject to exceptions, thresholds and grace periods as set forth in the Amended and Restated Credit Agreement). Under certain circumstances, a default interest rate will apply on all obligations at a rate equal to 2.0 % per annum above the applicable interest rate. Note 10 - Stock Repurchase Program 18 Table of Contents In the second quarter of 2019, the 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 transactio ns, privately negotiated transactions or by other methods. The Company had $ 4.5 million remaining under its repurchase plan as of March 31, 2022. No shares were repurchased in the first three months of 2022 or 2021 under the Company stock repurchase plan. Note 11 - Severance Reserve Changes in the Company’s reserve for severance included in Accrued expenses and other liabilities in the Condensed Consolidated Balance Sheets, as of March 31, 2022 and 2021 were as follows: (Dollars in thousands) Three Months Ended March 31, 2022 2021 Balance at beginning of period $ 192 $ 1,251 Charged to earnings 626 404 Cash paid ( 368 ) ( 340 ) Balance at end of period $ 450 $ 1,315 Note 12 - Stock-Based Compensation The Company recorded stock-based compensation benefit of $ 8.6 million and expense of $ 1.0 million for the three months ending March 31, 2022 and 2021, respectively. A portion of stock-based compensation is related to the change in the market value of the Company's common stock. Stock-based compensation liability of $ 7.6 million as of March 31, 2022 and $ 16.7 million as of December 31, 2021 is included in Accrued expenses and other liabilities in the Condensed Consolidated Balance Sheets. No stock-based awards were issued during the three months ended March 31, 2022. Note 13 — Income Taxes The Company recorded income tax expense of $ 3.2 million, a 26.3 % effective tax rate for the three months ended March 31, 2022. Income tax expense of $ 1.3 million, a 26.0 % effective tax rate was recorded for the three months ended March 31, 2021. The 2022 and 2021 effective tax rates are higher than the U.S. statutory rate primarily due to state taxes and other permanent items. The Company and its subsidiaries are subject to U.S. federal income tax, as well as income tax of multiple state and foreign jurisdictions. As of March 31, 2022, the Company is subject to U.S. federal income tax examinations for the years 2018 through 2020 and income tax examinations from various other jurisdictions for the years 2014 through 2020. Earnings from the Company’s foreign subsidiaries are considered to be indefinitely reinvested. A distribution of these non-U.S. earnings in the form of dividends or otherwise may subject the Company to foreign withholding taxes and U.S. federal and state taxes. Note 14 — Commitments and Contingencies Shareholder lawsuits On January 25, 2022, a lawsuit entitled Shiva Stein v. Lawson Products, Inc. et al., Case No. 1:22-cv-00639 , was filed in the United States District Court for the Southern District of New York against Lawson and the members of the Lawson board of directors (the “Stein Action”). On January 27, 2022, a lawsuit entitled Matthew Hopkins v. Lawson Products, Inc. et al, Case No. 1:22-cv-00724 , was filed in the United States District Court for the Southern District of New York against Lawson and the members of the Lawson board of directors (the “Hopkins Action”). On February 7, 2022, a lawsuit entitled Ema Bell v. Lawson Products, Inc. et al, Case No. 1:22-cv-01056 , was filed in the United States District Court for the Southern District of New York against Lawson, the members of the Lawson board of directors, LKCM TE Investors, LLC (the “TestEquity Equityholder”), TestEquity, Tide Sub, LLC, a wholly-owned subsidiary of Lawson (“Merger Sub 1”), 301 HW Opus Investors, LLC, (the “Gexpro Services Stockholder”), Gexpro Services and Gulf Sub, Inc., a wholly-owned subsidiary of Lawson (“Merger Sub 2”) (the “Bell Action”). On February 11, 2022, a lawsuit entitled John Yurco v. Lawson Products, Inc. et al., 19 Table of Contents Case No. 1:22-cv-01201 , was filed in the United States District Court for the Southern District of New York against Lawson and the members of the Lawson board of directors (the “Yurco Action”). On February 24, 2022, the Yurco Action was voluntarily dismissed by the plaintiff. On March 3, 2022, a lawsuit entitled Katherine Finger v. Lawson Products, Inc. et al., Case No. 1:22-cv-00287 , was filed in the United States District Court for the District of Delaware against Lawson and the members of the Lawson board of directors (the “Finger Action”). On March 5, 2022, a lawsuit entitled John Kelly v. Lawson Products, Inc. et al., Case No. 1:22-cv-01894 , was filed in the United States District Court for the Southern District of New York against Lawson and the members of the Lawson board of directors (the “Kelly Action”). On March 7, 2022, a lawsuit entitled Lewis D. Baker v. Lawson Products, Inc. et al., Case No. 2:22-cv-00842 , was filed in the United States District Court for the Eastern District of Pennsylvania against Lawson and the members of the Lawson board of directors (the “Baker Action”). On March 10, 2022, the Stein Action and the Kelly Action were voluntarily dismissed by the respective plaintiffs. On March 17, 2022, the Hopkins Action and the Baker Action were voluntarily dismissed by the respective plaintiffs. On March 24, 2022, the Bell Action was voluntarily dismissed by the plaintiff. The Finger Action alleges that the defendants violated Sections 14(a) (and Rule 14a-9 promulgated thereunder) and 20(a) of the Exchange Act by, among other things, omitting certain allegedly material information with respect to the Mergers (as defined in Note 1) in the Company's proxy statement. The Finger Action seeks, among other things, injunctive relief, money damages and the costs of the Finger Action, including reasonable attorneys’ and experts’ fees. Lawson and the members of its board of directors disagree with and intend to vigorously defend against the Finger Action. If the Finger Action is not resolved favorably, the Finger Action could result in additional costs to Lawson, including costs associated with the indemnification of directors. Additional plaintiffs may file lawsuits against Lawson and/or its directors and officers in connection with the Mergers. For example, on March 9, 2022, purported Lawson stockholder Keith Butler sent a letter to Lawson demanding that Lawson amend or supplement the Company’s proxy statement with information with respect to the Mergers. At this time, the Company is unable to estimate the ultimate outcome of the Finger Action or meaningfully quantify how the final resolution of the Finger Action may impact on its business, financial condition and results of operations. In addition, on each of February 2, 2022, February 14, 2022 and February 15, 2022, purported Lawson stockholders made demands pursuant to Section 220 of the Delaware General Corporation Law to inspect certain books and records of Lawson (collectively, the “Books and Records Demands”). One stated purpose of the Books and Records Demands is to investigate questions of director disinterestedness and independence and the alleged possibility of wrongdoing, mismanagement and/or material non-disclosure related to the Special Committee’s and the Lawson board of directors’ approval of the Mergers. In addition, on March 16, 2022, one of the purported Lawson stockholders who previously made a Books and Records Demand filed a lawsuit entitled Robert Garfield v. Lawson Products, Inc., Case No. 2022-0252, in the Court of Chancery of the State of Delaware against Lawson (the “Garfield Action”). On March 22, 2022, another of the purported Lawson stockholders who previously made a Books and Records Demand filed a lawsuit entitled Jeffrey Edelman v. Lawson Products, Inc., Case No. 2022-0270, in the Court of Chancery of the State of Delaware against Lawson (the “Edelman Action”). The Garfield Action and the Edelman Action are collectively referred to as the “Books and Records Actions.” The Books and Records Actions seek to compel inspection of certain books and records of Lawson to investigate questions of director disinterestedness and independence and the alleged possibility of wrongdoing, mismanagement and/or material non-disclosure related to the Special Committee’s and the Lawson board of directors’ approval of the Mergers. Pursuant to a stipulation approved by Delaware Court of Chancery on March 24, 2022, the Books and Records Actions are being held in abeyance until May 23, 2022. Lawson and the members of its board of directors disagree with and intend to vigorously defend against the Books and Records Actions and any claim, if asserted, arising from the other Books and Records Demands. Due to the inherent uncertainties of these demands, the Company is not able to predict either the outcome of these demands on its business, financial condition and results of operations, or a range of reasonably possible losses, if any, at this time. Accordingly, no amounts have been recorded in the condensed consolidated financial statements for these matters. Environmental matter In 2012, it was determined a Company owned site in Decatur, Alabama, contained hazardous substances in the soil and groundwater as a result of historical operations prior to the Company's ownership. The Company retained an environmental consulting firm to further investigate the contamination, prepare a remediation plan, and enroll the site in the Alabama Department of Environmental Management (“ADEM”) voluntary cleanup program. A remediation plan was approved by ADEM in 2018. The plan consists of chemical injections throughout the affected area, as well as subsequent monitoring of the area. The injection process was completed in the first quarter of 2019 and the environmental consulting firm is monitoring the affected area. At March 31, 2022 the Company had less than $ 0.1 million accrued for potential monitoring costs. The costs for future monitoring are not significant and have been fully accrued. The Company does not expect to capitalize any amounts related to the remediation plan. 20 Table of Contents Note 15 — Related Party Transactions During the three months ended March 31, 2022, the Company purchased approximately $ 0.5 million of inventory from a company owned by Luther King Capital Management Corporation (“LKCM”) at fair market value. The entire value of the purchase was prepaid per the terms of the purchase agreement. Approximately $ 0.2 million of the inventory was received by the end of the first quarter 2022, with the remaining amount scheduled to be received in the second quarter 2022. No liabilities exist with respect to this transaction as of March 31, 2022. The Company believes that this transaction is on terms comparable to those that the Company could reasonably expect in an arm’s length transaction with an unrelated third party. TestEquity and Gexpro Services Mergers As of April 1, 2022, the Closing Date of the TestEquity Merger and Gexpro Services Merger, entities affiliated with Luther King Capital Management Corporation (“LKCM”) and J. Bryan King (the Chairman of the Lawson board of directors), including private investment partnerships for which LKCM serves as investment manager, beneficially owned a majority of the ownership interests in the TestEquity Equityholder (which in turn owned all of the outstanding equity interests of TestEquity as of immediately prior to the completion of the TestEquity Merger). As of the Closing Date, Mr. King was a director of the TestEquity Equityholder. In addition, as of the Closing Date, Mark F. Moon (a member of the Lawson board of directors) was a director of, and held a direct or indirect equity interest in, the TestEquity Equityholder. As of the Closing Date of the Mergers, entities affiliated with LKCM and Mr. King, including private investment partnerships for which LKCM serves as investment manager, beneficially owned a majority of the ownership interests in the Gexpro Services Stockholder (which in turn owned all of the outstanding stock of Gexpro Services as of immediately prior to the completion of the Gexpro Services Merger). As of the day immediately preceding the Closing Date, entities affiliated with LKCM and Mr. King beneficially owned approximately 48 % of the shares of Lawson common stock outstanding as of the day immediately preceding the Closing Date. As a result of and after the consummation of the Mergers, entities affiliated with LKCM and J. Bryan King (the Chairman of the Lawson board of directors) beneficially owned in the aggregate approximately 14,640,000 shares of Lawson common stock as of the Closing Date, which shares represented approximately 75 % of the shares of Lawson common stock outstanding as of the Closing Date after giving effect to the issuance of shares as of the Closing Date in connection with the consummation of the Mergers. Such aggregate share amount does not include any of the up to 700,000 additional shares of Lawson common stock or any of the up to 1,000,000 additional shares of Lawson common stock potentially issuable to the TestEquity Equityholder and the Gexpro Services Stockholder, respectively, in accordance with the earnout provisions of the TestEquity Merger Agreement and the Gexpro Services Merger Agreement, respectively, summarized in Note 1 - Summary of Significant Accounting Policies and Other Information. 21 Table of Contents Note 16 – Segment Information The Company's operating segments, Lawson and Bolt Supply, 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 Supply 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 Supply segment total assets include the value of the acquired intangibles and the related amortization within its operating income. Financial information for the Company's reportable segments follows: (Dollars in thousands) Three Months Ended March 31, 2022 2021 Revenue Lawson $ 104,902 $ 93,330 Bolt Supply 12,975 10,226 Consolidated total $ 117,877 $ 103,556 Gross profit Lawson $ 55,531 $ 50,408 Bolt Supply 4,967 4,152 Consolidated total $ 60,498 $ 54,560 Operating income Lawson $ 11,096 $ 4,256 Bolt Supply 980 554 Consolidated total 12,076 4,810 Interest expense ( 95 ) ( 323 ) Other income, net 204 372 Income before income taxes $ 12,185 $ 4,859 Note 17 - COVID-19 Risks and Uncertainties Various events related to COVID-19 may continue to impact revenue, product sourcing, sales functions, and customers' ability to pay timely. The government of the State of Illinois defines Lawson Products as an essential business. A change in this status could result in the temporary closure of our business if the COVID-19 pandemic worsens, and government restrictions are reimposed to require business shutdowns. The COVID-19 pandemic could result in a temporary closure of any or all of our office space, distribution facilities, or branch locations, as well as disruptions to our supply chain and interactions with our suppliers and customers. The pandemic has had and may in the future have a material adverse impact on future financial results, liquidity, and overall performance of the Company. 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 elected to defer a total of $ 3.5 million of employer side social security payments in accordance with the CARES Act. The Company paid $ 1.7 million of accrued deferred payroll taxes in the fourth quarter of 2021, and the remaining balance of $ 1.8 million is expected to be paid in the fourth quarter of 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. 22 Table of Contents The Company will continue to closely monitor the operating environment and will take appropriate actions to protect the safety of its employees, customers and suppliers. Note 18 - Subsequent Events TestEquity and Gexpro Services Mergers Refer to Note 1 - Summary of Significant Accounting Policies and Other Information, for a description of the TestEquity Merger and the Gexpro Services Merger consummated on April 1, 2022. Amended and Restated Credit Agreement In connection with the TestEquity Merger and Gexpro Services Merger, Lawson entered into an Amended and Restated Credit Agreement. Refer to Note 9 - Credit Agreement, for a description of the agreement. Retirement of CEO On April 4, 2022, Michael G. DeCata, entered into an agreement pursuant to which he agreed to retire from his positions as President and Chief Executive Officer and as a member of the Board of Directors of Lawson, effective May 1, 2022. In connection with Mr. DeCata’s retirement, a Lawson subsidiary and Mr. DeCata entered into a Retirement and Consulting Agreement, dated as of April 4, 2022, pursuant to which Mr. DeCata agreed to provide consulting and advisory services from time to time through May 1, 2026. As part of the succession plan, Cesar Lanuza was appointed as President and Chief Executive Officer of the Lawson subsidiary that operates Lawson's business operations other than TestEquity and Gexpro Services, effective April 4, 2022. 23 Table of Contents