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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 Form 10-K
  þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2009
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission file number: 0-10546
 (LAWSON PRODUCTS, INC. LOGO) LAWSON PRODUCTS, INC.
 (Exact Name of Registrant as Specified in Charter)
 Delaware
    
    36-2229304(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)
 1666 East Touhy Avenue, Des Plaines, Illinois 60018 (Address of principal executive offices)
 Registrants telephone number, including area code:
(847) 827-9666
 Securities registered pursuant to Section 12(b) of the Act:
 Title of Each Class
    
    Name of Each Exchange on Which RegisteredCommon Stock, $1.00 par value
    
    The NASDAQ Stock Market LLC(NASDAQ Global Select Market)
 Securities registered pursuant to Section 12(g) of the Act:
 None (Title of class)
 Yes o No þ
 o þ
 þ o
 o o
 þ
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
    
    Smaller reporting Company o(Do not check if a smaller reporting company)
 o þ
   DOCUMENTS INCORPORATED BY REFERENCE




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##### 



TABLE OF CONTENTS
 Page #PART IItem 1. Business
    
    
    3Item 1A. Risk Factors
    
    
    8Item 1B. Unresolved Staff Comments
    
    
    11Item 2. Properties
    
    
    12Item 3. Legal Proceedings
    
    
    12Item 4. Submission of Matters to a Vote of Security Holders
    
    
    13PART IIItem 5. Market for Registrants Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity
Securities
    
    
    13Item 6. Selected Financial Data
    
    
    15Item 7. Managements Discussion and Analysis of Financial
Condition and Results of
Operations
    
    
    16Item 7A. Quantitative and Qualitative Disclosures About
Market Risk
    
    
    24Item 8. Financial Statements and Supplementary Data
    
    
    25Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial
Disclosure
    
    
    48Item 9A. Controls and Procedures
    
    
    48Item 9B. Other Information
    
    
    50PART IIIItem 10. Directors, Executive Officers and Corporate
Governance
    
    
    50Item 11. Executive Compensation
    
    
    50Item 12. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder
Matters
    
    
    51Item 13. Certain Relationships and Related Transactions,
and Director Independence
    
    
    51Item 14. Principal Accounting Fees and Services
    
    
    51PART IVItem 15(a). Exhibits, Financial Statement Schedules
    
    
    51Signatures
    
    
    52Exhibit Index
    
    
    53Exhibit 21Exhibit 23Exhibit 31.1Exhibit 31.2Exhibit 32
  Safe Harbor Statement under the Securities Litigation Reform Act of 1995:
   2




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PART I
 
 ITEM 1.
    
    BUSINESS.
 Overview
 Segment
Reporting
 MRO Segment
 Industry and Competition
   Operations
      3




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Products
 
 Percent of Total MRO SalesProduct Category
    
    2009
    
    
    2008Fastening systems
    
    
    19
    %
    
    
    20
    %Specialty chemicals
    
    
    12
    
    
    
    13Cutting tools and abrasives
    
    
    15
    
    
    
    13Fluid power
    
    
    10
    
    
    
    11Aftermarket automotive supplies
    
    
    11
    
    
    
    9Electrical
    
    
    9
    
    
    
    9Welding and metal repair
    
    
    4
    
    
    
    6Other
    
    
    20
    
    
    
    19100
    %
    
    
    100
    %
   Customers
   4




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OEM Segment
    Strategic Initiatives
  Sales Transformation
    5




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Network Optimization
   ERP Initiative
      6




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Employees
  Available Information
 www.lawsonproducts.com.
 Executive Officers of the Registrant
  Year FirstElected toPresentName
    
    Age
    
    Office
    
    PositionThomas J. Neri
    
    58
    
    2007
    
    President, Chief Executive Officer and DirectorHarry A. Dochelli
    
    50
    
    2009
    
    Executive Vice President and Chief Operating OfficerNeil E. Jenkins
    
    60
    
    2004
    
    Executive Vice President, Secretary and General CounselRobert O. Border
    
    46
    
    2009
    
    Senior Vice President Information TechnologyStewart A. Howley
    
    48
    
    2008
    
    Senior Vice President Strategic Business DevelopmentRonald J. Knutson
    
    46
    
    2009
    
    Senior Vice President and Chief Financial OfficerMichelle I. Russell
    
    48
    
    2007
    
    Senior Vice President Operations and Supply Chain ManagementMary Ellen Schopp
    
    47
    
    2007
    
    Senior Vice President Human Resources
  Mr. Neri
 Mr. Dochelli
 Mr. Jenkins
  7




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Mr. Border
 Mr. Howley
 Mr. Knutson
 Ms. Russell
 Ms. Schopp
 
 ITEM 1A.
    
    RISK FACTORS.
  Our results of operations may continue to be adversely impacted by the worldwide economic
recession.
   The market price of our common stock may decline.
   8




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A significant portion of our inventory may become obsolete.
  Work stoppages and other disruptions at transportation centers or shipping ports may adversely
affect our ability to obtain inventory and make deliveries to our customers.
  Changes in our customers and product mix could cause our gross margin percentage to decline in
the future.
  Increases in energy costs and the cost of raw materials used in our products could impact our
cost of goods and distribution and occupancy expenses, which may result in lower operating margins.
  Disruptions of our information and communication systems could adversely affect the Company.
  The
inability of management to successfully implement strategic
initiatives, including the installation of a new ERP system, could result in
significant disruptions in the Companys operations.
  Failure to retain experienced and productive sales agents could negatively impact our
operating results.
   9




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A limited number of the Companys stockholders can exert significant influence over the
Company.
   Any breach of our Deferred Prosecution Agreement with the U.S. Attorneys Office for the
Northern District of Illinois, may adversely affect our business, financial condition, results of
operations and stock price.
  The Company operates in highly competitive markets.
  Future acquisitions are subject to integration and other risks.
  Failure to meet the covenant requirements of our credit agreement could lead to higher
financing costs, increased restrictions and reduce or eliminate our ability to borrow funds.
   10




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Changes that affect governmental and other tax-supported entities could negatively impact our
sales and earnings.
  Any violation of Federal, state or local environmental protection regulations could lead to
significant penalties and fines.
  Our results of operations could be affected by changes in taxation.
  Failure to retain talented employees, managers and executives could negatively impact our
operating results.
  
 ITEM 1B.
    
    UNRESOLVED STAFF COMMENTS.
   11




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ITEM 2.
    
    PROPERTIES.
  Location
    
    Segment
    
    Function
    
    Own/Lease
    
    Square FootageAddison, Illinois
    
    MRO
    
    Distribution
    
    Own
    
    
    85,800Charlotte, North Carolina
    
    MRO
    
    Administration
    
    Lease
    
    
    3,844Des Plaines, Illinois
    
    MRO
    
    Administration/Distribution
    
    Own
    
    
    175,000Des Plaines, Illinois
    
    MRO
    
    Administration
    
    Own
    
    
    45,000Des Plaines, Illinois
    
    MRO/OEM
    
    Distribution
    
    Lease
    
    
    114,000Fairfield, New Jersey
    
    MRO
    
    Distribution
    
    Own
    
    
    60,000Independence, Ohio
    
    MRO
    
    Call Center
    
    Lease
    
    
    9,761Louisville, Kentucky
    
    MRO
    
    Distribution
    
    Lease
    
    
    6,113Mississauga, Ontario Canada
    
    MRO
    
    Distribution
    
    Own
    
    
    78,000Vernon Hills, Illinois
    
    MRO
    
    Distribution
    
    Own
    
    
    107,061Reno, Nevada
    
    MRO
    
    Distribution
    
    Own
    
    
    244,280Suwanee, Georgia
    
    MRO
    
    Distribution
    
    Own
    
    
    91,235Whittier, California
    
    MRO
    
    Administration
    
    Lease
    
    
    22,023Houston, Texas
    
    MRO
    
    Warehouse/Showroom
    
    Lease
    
    
    21,700San Jose, California
    
    MRO
    
    Warehouse/Showroom
    
    Lease
    
    
    6,425Phoenix, Arizona
    
    MRO
    
    Warehouse/Showroom
    
    Lease
    
    
    3,750Chatsworth, California
    
    MRO
    
    Warehouse/Showroom
    
    Lease
    
    
    11,300City of Industry, California
    
    MRO
    
    Warehouse/Showroom
    
    Lease
    
    
    20,097Decatur, Alabama
    
    OEM
    
    Manufacturing
    
    Own
    
    
    65,000Centralia, Missouri
    
    OEM
    
    Warehouse
    
    Lease
    
    
    26,880Cincinnati, Ohio
    
    OEM
    
    Warehouse
    
    Lease
    
    
    12,583Dunlap, Tennessee
    
    OEM
    
    Warehouse
    
    Lease
    
    
    16,569Ettrick, Wisconsin
    
    OEM
    
    Warehouse
    
    Lease
    
    
    11,504Hopkinsville, Kentucky
    
    OEM
    
    Warehouse
    
    Lease
    
    
    1,800Laredo, Texas
    
    OEM
    
    Warehouse
    
    Lease
    
    
    3,068Lenexa, Kansas
    
    OEM
    
    Administration/Warehouse
    
    Lease
    
    
    38,000Memphis, Tennessee
    
    OEM
    
    Warehouse
    
    Lease
    
    
    26,250Michigan City, Indiana
    
    OEM
    
    Warehouse
    
    Lease
    
    
    10,000Nuevo Laredo, Mexico
    
    OEM
    
    Warehouse
    
    Lease
    
    
    24,220Stuttgart, Arkansas
    
    OEM
    
    Warehouse
    
    Lease
    
    
    16,000Waite Park, Minnesota
    
    OEM
    
    Warehouse
    
    Lease
    
    
    2,400
  
 ITEM 3.
    
    LEGAL PROCEEDINGS.
    12




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ITEM 4.
    
    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
  
 PART II
 
 ITEM 5.
    
    MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES.
  2009
    
    
    2008Cash
    
    
    
    
    
    
    
    
    
    
    CashDividends
    
    
    
    
    
    
    
    
    
    
    DividendsDeclared per
    
    
    
    
    
    
    
    
    
    
    Declared perHigh
    
    
    Low
    
    
    Share
    
    
    High
    
    
    Low
    
    
    ShareFirst Quarter
    
    $
    26.68
    
    
    $
    11.68
    
    
    $
    0.03
    
    
    $
    38.00
    
    
    $
    23.21
    
    
    $
    0.20Second Quarter
    
    
    16.94
    
    
    
    9.96
    
    
    
    0.03
    
    
    
    29.39
    
    
    
    23.77
    
    
    
    0.20Third Quarter
    
    
    19.93
    
    
    
    11.58
    
    
    
    0.06
    
    
    
    38.49
    
    
    
    23.90
    
    
    
    0.20Fourth Quarter
    
    
    20.41
    
    
    
    12.75
    
    
    
    0.06
    
    
    
    32.10
    
    
    
    11.81
    
    
    
    0.20
   13




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Stock Price Performance Chart
  
 
 Indexed Returns Years Ended December 31,Base PeriodCompany Name/Index
    
    2004
    
    
    2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009Lawson Products
    
    
    100.00
    
    
    
    76.74
    
    
    
    94.70
    
    
    
    79.88
    
    
    
    49.45
    
    
    
    38.87S&P Smallcap 600
    
    
    100.00
    
    
    
    107.68
    
    
    
    123.96
    
    
    
    123.60
    
    
    
    85.19
    
    
    
    106.97Peer Group
    
    
    100.00
    
    
    
    125.85
    
    
    
    123.11
    
    
    
    144.76
    
    
    
    116.97
    
    
    
    144.29
  14




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ITEM 6.
    
    SELECTED FINANCIAL DATA.
  (Dollars in thousands, except per share data)2009
    
    
    2008
    
    
    2007
    
    
    2006
    
    
    2005Net Sales (1)
    
    $
    378,881
    
    
    $
    485,207
    
    
    $
    512,543
    
    
    $
    514,273
    
    
    $
    443,823Income (loss) from
continuing operations
before cumulative effect
of accounting change (2)
(3) (4) (5)
    
    $
    (2,616
    )
    
    $
    (27,060
    )
    
    $
    11,332
    
    
    $
    13,702
    
    
    $
    21,944Income (loss) from
discontinued operations
(6)
    
    
    (120
    )
    
    
    (571
    )
    
    
    (703
    )
    
    
    (729
    )
    
    
    4,794Income (loss) before
cumulative effect of
accounting change
    
    
    (2,736
    )
    
    
    (27,631
    )
    
    
    10,629
    
    
    
    12,973
    
    
    
    26,738Cumulative effect of
accounting change, net of
tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (361
    )
    
    
    Net Income (loss)
    
    $
    (2,736
    )
    
    $
    (27,631
    )
    
    $
    10,629
    
    
    $
    12,612
    
    
    $
    26,738Basic Income (loss) per
share of common
stock:Continuing operations
before cumulative effect
of accounting change
    
    $
    (0.31
    )
    
    $
    (3.18
    )
    
    $
    1.33
    
    
    $
    1.54
    
    
    $
    2.42Discontinued operations
    
    
    (0.01
    )
    
    
    (0.06
    )
    
    
    (0.08
    )
    
    
    (0.08
    )
    
    
    0.53Cumulative effect of
accounting change
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.04
    )
    
    
    Net Income (loss)
    
    $
    (0.32
    )
    
    $
    (3.24
    )
    
    $
    1.25
    
    
    $
    1.42
    
    
    $
    2.94Diluted Income (loss) per
share of common stock:Continuing operations
before cumulative effect
of accounting change
    
    $
    (0.31
    )
    
    $
    (3.18
    )
    
    $
    1.33
    
    
    $
    1.54
    
    
    $
    2.41Discontinued operations
    
    
    (0.01
    )
    
    
    (0.06
    )
    
    
    (0.08
    )
    
    
    (0.08
    )
    
    
    0.53Cumulative effect of
accounting change
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.04
    )
    
    
    Net Income (loss)
    
    $
    (0.32
    )
    
    $
    (3.24
    )
    
    $
    1.25
    
    
    $
    1.42
    
    
    $
    2.94Cash dividends declared
per share
    
    $
    0.18
    
    
    $
    0.80
    
    
    $
    0.80
    
    
    $
    0.80
    
    
    $
    0.80Total assets
    
    $
    241,647
    
    
    $
    271,223
    
    
    $
    299,863
    
    
    $
    281,292
    
    
    $
    279,224Noncurrent liabilities
    
    $
    41,761
    
    
    $
    64,139
    
    
    $
    52,660
    
    
    $
    48,320
    
    
    $
    41,256Stockholders equity
    
    $
    136,646
    
    
    $
    138,744
    
    
    $
    174,361
    
    
    $
    170,317
    
    
    $
    185,425
 Notes:(1)
    
    Results include Rutland net sales since the date of acquisition in December 2005 of $30.7
million, $46.5 million, $54.8 million, $57.7 million and $4.3 million in 2009, 2008, 2007,
2006 and 2005, respectively.(2)
    
    Severance and other charges, of $6.8 million, $9.3 million, $12.3 million and $1.2 million
were recorded in
2009, 2008, 2007 and 2006, respectively.(3)
    
    Settlement and related charges of $0.2 million, $31.7 million, $5.8 million and $3.2 million
related to the investigation and Deferred Prosecution Agreement were recorded in 2009, 2008,
2007 and 2006, respectively.(4)
    
    The 2009 results include a $1.3 million charge for impairment of long-lived assets.(5)
    
    The 2008 results include a $2.3 million charge for goodwill impairment.(6)
    
    The 2005 results include a $7.5 million after tax loss related to discontinuation of the UK
business and an after tax gain of $12.2 million related to the gain on the sale of the
Companys investment in real estate.  15




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ITEM 7.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
 OVERVIEW
   Business
      16




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SUMMARY OF FINANCIAL PERFORMANCE
 (Dollars in thousands)Year Ended December 31,2009
    
    
    2008
    
    
    2007% of
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    % ofNet
    
    
    
    
    
    
    Net
    
    
    
    
    
    
    NetAmount
    
    
    Sales
    
    
    Amount
    
    
    Sales
    
    
    Amount
    
    
    SalesNet salesMRO
    
    $
    320,400
    
    
    
    84.6
    %
    
    $
    403,584
    
    
    
    83.2
    %
    
    $
    429,508
    
    
    
    83.8
    %OEM
    
    
    58,481
    
    
    
    15.4
    
    
    
    81,623
    
    
    
    16.8
    
    
    
    83,035
    
    
    
    16.2Consolidated total
    
    $
    378,881
    
    
    
    100.0
    %
    
    $
    485,207
    
    
    
    100.0
    %
    
    $
    512,543
    
    
    
    100.0
    %Gross profitMRO
    
    $
    207,103
    
    
    
    64.6
    %
    
    $
    266,371
    
    
    
    66.0
    %
    
    $
    284,598
    
    
    
    66.3
    %OEM
    
    
    10,674
    
    
    
    18.3
    
    
    
    12,627
    
    
    
    15.5
    
    
    
    19,231
    
    
    
    23.2Consolidated total
    
    
    217,777
    
    
    
    57.5
    
    
    
    278,998
    
    
    
    57.5
    
    
    
    303,829
    
    
    
    59.3Operating expenses:Selling, general and
administrative expenses
    
    
    215,123
    
    
    
    56.8
    
    
    
    256,060
    
    
    
    52.8
    
    
    
    265,267
    
    
    
    51.8Severance and other charges
    
    
    6,820
    
    
    
    1.8
    
    
    
    9,252
    
    
    
    1.9
    
    
    
    12,328
    
    
    
    2.4Settlement related costs
    
    
    154
    
    
    
    
    
    
    
    31,666
    
    
    
    6.5
    
    
    
    5,793
    
    
    
    1.1Impairment of long-lived
assets
    
    
    1,267
    
    
    
    0.4
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Impairment of goodwill
    
    
    
    
    
    
    
    
    
    
    2,251
    
    
    
    0.5
    
    
    
    
    
    
    
    Operating income (loss)
    
    
    (5,587
    )
    
    
    (1.5
    )
    
    
    (20,231
    )
    
    
    (4.2
    )
    
    
    20,441
    
    
    
    4.0Other expenses, net
    
    
    (150
    )
    
    
    
    
    
    
    (469
    )
    
    
    (0.1
    )
    
    
    (369
    )
    
    
    (0.1
    )Income (loss) from continuing
operations before income tax
expense
    
    
    (5,737
    )
    
    
    (1.5
    )
    
    
    (20,700
    )
    
    
    (4.3
    )
    
    
    20,072
    
    
    
    3.9Income tax (benefit) expense
    
    
    (3,121
    )
    
    
    (0.8
    )
    
    
    6,360
    
    
    
    1.3
    
    
    
    8,740
    
    
    
    1.7Income (loss) from continuing
operations
    
    $
    (2,616
    )
    
    
    (0.7
    )%
    
    $
    (27,060
    )
    
    
    (5.6
    )%
    
    $
    11,332
    
    
    
    2.2
    %
  17




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RESULTS OF OPERATIONS FOR 2009 AS COMPARED TO 2008
 Sales and Gross Profit
  (Dollars in thousands)Year ended December 31,
    
    
    Decrease2009
    
    
    2008
    
    
    Amount
    
    
    %Net salesMRO
    
    $
    320,400
    
    
    $
    403,584
    
    
    $
    (83,184
    )
    
    
    (20.6
    )%OEM
    
    
    58,481
    
    
    
    81,623
    
    
    
    (23,142
    )
    
    
    (28.4
    )Consolidated
    
    $
    378,881
    
    
    $
    485,207
    
    
    $
    (106,326
    )
    
    
    (21.9
    )Gross profitMRO
    
    $
    207,103
    
    
    $
    266,371
    
    
    $
    (59,268
    )
    
    
    (22.3
    )%OEM
    
    
    10,674
    
    
    
    12,627
    
    
    
    (1,953
    )
    
    
    (15.5
    )Consolidated
    
    $
    217,777
    
    
    $
    278,998
    
    
    $
    (61,221
    )
    
    
    (21.9
    )Gross profit marginMRO
    
    
    64.6
    %
    
    
    66.0
    %OEM
    
    
    18.3
    
    
    
    15.5Consolidated
    
    
    57.5
    
    
    
    57.5
     Selling, General and Administrative Expenses
   18




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Severance and Other Charges
   Settlement and Related Costs
  Impairment of Long-Lived Assets
  Impairment of Goodwill
  Other Expense, Net
  Income Tax Expense
   19




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##### Table of Contents



RESULTS OF OPERATIONS FOR 2008 AS COMPARED TO 2007
 Sales and Gross Profit
  (Dollars in thousands)MRO
    
    Year ended December 31,
    
    
    Decrease(Dollars in thousands)
    
    2008
    
    
    2007
    
    
    Amount
    
    
    %Net salesMRO
    
    $
    403,584
    
    
    $
    429,508
    
    
    $
    (25,924
    )
    
    
    (6.0
    )%OEM
    
    
    81,623
    
    
    
    83,035
    
    
    
    (1,412
    )
    
    
    (1.7
    )Consolidated
    
    $
    485,207
    
    
    $
    512,543
    
    
    $
    (27,336
    )
    
    
    (5.3
    )Gross profitMRO
    
    $
    266,371
    
    
    $
    284,598
    
    
    $
    (18,227
    )
    
    
    (6.4
    )%OEM
    
    
    12,627
    
    
    
    19,231
    
    
    
    (6,604
    )
    
    
    (34.3
    )Consolidated
    
    $
    278,998
    
    
    $
    303,829
    
    
    $
    (24,831
    )
    
    
    (8.2
    )Gross profit marginMRO
    
    
    66.0
    %
    
    
    66.3
    %OEM
    
    
    15.5
    
    
    
    23.2Consolidated
    
    
    57.5
    
    
    
    59.3
   Selling, General and Administrative Expenses
  Severance and Other Charges
  Settlement and Related Costs
   20




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##### Table of Contents



Impairment of Goodwill
  Other Expense, Net
  Income Tax Expense
  LIQUIDITY AND CAPITAL RESOURCES
       21




---



##### Table of Contents



Covenant
    
    Requirement
    
    
    ActualMinimum EBITDA, as defined in the amended Credit
Agreement
    
    $8.0 million
    
    
    $12.3 millionCash plus accounts receivable and inventory to debt ratio
    
    
    1.75:1.00
    
    
    
    38.39:1.00Minimum tangible net worth
    
    $55.0 million
    
    
    $75.3 million
  CONTRACTUAL OBLIGATIONS
  (Dollars in thousands)Payments due in years ended December 31,Total
    
    
    2010
    
    
    2011  2012
    
    
    2013  2014
    
    
    ThereafterOperating leases
    
    $
    5,172
    
    
    $
    2,394
    
    
    $
    2,483
    
    
    $
    295
    
    
    $
    Capital leases
    
    
    2,120
    
    
    
    1,034
    
    
    
    959
    
    
    
    127
    
    
    
    Deferred compensation
    
    
    13,563
    
    
    
    3,189
    
    
    
    3,070
    
    
    
    1,590
    
    
    
    5,714Security bonus plan *
    
    
    26,121
    
    
    
    190
    
    
    
    
    
    
    
    
    
    
    
    25,931Severance obligation
    
    
    4,145
    
    
    
    3,105
    
    
    
    1,008
    
    
    
    32
    
    
    
    Long term incentive plan
    
    
    2,984
    
    
    
    1,492
    
    
    
    1,492
    
    
    
    
    
    
    
    Purchase commitments
    
    
    3,949
    
    
    
    3,949
    
    
    
    
    
    
    
    
    
    
    
    Deferred Prosecution
Agreement
    
    
    10,000
    
    
    
    10,000
    
    
    
    
    
    
    
    
    
    
    
    Total contractual
cash obligations
    
    $
    68,054
    
    
    $
    25,353
    
    
    $
    9,012
    
    
    $
    2,044
    
    
    $
    31,645
 *
    
    Payments to participants of the security bonus plan are made on a lump sum basis at time of
separation from the Company. Payouts for known separation dates have been included in the
scheduled year of payout, while payouts for unknown separation dates are reflected in the
thereafter column.  22




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##### Table of Contents



OFF-BALANCE SHEET ARRANGEMENTS
  CRITICAL ACCOUNTING POLICIES
  Allowance for Doubtful Accounts
 Inventory Reserves
   Income Taxes
  23




---



##### Table of Contents



Goodwill Impairment
    
 ITEM 7A.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
      24




---



##### Table of Contents



ITEM 8.
    
    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
  Report of Independent Registered Public Accounting Firm on
Consolidated Financial Statements
    
    
    26Consolidated Balance Sheets as of December 31, 2009 and 2008
    
    
    27Consolidated Statements of Operations for the Years ended December 31,
2009, 2008 and 2007
    
    
    28Consolidated Statements of Changes in Stockholders Equity for the
Years ended December 31, 2009, 2008 and 2007
    
    
    29Consolidated Statements of Cash Flows for the Years ended December 31,
2009, 2008 and 2007
    
    
    30Notes to Consolidated Financial Statements
    
    
    31Schedule II  Valuation and Qualifying Accounts
    
    
    47
  25




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##### Table of Contents



Report of Independent Registered Public Accounting Firm
on Consolidated Financial Statements
 
      
  26




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##### Table of Contents



Lawson Products, Inc.
 
 Consolidated Balance Sheets  (Dollars in thousands)
 December 31,2009
    
    
    2008ASSETSCurrent assets:Cash and cash equivalents
    
    $
    8,787
    
    
    $
    4,300Accounts receivable, less allowance for
doubtful accounts of $1,341 and $1,680
respectively
    
    
    39,804
    
    
    
    48,634Inventories
    
    
    73,696
    
    
    
    86,435Miscellaneous receivables and prepaid expenses
    
    
    10,423
    
    
    
    12,039Deferred income taxes
    
    
    4,819
    
    
    
    6,127Property held for sale
    
    
    332
    
    
    
    Discontinued current assets
    
    
    459
    
    
    
    296Total current assets
    
    
    138,320
    
    
    
    157,831Property, plant and equipment, less
accumulated depreciation and amortization
    
    
    40,576
    
    
    
    47,783Other assets:Cash value of life insurance
    
    
    17,021
    
    
    
    17,970Deferred income taxes
    
    
    15,249
    
    
    
    18,159Goodwill
    
    
    27,957
    
    
    
    25,748Other
    
    
    2,524
    
    
    
    3,732Total assets
    
    $
    241,647
    
    
    $
    271,223LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    19,968
    
    
    $
    20,078Settlement payable  current
    
    
    10,000
    
    
    
    10,000Accrued expenses and other liabilities
    
    
    33,272
    
    
    
    38,209Discontinued current liabilities
    
    
    
    
    
    
    53Total current liabilities
    
    
    63,240
    
    
    
    68,340Noncurrent liabilities and deferred creditsRevolving line of credit
    
    
    
    
    
    
    7,700Security bonus plan
    
    
    25,931
    
    
    
    25,312Deferred compensation
    
    
    10,374
    
    
    
    9,379Settlement payable  noncurrent
    
    
    
    
    
    
    10,000Other
    
    
    5,456
    
    
    
    11,74841,761
    
    
    
    64,139Commitments and contingencies  Note 13Stockholders 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
and outstanding  8,522,001 shares
    
    
    8,522
    
    
    
    8,522Capital in excess of par value
    
    
    4,780
    
    
    
    4,774Retained earnings
    
    
    121,888
    
    
    
    126,158Accumulated other comprehensive income (loss)
    
    
    1,456
    
    
    
    (710
    )Total stockholders equity
    
    
    136,646
    
    
    
    138,744Total liabilities and stockholders equity
    
    $
    241,647
    
    
    $
    271,223
   27




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##### Table of Contents



Lawson Products, Inc.
 
 Consolidated Statements of Operations  (Dollars in thousands, except per share data)
 Year Ended December 31,2009
    
    
    2008
    
    
    2007Net sales
    
    $
    378,881
    
    
    $
    485,207
    
    
    $
    512,543Cost of goods sold
    
    
    161,104
    
    
    
    206,209
    
    
    
    208,714Gross profit
    
    
    217,777
    
    
    
    278,998
    
    
    
    303,829Operating expenses:Selling, general and administrative expenses
    
    
    215,123
    
    
    
    256,060
    
    
    
    265,267Severance and other charges
    
    
    6,820
    
    
    
    9,252
    
    
    
    12,328Settlement and related costs
    
    
    154
    
    
    
    31,666
    
    
    
    5,793Impairment of long-lived assets
    
    
    1,267
    
    
    
    
    
    
    
    Impairment of goodwill
    
    
    
    
    
    
    2,251
    
    
    
    Operating income (loss)
    
    
    (5,587
    )
    
    
    (20,231
    )
    
    
    20,441Interest expense
    
    
    (1,037
    )
    
    
    (789
    )
    
    
    (910
    )Other income, net
    
    
    887
    
    
    
    320
    
    
    
    541Income (loss) from continuing operations before
income taxes
    
    
    (5,737
    )
    
    
    (20,700
    )
    
    
    20,072Income tax (benefit) expense
    
    
    (3,121
    )
    
    
    6,360
    
    
    
    8,740Income (loss) from continuing operations
    
    
    (2,616
    )
    
    
    (27,060
    )
    
    
    11,332Discontinued operations, net
    
    
    (120
    )
    
    
    (571
    )
    
    
    (703
    )Net income (loss)
    
    $
    (2,736
    )
    
    $
    (27,631
    )
    
    $
    10,629Basic income (loss) per share of common stock:Continuing operations
    
    $
    (0.31
    )
    
    $
    (3.18
    )
    
    $
    1.33Discontinued operations
    
    
    (0.01
    )
    
    
    (0.06
    )
    
    
    (0.08
    )Net Income (loss)
    
    $
    (0.32
    )
    
    $
    (3.24
    )
    
    $
    1.25Diluted income (loss) per share of common stock:Continuing operations
    
    $
    (0.31
    )
    
    $
    (3.18
    )
    
    $
    1.33Discontinued operations
    
    
    (0.01
    )
    
    
    (0.06
    )
    
    
    (0.08
    )Net Income (loss)
    
    $
    (0.32
    )
    
    $
    (3.24
    )
    
    $
    1.25
   28




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##### Table of Contents



Lawson Products, Inc.
 
 Consolidated Statements of Changes in Stockholders Equity  (Dollars in thousands)
 AccumulatedCommon
    
    
    Capital in
    
    
    
    
    
    
    OtherStock,
    
    
    Excess of Par
    
    
    Retained
    
    
    Comprehensive
    
    
    Comprehensive$1 par value
    
    
    Value
    
    
    Earnings
    
    
    Income (loss)
    
    
    Income (loss)Balance at January 1, 2007
    
    $
    8,521
    
    
    $
    4,749
    
    
    $
    158,008
    
    
    $
    (961
    )Net income
    
    
    
    
    
    
    
    
    
    
    10,629
    
    
    
    
    
    
    $
    10,629Other comprehensive income,
net of tax:Cumulative translation
adjustment related to
closure of Mexico
operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    403
    
    
    
    403Adjustment for foreign
currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,017
    
    
    
    1,017Comprehensive income for the
year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    12,049Adjustment for FIN 48 adoption
    
    
    
    
    
    
    
    
    
    
    (1,213
    )
    
    
    Cash dividends declared
    
    
    
    
    
    
    
    
    
    
    (6,818
    )
    
    
    Stock issued under employee
stock plans
    
    
    1
    
    
    
    25
    
    
    
    
    
    
    
    Balance at December 31, 2007
    
    
    8,522
    
    
    
    4,774
    
    
    
    160,606
    
    
    
    459Net loss
    
    
    
    
    
    
    
    
    
    
    (27,631
    )
    
    
    
    
    
    $
    (27,631
    )Other comprehensive loss,
net of tax:Adjustment for foreign
currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,169
    )
    
    
    (1,169
    )Comprehensive loss for the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (28,800
    )Cash dividends declared
    
    
    
    
    
    
    
    
    
    
    (6,817
    )
    
    
    Balance at December 31, 2008
    
    $
    8,522
    
    
    $
    4,774
    
    
    $
    126,158
    
    
    $
    (710
    )Net loss
    
    
    
    
    
    
    
    
    
    
    (2,736
    )
    
    
    
    
    
    $
    (2,736
    )Other comprehensive loss,
net of tax:Adjustment for foreign
currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,166
    
    
    
    2,166Comprehensive loss for the
year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (570
    )Stock based compensation
    
    
    
    
    
    
    6
    
    
    
    
    
    
    
    Cash dividends declared
    
    
    
    
    
    
    
    
    
    
    (1,534
    )
    
    
    Balance at December 31, 2009
    
    $
    8,522
    
    
    $
    4,780
    
    
    $
    121,888
    
    
    $
    1,456
   29




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##### Table of Contents



Lawson Products, Inc.
 
 Consolidated Statements of Cash Flows  (Dollars in thousands)
 Year Ended December 31,2009
    
    
    2008
    
    
    2007Operating activitiesNet income (loss)
    
    $
    (2,736
    )
    
    $
    (27,631
    )
    
    $
    10,629Adjustments to reconcile net income (loss) to
net cash provided by operating activities:Depreciation and amortization
    
    
    7,216
    
    
    
    8,282
    
    
    
    7,435Provision for allowance for doubtful accounts
    
    
    1,851
    
    
    
    1,481
    
    
    
    954Deferred income taxes
    
    
    1,752
    
    
    
    1,859
    
    
    
    (1,249
    )Deferred compensation and security bonus
plan expense (benefit)
    
    
    4,493
    
    
    
    (526
    )
    
    
    5,000Payments under deferred compensation and
security bonus plans
    
    
    (4,494
    )
    
    
    (6,255
    )
    
    
    (4,922
    )Stock based compensation
    
    
    11
    
    
    
    (843
    )
    
    
    (427
    )Settlement payment
    
    
    (10,000
    )
    
    
    (10,000
    )
    
    
    Provision for settlement
    
    
    
    
    
    
    30,000
    
    
    
    Loss on disposal of property and equipment
    
    
    179
    
    
    
    56
    
    
    
    Impairment of long-lived assets
    
    
    1,267
    
    
    
    
    
    
    
    Impairment of goodwill
    
    
    
    
    
    
    2,251
    
    
    
    Changes in operating assets and liabilities:Accounts receivable
    
    
    7,591
    
    
    
    7,956
    
    
    
    1,120Inventories
    
    
    13,484
    
    
    
    9,368
    
    
    
    (5,955
    )Prepaid expenses and other assets
    
    
    3,599
    
    
    
    2,050
    
    
    
    (5,732
    )Accounts payable and accrued expenses
    
    
    (2,968
    )
    
    
    (7,586
    )
    
    
    960Other
    
    
    (5,301
    )
    
    
    5,276
    
    
    
    3,735Net cash provided by operating activities
    
    
    15,944
    
    
    
    15,738
    
    
    
    11,548Investing activitiesPurchases of property, plant and equipment
    
    
    (2,768
    )
    
    
    (3,549
    )
    
    
    (17,694
    )Proceeds from sale of property
    
    
    2,179
    
    
    
    
    
    
    
    Other
    
    
    
    
    
    
    36
    
    
    
    90Net cash used in investing activities
    
    
    (589
    )
    
    
    (3,513
    )
    
    
    (17,604
    )Financing activitiesNet (payments on) proceeds from revolving
line of credit
    
    
    (7,700
    )
    
    
    (3,300
    )
    
    
    11,000Dividends paid
    
    
    (2,727
    )
    
    
    (6,817
    )
    
    
    (6,817
    )Other
    
    
    (420
    )
    
    
    
    
    
    
    26Net cash (used in) provided by financing
activities
    
    
    (10,847
    )
    
    
    (10,117
    )
    
    
    4,209Increase (decrease) in cash and cash equivalents
    
    
    4,508
    
    
    
    2,108
    
    
    
    (1,847
    )Cash and cash equivalents at beginning of year
    
    
    4,581
    
    
    
    2,473
    
    
    
    4,320Cash and cash equivalents at end of year
    
    
    9,089
    
    
    
    4,581
    
    
    
    2,473Cash held by discontinued operations
    
    
    (302
    )
    
    
    (281
    )
    
    
    (802
    )Cash and cash equivalents held by continuing
operations at end of year
    
    $
    8,787
    
    
    $
    4,300
    
    
    $
    1,671
   30




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##### Table of Contents



Lawson Products, Inc.
 
 Notes to Consolidated Financial Statements
 Note 1  Description of Business
  Note 2  Summary of Significant Accounting Policies
 Principles of Consolidation
 Revenue Recognition
 Shipping and Handling Fees and Costs
 Cash Equivalents
 Allowance for Doubtful Accounts Methodology
 Inventories
 Property Held for Sale
 Property, Plant and Equipment
  31




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##### Table of Contents



Lawson Products, Inc.
 Notes to Consolidated Financial Statements
  Cash Value of Life Insurance
 Deferred Compensation
 Stock-Based Compensation
 Goodwill
 Other Intangibles
 Impairment of Long-Lived Assets
 Income Taxes
  32




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##### Table of Contents



Lawson Products, Inc.
 Notes to Consolidated Financial Statements
   Earnings per Share
 Foreign Currency
 Use of Estimates
 Recent Accounting Pronouncements
 The FASB Accounting Standards Codification and the
Hierarchy of Generally Accepted Accounting Principles,
 Subsequent Events, Subsequent Events
  33




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##### Table of Contents



Lawson Products, Inc.
 Notes to Consolidated Financial Statements
 Note 3  Inventories
  (Dollars in thousands)December 31,2009
    
    
    2008Finished goods
    
    $
    81,621
    
    
    $
    92,565Work in progress
    
    
    1,227
    
    
    
    1,791Raw materials
    
    
    1,759
    
    
    
    2,146Total
    
    
    84,607
    
    
    
    96,502Reserve for obsolete and excess inventory
    
    
    (10,911
    )
    
    
    (10,067
    )$
    73,696
    
    
    $
    86,435
 Note 4  Property, Plant and Equipment
  (Dollars in thousands)December 31,2009
    
    
    2008Land
    
    $
    8,712
    
    
    $
    9,197Buildings and improvements
    
    
    51,007
    
    
    
    54,069Machinery and equipment
    
    
    32,637
    
    
    
    32,754Capitalized software
    
    
    11,627
    
    
    
    13,246Furniture and fixtures
    
    
    6,073
    
    
    
    6,708Capital leases
    
    
    3,451
    
    
    
    3,736Vehicles
    
    
    325
    
    
    
    354Construction in progress
    
    
    348
    
    
    
    1,014114,180
    
    
    
    121,078Accumulated depreciation and amortization
    
    
    (73,604
    )
    
    
    (73,295
    )$
    40,576
    
    
    $
    47,783
 Note 5  Sale of Property and Property Held for Sale
 Subsequent Events.
 Note 6  Goodwill
   34




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##### Table of Contents



Lawson Products, Inc.
 Notes to Consolidated Financial Statements
   (Dollars in thousands)(Dollars in thousands)
    
    MRO
    
    
    OEM
    
    
    TotalBalance at December 31, 2007
    
    $
    25,748
    
    
    $
    2,251
    
    
    $
    27,999Impairment loss
    
    
    
    
    
    
    (2,251
    )
    
    
    (2,251
    )Balance at December 31, 2008
    
    $
    25,748
    
    
    $
    
    
    
    $
    25,748Translation adjustment
    
    
    2,209
    
    
    
    
    
    
    
    2,209Balance at December 31, 2009
    
    $
    27,957
    
    
    $
    
    
    
    $
    27,957
 Note 7  Impairment of Long-Lived Assets
  Note 8  Income Taxes
  (Dollars in thousands)Year Ended December 31,2009
    
    
    2008
    
    
    2007United States
    
    $
    (5,027
    )
    
    $
    (23,901
    )
    
    $
    15,741Canada
    
    
    (710
    )
    
    
    3,201
    
    
    
    4,331$
    (5,737
    )
    
    $
    (20,700
    )
    
    $
    20,072
  35




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##### Table of Contents



Lawson Products, Inc.
 Notes to Consolidated Financial Statements
  (Dollars in thousands)Year Ended December 31,2009
    
    
    2008
    
    
    2007Current income tax expense (benefit):U.S. Federal
    
    $
    (4,677
    )
    
    $
    2,920
    
    
    $
    6,485U.S. State
    
    
    (94
    )
    
    
    666
    
    
    
    1,960Canada
    
    
    (102
    )
    
    
    915
    
    
    
    1,544Total
    
    $
    (4,873
    )
    
    $
    4,501
    
    
    $
    9,989Deferred income tax expense (benefit):U.S. Federal
    
    $
    1,760
    
    
    $
    1,874
    
    
    $
    (1,500
    )U.S. State
    
    
    103
    
    
    
    21
    
    
    
    177Canada
    
    
    (111
    )
    
    
    (36
    )
    
    
    74Total
    
    $
    1,752
    
    
    $
    1,859
    
    
    $
    (1,249
    )Total income tax expense (benefit):U.S. Federal
    
    $
    (2,917
    )
    
    $
    4,794
    
    
    $
    4,985U.S. State
    
    
    9
    
    
    
    687
    
    
    
    2,137Canada
    
    
    (213
    )
    
    
    879
    
    
    
    1,618Total
    
    $
    (3,121
    )
    
    $
    6,360
    
    
    $
    8,740
  Year Ended December 31,2009
    
    
    2008
    
    
    2007Statutory federal rate
    
    
    35.0
    %
    
    
    35.0
    %
    
    
    35.0
    %Increase (decrease) resulting from:State income taxes, net of federal income tax benefit
    
    
    (0.3
    )
    
    
    (3.7
    )
    
    
    7.4Executive life insurance
    
    
    8.6
    
    
    
    (10.3
    )
    
    
    (3.4
    )Canadian subsidiaries
    
    
    (0.2
    )
    
    
    0.2
    
    
    
    0.2Appeals settlement, net
    
    
    7.0
    
    
    
    (4.3
    )
    
    
    Change in valuation allowance
    
    
    19.3
    
    
    
    
    
    
    
    Expiration of loss carryforwards
    
    
    (10.0
    )
    
    
    
    
    
    
    Fines and penalties
    
    
    (3.2
    )
    
    
    (49.3
    )
    
    
    Other items, net
    
    
    (1.8
    )
    
    
    1.7
    
    
    
    4.3Provision for income taxes
    
    
    54.4
    %
    
    
    (30.7
    )%
    
    
    43.5
    %
    36




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##### Table of Contents



Lawson Products, Inc.
 Notes to Consolidated Financial Statements
  (Dollars in thousands)December 31,2009
    
    
    2008Deferred tax assets:Compensation and benefits
    
    $
    19,293
    
    
    $
    20,879Inventory reserve
    
    
    4,055
    
    
    
    6,142Capital loss
    
    
    2,166
    
    
    
    2,854Accounts receivable reserve
    
    
    455
    
    
    
    594Property, plant and equipment
    
    
    184
    
    
    
    260Net operating loss carryforward
    
    
    193
    
    
    
    Other
    
    
    1,423
    
    
    
    903Total deferred tax assets
    
    
    27,769
    
    
    
    31,632Valuation allowance for deferred tax assets
    
    
    (1,744
    )
    
    
    (2,854
    )Net deferred tax assets
    
    
    26,025
    
    
    
    28,778Deferred tax liabilities:Goodwill
    
    
    4,756
    
    
    
    3,687Other
    
    
    1,201
    
    
    
    805Total deferred liabilities
    
    
    5,957
    
    
    
    4,492Total net deferred assets
    
    $
    20,068
    
    
    $
    24,286Net deferred tax assets:Net current deferred income taxes
    
    
    4,819
    
    
    
    6,127Net noncurrent deferred income taxes
    
    
    15,249
    
    
    
    18,159$
    20,068
    
    
    $
    24,286
   (Dollars in thousands)December 31,2009
    
    
    2008Balance at beginning of year
    
    $
    3,197
    
    
    $
    923Additions for tax positions of current year
    
    
    627
    
    
    
    248Additions for tax positions of prior years
    
    
    (1,440
    )
    
    
    2,026Settlements
    
    
    (1,154
    )
    
    
    Balance at end of year
    
    $
    1,230
    
    
    $
    3,197
     37




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##### Table of Contents



Lawson Products, Inc.
 Notes to Consolidated Financial Statements
 Note 9  Accrued Expenses and Other Liabilities
  (Dollars in thousands)December 31,2009
    
    
    2008Salaries, commissions and other compensation
    
    $
    14,560
    
    
    $
    15,471Accrued severance
    
    
    3,105
    
    
    
    4,889Accrued and withheld taxes, other than income taxes
    
    
    2,407
    
    
    
    2,774Accrued profit sharing contributions
    
    
    2,066
    
    
    
    2,372Accrued stock performance rights
    
    
    1,210
    
    
    
    1,206Accrued self-insured health benefits
    
    
    927
    
    
    
    1,055Cash dividends payable
    
    
    511
    
    
    
    1,704Other
    
    
    8,486
    
    
    
    8,738$
    33,272
    
    
    $
    38,209
 Note 10  Revolving Line of Credit
       38




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##### Table of Contents



Lawson Products, Inc.
 Notes to Consolidated Financial Statements
  Note 11  Reserve for Severance
  (Dollars in thousands)Year Ended December 31,2009
    
    
    2008
    
    
    2007Beginning balance
    
    $
    6,111
    
    
    $
    7,058
    
    
    $
    962Charged to earnings current year
    
    
    7,027
    
    
    
    5,378
    
    
    
    10,886Cash paid
    
    
    (8,642
    )
    
    
    (6,264
    )
    
    
    (4,670
    )Adjustment to prior year reserves
    
    
    (351
    )
    
    
    (61
    )
    
    
    (120
    )Ending balance
    
    $
    4,145
    
    
    $
    6,111
    
    
    $
    7,058
  (Dollars in thousands)December 31,2009
    
    
    2008Accrued severance included in:Accrued expenses and other liabilities
    
    $
    3,105
    
    
    $
    4,889Noncurrent other
    
    
    1,040
    
    
    
    1,222Total accrued severance
    
    $
    4,145
    
    
    $
    6,111
  Note 12  Retirement and Security Bonus Plans
     39




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##### Table of Contents



Lawson Products, Inc.
 Notes to Consolidated Financial Statements
 Note 13  Commitments and Contingencies
 Lease Commitments
  (Dollars in thousands)Year ended December 31,
    
    Operating Leases
    
    
    Capital Leases2010
    
    $
    2,394
    
    
    $
    1,0342011
    
    
    1,690
    
    
    
    7522012
    
    
    793
    
    
    
    2072013
    
    
    222
    
    
    
    732014
    
    
    73
    
    
    
    54Total
    
    $
    5,172
    
    
    
    2,120Less: Interest portion
    
    
    
    
    
    
    (233
    )Liability
    
    
    
    
    
    $
    1,887
 Litigation and regulatory matters
    Tax matters
     40




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##### Table of Contents



Lawson Products, Inc.
 Notes to Consolidated Financial Statements
 Note 14  Stock Compensation Plans
    Stock Performance Rights
   Expected volatility
    
    57.4% to 101.7%Risk-free rate of return
    
    0.2% to 2.7%Expected term (in years)
    
    0.5 to 5.2Expected annual dividend
    
    $0.24
    41




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##### Table of Contents



Lawson Products, Inc.
 Notes to Consolidated Financial Statements
  WeightedNumber
    
    
    Averageof SPRs
    
    
    Exercise PriceOutstanding on December 31, 2008
    
    
    307,600
    
    
    $
    31.40Granted
    
    
    92,300
    
    
    
    17.76Cancelled
    
    
    (11,600
    )
    
    
    26.34Outstanding on December 31, 2009
    
    
    388,300
    
    
    
    28.31Exercisable on December 31, 2009
    
    
    224,666
    
    
    $
    33.14
  Restricted Stock Awards
  Stock Options
   42




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##### Table of Contents



Lawson Products, Inc.
 Notes to Consolidated Financial Statements
 Note 15  Earnings (Loss) Per Share
  (Amounts in thousands except for per share data)Year Ended December 31,2009
    
    
    2008
    
    
    2007Weighted average shares:Basic weighted average shares outstanding
    
    
    8,522
    
    
    
    8,522
    
    
    
    8,522Effect of dilutive securities outstanding
    
    
    
    
    
    
    
    
    
    
    2Diluted weighted average shares outstanding
    
    
    8,522
    
    
    
    8,522
    
    
    
    8,524Earnings (loss):Continuing operations
    
    $
    (2,616
    )
    
    $
    (27,060
    )
    
    $
    11,332Discontinued operations
    
    
    (120
    )
    
    
    (571
    )
    
    
    (703
    )Net Income (loss)
    
    $
    (2,736
    )
    
    $
    (27,631
    )
    
    $
    10,629Basic earnings (loss) per share of common stock:Continuing operations
    
    $
    (0.31
    )
    
    $
    (3.18
    )
    
    $
    1.33Discontinued operations
    
    
    (0.01
    )
    
    
    (0.06
    )
    
    
    (0.08
    )Net Income (loss)
    
    $
    (0.32
    )
    
    $
    (3.24
    )
    
    $
    1.25Diluted earnings (loss) per share of common stock:Continuing operations
    
    $
    (0.31
    )
    
    $
    (3.18
    )
    
    $
    1.33Discontinued operations
    
    
    (0.01
    )
    
    
    (0.06
    )
    
    
    (0.08
    )Net Income (loss)
    
    $
    (0.32
    )
    
    $
    (3.24
    )
    
    $
    1.25
   43




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##### Table of Contents



Lawson Products, Inc.
 Notes to Consolidated Financial Statements
 Note 16  Segment Reporting
   (Dollars in thousands)Year Ended December 31,2009
    
    
    2008
    
    
    2007Net salesMRO
    
    $
    320,400
    
    
    $
    403,584
    
    
    $
    429,508OEM
    
    
    58,481
    
    
    
    81,623
    
    
    
    83,035Consolidated total
    
    $
    378,881
    
    
    $
    485,207
    
    
    $
    512,543Operating income (loss)MRO
    
    $
    6,999
    
    
    $
    26,113
    
    
    $
    34,366OEM
    
    
    (4,345
    )
    
    
    (3,175
    )
    
    
    4,196Severance and other charges
    
    
    (6,820
    )
    
    
    (9,252
    )
    
    
    (12,328
    )Settlement and related costs
    
    
    (154
    )
    
    
    (31,666
    )
    
    
    (5,793
    )Impairment of long-lived assets
    
    
    (1,267
    )
    
    
    
    
    
    
    Impairment of goodwill
    
    
    
    
    
    
    (2,251
    )
    
    
    Consolidated total
    
    
    (5,587
    )
    
    
    (20,231
    )
    
    
    20,441Interest expense
    
    
    (1,037
    )
    
    
    (789
    )
    
    
    (910
    )Other income, net
    
    
    887
    
    
    
    320
    
    
    
    541Income (loss) from
continuing operations
before income taxes
    
    $
    (5,737
    )
    
    $
    (20,700
    )
    
    $
    20,072Capital expendituresMRO
    
    $
    2,008
    
    
    $
    2,809
    
    
    $
    16,943OEM
    
    
    760
    
    
    
    740
    
    
    
    751Consolidated total
    
    $
    2,768
    
    
    $
    3,549
    
    
    $
    17,694Depreciation and amortizationMRO
    
    $
    6,485
    
    
    $
    7,509
    
    
    $
    6,692OEM
    
    
    731
    
    
    
    773
    
    
    
    743Consolidated total
    
    $
    7,216
    
    
    $
    8,282
    
    
    $
    7,435Total assetsMRO
    
    $
    181,717
    
    
    $
    202,640
    
    
    $
    221,274OEM
    
    
    39,402
    
    
    
    44,000
    
    
    
    52,955Segment total
    
    
    221,119
    
    
    
    246,640
    
    
    
    274,229Corporate
    
    
    20,069
    
    
    
    24,287
    
    
    
    24,570Consolidated total
    
    $
    241,188
    
    
    $
    270,927
    
    
    $
    298,799
  44




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##### Table of Contents



Lawson Products, Inc.
 Notes to Consolidated Financial Statements
  (Dollars in thousands)Year Ended December 31,2009
    
    
    2008
    
    
    2007Net salesUnited States
    
    $
    353,228
    
    
    $
    455,028
    
    
    $
    482,491Canada
    
    
    25,653
    
    
    
    30,179
    
    
    
    30,052Consolidated total
    
    $
    378,881
    
    
    $
    485,207
    
    
    $
    512,543Long-lived assetsUnited States
    
    $
    59,160
    
    
    $
    67,076
    
    
    $
    73,971Canada
    
    
    9,936
    
    
    
    7,468
    
    
    
    8,322Consolidated total
    
    $
    69,096
    
    
    $
    74,544
    
    
    $
    82,293
  Note 17  Discontinued Operations
   45




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##### Table of Contents



Lawson Products, Inc.
 Notes to Consolidated Financial Statements
 Note 18  Summary of Unaudited Quarterly Results of Operations
  (Dollars in thousands, except for per share amounts)2009 Quarter EndedDec. 31
    
    
    Sep. 30
    
    
    June 30
    
    
    Mar. 31Net sales
    
    $
    89,342
    
    
    $
    95,125
    
    
    $
    95,033
    
    
    $
    99,381Gross profit
    
    
    51,344
    
    
    
    56,397
    
    
    
    55,869
    
    
    
    54,167Income (loss) from continuing operations
    
    $
    (114
    )
    
    $
    1,521
    
    
    $
    1,896
    
    
    $
    (5,919
    )Loss from discontinued operations
    
    
    (24
    )
    
    
    (18
    )
    
    
    (49
    )
    
    
    (29
    )Net income (loss)
    
    $
    (138
    )
    
    $
    1,503
    
    
    $
    1,847
    
    
    $
    (5,948
    )Basic and diluted income (loss) per share
of common stock:Continuing operations
    
    $
    (0.01
    )
    
    $
    0.18
    
    
    $
    0.22
    
    
    $
    (0.70
    )Discontinued operations
    
    
    (0.01
    )
    
    
    
    
    
    
    
    
    
    
    Net income (loss)
    
    $
    (0.02
    )
    
    $
    0.18
    
    
    $
    0.22
    
    
    $
    (0.70
    )
 2008 Quarter EndedDec. 31
    
    
    Sep. 30
    
    
    June 30
    
    
    Mar. 31Net sales
    
    $
    106,825
    
    
    $
    125,364
    
    
    $
    127,148
    
    
    $
    125,870Gross profit
    
    
    60,337
    
    
    
    71,089
    
    
    
    73,444
    
    
    
    74,128Income (loss) from continuing operations
    
    $
    (5,417
    )
    
    $
    3,068
    
    
    $
    (29,235
    )
    
    $
    4,524Income (loss) from discontinued operations
    
    
    (8
    )
    
    
    10
    
    
    
    (418
    )
    
    
    (155
    )Net Income (loss)
    
    $
    (5,425
    )
    
    $
    3,078
    
    
    $
    (29,653
    )
    
    $
    4,369Basic and diluted Income (loss) per share
of common stock:Continuing operations
    
    $
    (0.64
    )
    
    $
    0.36
    
    
    $
    (3.43
    )
    
    $
    0.53Discontinued operations
    
    
    
    
    
    
    
    
    
    
    (0.05
    )
    
    
    (0.02
    )Net Income (loss)
    
    $
    (0.64
    )
    
    $
    0.36
    
    
    $
    (3.48
    )
    
    $
    0.51
 Note 19  Subsequent Events
 Revolving Line of Credit.
   46




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##### Table of Contents



Lawson Products, Inc. and Subsidiaries
 
 Schedule II  Valuation and Qualifying Accounts
  (Dollars in thousands)Balance at
    
    
    Charged to
    
    
    
    
    
    
    Balance atBeginning of
    
    
    Costs and
    
    
    
    
    
    
    End ofDescription
    
    Period
    
    
    Expenses
    
    
    Deductions
    
    
    PeriodAllowance for
doubtful accounts:Year ended
December 31,
2009
    
    $
    1,680
    
    
    $
    1,851
    
    
    $
    (2,190
    )(1)
    
    $
    1,341Year ended
December 31,
2008
    
    
    1,376
    
    
    
    1,461
    
    
    
    (1,157
    )(1)
    
    
    1,680Year ended
December 31,
2007
    
    
    1,332
    
    
    
    928
    
    
    
    (884
    )(1)
    
    
    1,376Allowance for
excess and
obsolete inventory:Year ended
December 31,
2009
    
    $
    10,067
    
    
    $
    1,994
    
    
    $
    (1,150
    )(2)
    
    $
    10,911Year ended
December 31,
2008
    
    
    10,024
    
    
    
    2,486
    
    
    
    (2,443
    )(2)
    
    
    10,067Year ended
December 31,
2007
    
    
    9,233
    
    
    
    2,455
    
    
    
    (1,664
    )(2)
    
    
    10,024Valuation allowance
for deferred tax
assets:Year ended
December 31,
2009
    
    $
    2,854
    
    
    $
    (536
    )
    
    $
    (574
    )(3)
    
    $
    1,744Year ended
December 31,
2008
    
    
    3,337
    
    
    
    (483
    )
    
    
    
    
    
    
    2,854Year ended
December 31,
2007
    
    
    1,318
    
    
    
    2,763
    
    
    
    (744
    )(3)
    
    
    3,337
 (1)
    
    Uncollected receivables written off, net of recoveries and translation adjustment.(2)
    
    Disposal of excess and obsolete inventory and translation adjustment.(3)
    
    Capital loss carryforward written off.  47




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##### Table of Contents



ITEM 9.
    
    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
  
 ITEM 9A.
    
    CONTROLS AND PROCEDURES.
 Evaluation of Disclosure Controls and Procedures
  Managements Report on Internal Control over Financial Reporting
    Internal
Control  Integrated Framework.
 Changes in Internal Controls
   48




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##### Table of Contents



Report of Independent Registered Public Accounting Firm on Internal Control Over Financial
Reporting
 
       
  49




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##### Table of Contents



ITEM 9B.
    
    OTHER INFORMATION.
  
 PART III
 
 ITEM 10.
    
    DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
 a. Directors
  b. Executive Officers
 Business
 c. Audit Committee
   d. Code of Business Conduct
 www.lawsonproducts.com
 
 ITEM 11.
    
    EXECUTIVE COMPENSATION.
   50




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##### Table of Contents



ITEM 12.
    
    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS.
  Equity Compensation Plan Information
  Number of securitiesNumber of securities
    
    
    Weighted-average
    
    
    remaining available for futureto be issued upon
    
    
    exercise price of
    
    
    issuance under equityexercise of
    
    
    outstanding
    
    
    compensation plansoutstanding options,
    
    
    options, warrants
    
    
    (excluding securities reflectedPlan category
    
    warrants and rights
    
    
    and rights
    
    
    in the first column)Equity
compensation plans
approved by
security holders
    
    
    43,400
    *
    
    $
    23.56
    **
    
    
    459,600Equity compensation
plans not approved
by security holders
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    43,400
    *
    
    $
    23.56
    **
    
    
    459,600
 *
    
    Includes common stock to cover conversion of 40,400 restricted stock awards and 3,000 stock
options.**
    
    Exercise price of 3,000 stock options outstanding on December 31, 2009. 
 ITEM 13.
    
    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
  
 ITEM 14.
    
    PRINCIPAL ACCOUNTING FEES AND SERVICES.
  
 PART IV
 
 ITEM 15.
    
    EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
 (a)
    
    
    (1
    )
    
    See Index to Financial Statements in Item 8 on page 25.(2
    )
    
    See Schedule II in Item 8 on page 47.(3
    )
    
    See the Exhibit Index immediately following the signature page of this Annual Report on
Form 10-K.
  51




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##### Table of Contents



SIGNATURES
  LAWSON PRODUCTS, INC.By:
    /s/ Thomas J. NeriThomas J. NeriPresident, Chief Executive Officer and
Director
(principal executive officer) 
Date: February 25, 2010By:
    /s/ Ronald J. KnutsonRonald J. KnutsonSenior Vice President and Chief Financial
Officer
(principal financial and accounting officer) 
Date: February 25, 2010  Signature
    
    Title/s/ Thomas J. Neri
    
    President, Chief Executive Officer and DirectorThomas J. Neri
    
    (principal executive officer)/s/ Ronald B. Port
    
    Chairman of the BoardRonald B. Port/s/ Andrew B. Albert
    
    DirectorAndrew B. Albert/s/ I. Steven Edelson
    
    DirectorI. Steven Edelson/s/ James S. Errant
    
    DirectorJames S. Errant/s/ Lee S. Hillman
    
    DirectorLee S. Hillman/s/ Thomas S. Postek
    
    DirectorThomas S. Postek/s/ Robert G. Rettig
    
    DirectorRobert G. Rettig/s/ Wilma J. Smelcer
    
    DirectorWilma J. Smelcer
  52




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##### Table of Contents



EXHIBIT INDEX
 ExhibitNumber
    
    Description of Exhibit3.1
    
    
    Certificate of Incorporation of the Company, as amended,
incorporated herein by reference to Exhibit 3(a) to the Companys
Annual Report on Form 10-K for the fiscal year ended December 31,
1988.3.2
    
    
    Amended and Restated By-laws of the Company, incorporated herein
by reference to the Companys Current Report on Form 8-K dated
September 15, 2008.3.3
    
    
    Amended and Restated By-laws of the Company, incorporated herein
by reference to the Companys Current Report on Form 8-K dated
October 20, 2009.10.1
    *
    
    Lawson Products, Inc. Incentive Stock Plan, incorporated herein by
reference to Appendix A to the Companys Proxy Statement for the
Annual Meeting of Stockholders held on May 11, 1999.10.2
    *
    
    Amended and Restated Executive Deferral Plan, incorporated herein
by reference from Exhibit 10(c)(7) to the Companys Annual Report
on Form 10-K for the fiscal year ended December 31, 1995.10.3
    *
    
    Lawson Products, Inc. Stock Performance Plan, incorporated herein
by reference from Exhibit 10(c)(8) to the Companys Annual Report
on Form 10-K for the fiscal year ended December 31, 2000.10.4
    *
    
    Lawson Products, Inc. Long-Term Capital Accumulation Plan,
incorporated herein by reference from Exhibit 10(c)(10) to the
Companys Current Report on Form 8-K dated October 21, 2004.10.5
    *
    
    Form of Shareholder Value Appreciation Rights Award Agreement,
incorporated by reference to Exhibit 10(c)(14) to the Companys
Annual Report on Form 10-K for the fiscal year ended December 31,
2004.10.6
    *
    
    Form Letter regarding Stock Performance Rights, incorporated by
reference to Exhibit 10(c)(16) to the Companys Annual Report on
Form 10-K for the fiscal year ended December 31, 2004.10.7
    *
    
    Executive Employment Agreement dated December 5, 2005 between the
Company and Stewart Howley, incorporated herein by reference to
Exhibit 10.11 to the Companys Annual Report on Form 10-K for the
fiscal year ended December 31, 2008.10.8
    *
    
    Employment Agreement dated February 29, 2008 between the Company
and Harry Dochelli, incorporated herein by reference to
Exhibit 10.12 to the Companys Annual Report on Form 10-K for the
fiscal year ended December 31, 2008.10.9
    *
    
    Lawson Products, Inc. Long-Term Incentive Plan, incorporated
herein by reference to Exhibit 10.1 to the Companys Current
Report on Form 8-K dated May 13, 2008.10.10
    *
    
    Executive Services Agreement dated June 23, 2008 between the
Company and Tatum, LLC, incorporated herein by reference to
Exhibit 10.14 to the Companys Annual Report on Form 10-K for the
fiscal year ended December 31, 2008.10.11
    
    
    Deferred Prosecution Agreement, dated August 11, 2008 between the
Company and the United States District Court, Northern District of
Illinois Eastern Division, incorporated by reference to
Exhibit 10.1 to the Companys Form 10-Q for the quarter ended June
30, 2008.
  53




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##### Table of Contents



ExhibitNumber
    
    Description of Exhibit10.12
    *
    
    Form of Indemnification Agreement for Directors and Officers
incorporated herein by reference to the Companys Current Report
on Form 8-K dated September 15, 2008.10.13
    
    
    First Amended and Restated Credit Agreement dated November 7, 2008
between the Company and Bank of America, N.A. Successor by Merger
to LaSalle Bank National Association, incorporated by reference to
Exhibit 10.1 to the Companys Current Report on Form 8-K dated
November 7, 2008.10.14
    *
    
    Amendment No. 1 to Lawson Products, Inc. Long-Term Capital
Accumulation Plan, incorporated by reference to Exhibit 10.1 to
the Companys Current Report on Form 8-K dated February 12, 2009.10.15
    *
    
    Form of Amended and Restated Award Agreement, incorporated by
reference to Exhibit 10.2 to the Companys Current Report on
Form 8-K dated February 12, 2009.10.16
    *
    
    Amended and Restated Employment Agreement dated as of February 12,
2009 by and between the Company and Thomas Neri, incorporated by
reference to Exhibit 10.3 to the Companys Current Report on
Form 8-K dated February 12, 2009.10.17
    *
    
    Amended and Restated Employment Agreement dated as of February 12,
2009 by and between the Company and Neil E. Jenkins, incorporated
by reference to Exhibit 10.4 to the Companys Current Report on
Form 8-K dated February 12, 2009.10.18
    *
    
    Change in Control Agreement dated as of February 12, 2009 by and
between the Company and Harry Dochelli, incorporated by reference
to Exhibit 10.5 to the Companys Current Report on Form 8-K dated
February 12, 2009.10.19
    *
    
    Change in Control Agreement dated as of February 12, 2009 by and
between the Company and Stewart Howley, incorporated by reference
to Exhibit 10.6 to the Companys Current Report on Form 8-K dated
February 12, 2009.10.20
    
    
    Amendment No. 1 to Deferred Prosecution Agreement dated July 31,
2009, incorporated by reference to Exhibit 10.1 to the Companys
Current Report on Form 8-K dated July 31, 2009.10.21
    
    
    Credit Agreement dated as of August 21, 2009, by and among Lawson
Products, Inc. and certain of its subsidiaries and The PrivateBank
And Trust Company, incorporated by reference to Exhibit 10.1 to
the Companys Current Report on Form 8-K dated August 21, 2009 and
with all exhibits and schedules, incorporated by reference to
Exhibit 10.2 to the Companys Current Report on Form 8-K dated
January 29, 2010.10.22
    
    
    Consent, Waiver and First Amendment to the Credit Agreement dated
December 31, 2009 between the Company and The PrivateBank And
Trust Company, incorporated herein by reference to Exhibit 10.1 to
the Companys Current Report on Form 8-K dated December 31, 2009.10.23
    *
    
    Change in Control Agreement dated January 29, 2010 between the
Company and Mr. Ronald Knutson, incorporated herein by reference
to Exhibit 10.1 to the Companys Current Report on Form 8-K dated
January 29, 2010.10.24
    
    
    Second Amendment to the Credit Agreement dated January 29, 2010
between the Company and The PrivateBank And Trust Company,
incorporated herein by reference to Exhibit 10.1 to the Companys
Current Report on Form 8-K dated January 29, 2010.21
    
    
    Subsidiaries of the Company.23
    
    
    Consent of Ernst & Young LLP.
  54




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##### Table of Contents



ExhibitNumber
    
    Description of Exhibit31.1
    
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350 as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.31.2
    
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350 as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.32
    
    
    Certification of Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
 *
    
    Indicates management employment contracts or compensatory plans or arrangements.  55