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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, 2010
 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
 Yes o No þ
 Yes þ No o
 Yes o No o
 Form 10-K. þ
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
(Do not check if a smaller reporting company)
    
    Smaller reporting Company o
 Yes o No þ
   DOCUMENTS INCORPORATED BY REFERENCE




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##### 



TABLE OF CONTENTS
 Page #PART IItem 1. Business
    
    
    3Item 1A. Risk Factors
    
    
    10Item 1B. Unresolved Staff Comments
    
    
    13Item 2. Properties
    
    
    13Item 3. Legal Proceedings
    
    
    14PART IIItem 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
    
    
    15Item 6. Selected Financial Data
    
    
    16Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    17Item 7A. Quantitative and Qualitative Disclosures About Market Risk
    
    
    27Item 8. Financial Statements and Supplementary Data
    
    
    28Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
    
    
    55Item 9A. Controls and Procedures
    
    
    55Item 9B. Other Information
    
    
    57PART IIIItem 10. Directors, Executive Officers and Corporate Governance
    
    
    57Item 11. Executive Compensation
    
    
    57Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    58Item 13. Certain Relationships and Related Transactions, and Director Independence
    
    
    58Item 14. Principal Accounting Fees and Services
    
    
    58PART IVItem 15(a). Exhibits, Financial Statement Schedules
    
    
    58Signatures
    
    
    59Exhibit Index
    
    
    60Exhibit 18Exhibit 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
  Industry and Competition
   Operations
     3




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Products
  
 Percent of total MRO salesProduct Category
    
    2010
    
    
    2009Fastening systems
    
    
    21
    %
    
    
    22
    %Specialty chemicals
    
    
    12
    
    
    
    13Cutting tools and abrasives
    
    
    13
    
    
    
    13Fluid power
    
    
    12
    
    
    
    11Aftermarket automotive supplies
    
    
    10
    
    
    
    10Electrical
    
    
    10
    
    
    
    10Welding and metal repair
    
    
    5
    
    
    
    5Other
    
    
    17
    
    
    
    16100
    %
    
    
    100
    %
     4




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Customers
  Strategic Initiatives
  Build the Team
   Strengthen the Core MRO Business
  Sales Transformation
   5




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Network Optimization
    6




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Implementation of ERP System
      Focus the Portfolio of Businesses
  Grow Aggressively
   7




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Employees
  Available Information
 www.lawsonproducts.com.
  8




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Executive Officers of the Registrant
  Year FirstElected toPresentName
    
    Age
    
    Office
    
    
    PositionThomas J. Neri
    
    
    59
    
    
    
    2007
    
    
    President, Chief Executive Officer and DirectorHarry A. Dochelli
    
    
    51
    
    
    
    2009
    
    
    Executive Vice President, Chief Operating OfficerNeil E. Jenkins
    
    
    61
    
    
    
    2004
    
    
    Executive Vice President, Secretary and General CounselRobert O. Border
    
    
    47
    
    
    
    2010
    
    
    Senior Vice President, Chief Information OfficerStewart A. Howley
    
    
    49
    
    
    
    2008
    
    
    Senior Vice President, Strategic Business DevelopmentRonald J. Knutson
    
    
    47
    
    
    
    2009
    
    
    Senior Vice President, Chief Financial OfficerLawrence J. Krema
    
    
    50
    
    
    
    2010
    
    
    Senior Vice President, Human ResourcesMichelle I. Russell
    
    
    49
    
    
    
    2007
    
    
    Senior Vice President, Operations and Supply Chain Management
  Mr. Neri
 Mr. Dochelli
 Mr. Jenkins
 Mr. Border
 Mr. Howley
 Mr. Knutson
 Mr. Krema
 Ms. Russell
  9




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ITEM 1A.
    
    RISK FACTORS.
  Our results of operations may be adversely impacted by a downturn in the worldwide economy.
   The market price of our common stock may decline.
  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.
   10




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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 and increase our costs.
  Failure to manage changes within the organization
  Failure to retain talented employees, managers and executives could negatively impact our
operating results.
  Failure to retain experienced and productive sales agents could negatively impact our
operating results.
   11




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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.
   12




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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.
   
 ITEM 1B.
    
    UNRESOLVED STAFF COMMENTS.
  
 ITEM 2.
    
    PROPERTIES.
  SquareLocation
    
    Segment
    
    Function
    
    Own/Lease
    
    FootageAddison, Illinois
    
    MRO
    
    Distribution
    
    Own
    
    
    85,800Des Plaines, Illinois
    
    MRO
    
    Packaging/Administration
    
    Own
    
    
    175,000Des Plaines, Illinois
    
    MRO
    
    Administration
    
    Own
    
    
    45,000Des Plaines, Illinois
    
    MRO
    
    Administration (1)
    
    Lease
    
    
    114,000Fairfield, New Jersey
    
    MRO
    
    Distribution
    
    Own
    
    
    60,000Independence, Ohio
    
    MRO
    
    Call Center
    
    Lease
    
    
    9,761Mississauga, Ontario
Canada
    
    MRO
    
    Distribution
    
    Own
    
    
    78,000Vernon Hills, Illinois
    
    MRO
    
    Distribution
    
    Own
    
    
    107,061Reno, Nevada
    
    MRO
    
    Distribution
    
    Own
    
    
    244,280Suwanee, Georgia
    
    MRO
    
    Distribution
    
    Own
    
    
    91,235Decatur, Alabama
    
    OEM
    
    Manufacturing
    
    Own
    
    
    65,000
 (1)
    
    Lease expires in March 2012
   13




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ITEM 3.
    
    LEGAL PROCEEDINGS.
     14




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PART II
 
 ITEM 5.
    
    MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
  2010
    
    
    2009Cash
    
    
    
    
    
    
    
    
    
    
    CashDividends
    
    
    
    
    
    
    
    
    
    
    DividendsDeclared per
    
    
    
    
    
    
    
    
    
    
    Declared perHigh
    
    
    Low
    
    
    Share
    
    
    High
    
    
    Low
    
    
    ShareFirst Quarter
    
    $
    18.40
    
    
    $
    15.10
    
    
    $
    0.06
    
    
    $
    26.68
    
    
    $
    11.68
    
    
    $
    0.03Second Quarter
    
    
    18.88
    
    
    
    12.64
    
    
    
    0.06
    
    
    
    16.94
    
    
    
    9.96
    
    
    
    0.03Third Quarter
    
    
    18.60
    
    
    
    13.41
    
    
    
    0.08
    
    
    
    19.93
    
    
    
    11.58
    
    
    
    0.06Fourth Quarter
    
    
    27.11
    
    
    
    14.19
    
    
    
    0.12
    
    
    
    20.41
    
    
    
    12.75
    
    
    
    0.06
  Stock Price Performance Chart
  
 Indexed Returns      Years Ended December 31,Base PeriodCompany Name/Index
    
    2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010Lawson Products
    
    
    100.00
    
    
    
    123.41
    
    
    
    104.09
    
    
    
    64.44
    
    
    
    50.66
    
    
    
    72.61S&P Smallcap 600
    
    
    100.00
    
    
    
    115.12
    
    
    
    114.78
    
    
    
    79.11
    
    
    
    99.34
    
    
    
    106.63Peer Group
    
    
    100.00
    
    
    
    97.82
    
    
    
    115.02
    
    
    
    92.95
    
    
    
    114.65
    
    
    
    165.03
  15




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ITEM 6.
    
    SELECTED FINANCIAL DATA.
  (Dollars in thousands, except per share data)(as adjusted)
    
    
    (as adjusted)
    
    
    (as adjusted)
    
    
    (as adjusted)2010 (1)
    
    
    2009
    
    
    2008 (2)
    
    
    2007
    
    
    2006Net sales
    
    $
    316,780
    
    
    $
    301,769
    
    
    $
    376,572
    
    
    $
    390,307
    
    
    $
    386,780Income (loss) from continuing
operations before cumulative effect
of accounting change (3)
    
    $
    9,590
    
    
    $
    1,912
    
    
    $
    (23,679
    )
    
    $
    8,262
    
    
    $
    9,364Income (loss) from discontinued
operations
    
    
    (2,653
    )
    
    
    (4,648
    )
    
    
    (3,952
    )
    
    
    2,367
    
    
    
    3,609Income (loss) before cumulative
effect of accounting change
    
    
    6,937
    
    
    
    (2,736
    )
    
    
    (27,631
    )
    
    
    10,629
    
    
    
    12,973Cumulative effect of accounting
change, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (361
    )Net income (loss)
    
    $
    6,937
    
    
    $
    (2,736
    )
    
    $
    (27,631
    )
    
    $
    10,629
    
    
    $
    12,612Basic income (loss) per
share of common stock:Continuing operations before
cumulative effect of accounting
change
    
    $
    1.13
    
    
    $
    0.22
    
    
    $
    (2.78
    )
    
    $
    0.97
    
    
    $
    1.05Discontinued operations
    
    
    (0.32
    )
    
    
    (0.54
    )
    
    
    (0.46
    )
    
    
    0.28
    
    
    
    0.41Cumulative effect of accounting change
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.04
    )Net income (loss)
    
    $
    0.81
    
    
    $
    (0.32
    )
    
    $
    (3.24
    )
    
    $
    1.25
    
    
    $
    1.42Diluted income
(loss) per share of
common stock:Continuing operations before
cumulative effect of
accounting change
    
    $
    1.12
    
    
    $
    0.22
    
    
    $
    (2.78
    )
    
    $
    0.97
    
    
    $
    1.05Discontinued operations
    
    
    (0.31
    )
    
    
    (0.54
    )
    
    
    (0.46
    )
    
    
    0.28
    
    
    
    0.41Cumulative effect of accounting change
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.04
    )Net income (loss)
    
    $
    0.81
    
    
    $
    (0.32
    )
    
    $
    (3.24
    )
    
    $
    1.25
    
    
    $
    1.42Cash dividends declared per share
    
    $
    0.32
    
    
    $
    0.18
    
    
    $
    0.80
    
    
    $
    0.80
    
    
    $
    0.80Total assets
    
    $
    236,384
    
    
    $
    241,647
    
    
    $
    271,223
    
    
    $
    299,863
    
    
    $
    281,292Noncurrent liabilities
    
    $
    37,968
    
    
    $
    41,761
    
    
    $
    64,139
    
    
    $
    52,660
    
    
    $
    48,320Stockholders equity
    
    $
    142,865
    
    
    $
    136,646
    
    
    $
    138,744
    
    
    $
    174,361
    
    
    $
    170,317
 Notes:(1)
    
    The 2010 results include a $4.1 million benefit from legal settlements and a $1.7 million
gain on sale of assets.(2)
    
    The 2008 results include a $4.0 million charge related to unclaimed property liabilities.(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.
  16




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ITEM 7.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
 OVERVIEW
   Business
    17




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SUMMARY OF FINANCIAL PERFORMANCE
 (Dollars in thousands)Year Ended December 31,(as adjusted)
    
    
    (as adjusted)2010
    
    
    2009
    
    
    2008% of
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    % ofNet
    
    
    
    
    
    
    Net
    
    
    
    
    
    
    NetAmount
    
    
    Sales
    
    
    Amount
    
    
    Sales
    
    
    Amount
    
    
    SalesNet salesMRO
    
    $
    303,138
    
    
    
    95.7
    %
    
    $
    289,715
    
    
    
    96.0
    %
    
    $
    357,092
    
    
    
    94.8
    %OEM
    
    
    13,642
    
    
    
    4.3
    
    
    
    12,054
    
    
    
    4.0
    
    
    
    19,480
    
    
    
    5.2Consolidated total
    
    $
    316,780
    
    
    
    100.0
    %
    
    $
    301,769
    
    
    
    100.0
    %
    
    $
    376,572
    
    
    
    100.0
    %Gross profitMRO
    
    $
    192,544
    
    
    
    63.5
    %
    
    $
    184,430
    
    
    
    63.7
    %
    
    $
    233,525
    
    
    
    65.4
    %OEM
    
    
    2,282
    
    
    
    16.7
    
    
    
    1,129
    
    
    
    9.4
    
    
    
    3,262
    
    
    
    16.8Consolidated total
    
    
    194,826
    
    
    
    61.5
    
    
    
    185,559
    
    
    
    61.5
    
    
    
    236,787
    
    
    
    62.9Operating expenses:Selling, general and
administrative expenses
    
    
    180,021
    
    
    
    56.8
    
    
    
    177,421
    
    
    
    58.8
    
    
    
    211,100
    
    
    
    56.1Severance expenses
    
    
    3,629
    
    
    
    1.2
    
    
    
    6,228
    
    
    
    2.1
    
    
    
    5,238
    
    
    
    1.4Loss (gain) on sale of assets
    
    
    (1,701
    )
    
    
    (0.5
    )
    
    
    16
    
    
    
    
    
    
    
    44
    
    
    
    Other operating (income)
expenses
    
    
    (4,050
    )
    
    
    (1.3
    )
    
    
    481
    
    
    
    0.1
    
    
    
    35,616
    
    
    
    9.4Total operating expenses
    
    
    177,899
    
    
    
    56.2
    
    
    
    184,146
    
    
    
    61.0
    
    
    
    251,998
    
    
    
    66.9Operating income (loss)
    
    
    16,927
    
    
    
    5.3
    
    
    
    1,413
    
    
    
    0.5
    
    
    
    (15,211
    )
    
    
    (4.0
    )Interest expense
    
    
    (391
    )
    
    
    (0.1
    )
    
    
    (1,037
    )
    
    
    (0.3
    )
    
    
    (789
    )
    
    
    (0.2
    )Other income
    
    
    160
    
    
    
    0.1
    
    
    
    1,029
    
    
    
    0.3
    
    
    
    626
    
    
    
    0.1Income (loss) from continuing
operations before income tax
expense
    
    
    16,696
    
    
    
    5.3
    
    
    
    1,405
    
    
    
    0.5
    
    
    
    (15,374
    )
    
    
    (4.1
    )Income tax expense (benefit)
    
    
    7,106
    
    
    
    2.3
    
    
    
    (507
    )
    
    
    (0.1
    )
    
    
    8,305
    
    
    
    2.2Income (loss) from continuing
operations
    
    $
    9,590
    
    
    
    3.0
    %
    
    $
    1,912
    
    
    
    0.6
    %
    
    $
    (23,679
    )
    
    
    (6.3
    )%
  18




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(Dollars in thousands)Less:
    
    
    Less: outboundPreviously
    
    
    discontinued
    
    
    shippingreported
    
    
    operations
    
    
    re-class
    
    
    As adjustedYear Ended December 31, 2009Net salesMRO
    
    $
    320,400
    
    
    $
    30,685
    
    
    $
    
    
    
    $
    289,715OEM
    
    
    58,481
    
    
    
    46,427
    
    
    
    
    
    
    
    12,054Consolidated total
    
    $
    378,881
    
    
    $
    77,112
    
    
    $
    
    
    
    $
    301,769Gross profitMRO
    
    $
    207,103
    
    
    $
    12,459
    
    
    $
    10,214
    
    
    $
    184,430OEM
    
    
    10,674
    
    
    
    9,441
    
    
    
    104
    
    
    
    1,129Consolidated total
    
    
    217,777
    
    
    
    21,900
    
    
    
    10,318
    
    
    
    185,559Total operating expenses
    
    
    223,364
    
    
    
    28,900
    
    
    
    10,318
    
    
    
    184,146Operating income (loss)
    
    
    (5,587
    )
    
    
    (7,000
    )
    
    
    
    
    
    
    1,413Interest expense
    
    
    (1,037
    )
    
    
    
    
    
    
    
    
    
    
    (1,037
    )Other income
    
    
    887
    
    
    
    (142
    )
    
    
    
    
    
    
    1,029Income (loss) from continuing
operations before income tax expense
    
    
    (5,737
    )
    
    
    (7,142
    )
    
    
    
    
    
    
    1,405Income taxes
    
    
    (3,121
    )
    
    
    (2,614
    )
    
    
    
    
    
    
    (507
    )Income (loss) from continuing operations
    
    $
    (2,616
    )
    
    $
    (4,528
    )
    
    $
    
    
    
    $
    1,912
 (Dollars in thousands)Less:
    
    
    Less: outboundPreviously
    
    
    discontinued
    
    
    shippingreported
    
    
    operations
    
    
    re-class
    
    
    As adjustedYear Ended December 31, 2008Net salesMRO
    
    $
    403,584
    
    
    $
    46,492
    
    
    $
    
    
    
    $
    357,092OEM
    
    
    81,623
    
    
    
    62,143
    
    
    
    
    
    
    
    19,480Consolidated total
    
    $
    485,207
    
    
    $
    108,635
    
    
    $
    
    
    
    $
    376,572Gross profitMRO
    
    $
    266,371
    
    
    $
    19,739
    
    
    $
    13,107
    
    
    $
    233,525OEM
    
    
    12,627
    
    
    
    9,208
    
    
    
    157
    
    
    
    3,262Consolidated total
    
    
    278,998
    
    
    
    28,947
    
    
    
    13,264
    
    
    
    236,787Total operating expenses
    
    
    299,229
    
    
    
    33,967
    
    
    
    13,264
    
    
    
    251,998Operating loss
    
    
    (20,231
    )
    
    
    (5,020
    )
    
    
    
    
    
    
    (15,211
    )Interest expense
    
    
    (789
    )
    
    
    
    
    
    
    
    
    
    
    (789
    )Other income
    
    
    320
    
    
    
    (306
    )
    
    
    
    
    
    
    626Loss from continuing
operations before income tax
expense
    
    
    (20,700
    )
    
    
    (5,326
    )
    
    
    
    
    
    
    (15,374
    )Income taxes
    
    
    6,360
    
    
    
    (1,945
    )
    
    
    
    
    
    
    8,305Loss from continuing operations
    
    $
    (27,060
    )
    
    $
    (3,381
    )
    
    $
    
    
    
    $
    (23,679
    )
  19




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##### Table of Contents



RESULTS OF OPERATIONS FOR 2010 AS COMPARED TO 2009
 Net Sales and Gross Profit
  (Dollars in thousands)Year ended December 31,
    
    
    Change(as adjusted)2010
    
    
    2009
    
    
    Amount
    
    
    %Net salesMRO
    
    $
    303,138
    
    
    $
    289,715
    
    
    $
    13,423
    
    
    
    4.6
    %OEM
    
    
    13,642
    
    
    
    12,054
    
    
    
    1,588
    
    
    
    13.2Consolidated
    
    $
    316,780
    
    
    $
    301,769
    
    
    $
    15,011
    
    
    
    5.0Gross profitMRO
    
    $
    192,544
    
    
    $
    184,430
    
    
    $
    8,114
    
    
    
    4.4
    %OEM
    
    
    2,282
    
    
    
    1,129
    
    
    
    1,153
    
    
    
    102.1Consolidated
    
    $
    194,826
    
    
    $
    185,559
    
    
    $
    9,267
    
    
    
    5.0Gross profit marginMRO
    
    
    63.5
    %
    
    
    63.7
    %OEM
    
    
    16.7
    
    
    
    9.4Consolidated
    
    
    61.5
    
    
    
    61.5
     Selling, General and Administrative Expenses
   20




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##### Table of Contents



Severance Expenses
  Loss (Gain) on Sale of Assets
  Other Operating (Income) Expenses
   Interest Expense
  Other Income
  Income Tax Expense
   21




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##### Table of Contents



RESULTS OF OPERATIONS FOR 2009 AS COMPARED TO 2008
 Net Sales and Gross Profit
  (Dollars in thousands)Year ended December 31,
    
    
    Decrease(as adjusted)
    
    
    (as adjusted)2009
    
    
    2008
    
    
    Amount
    
    
    %Net salesMRO
    
    $
    289,715
    
    
    $
    357,092
    
    
    $
    (67,377
    )
    
    
    (18.9
    )%OEM
    
    
    12,054
    
    
    
    19,480
    
    
    
    (7,426
    )
    
    
    (38.1
    )Consolidated
    
    $
    301,769
    
    
    $
    376,572
    
    
    $
    (74,803
    )
    
    
    (19.9
    )Gross profitMRO
    
    $
    184,430
    
    
    $
    233,525
    
    
    $
    (49,095
    )
    
    
    (21.0
    )%OEM
    
    
    1,129
    
    
    
    3,262
    
    
    
    (2,133
    )
    
    
    (65.4
    )Consolidated
    
    $
    185,559
    
    
    $
    236,787
    
    
    $
    (51,228
    )
    
    
    (21.6
    )Gross profit marginMRO
    
    
    63.7
    %
    
    
    65.4
    %OEM
    
    
    9.4
    
    
    
    16.7Consolidated
    
    
    61.5
    
    
    
    62.9
    Selling, General and Administrative Expenses
   22




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##### Table of Contents



Severance Expense s
   Other Operating (Income) Expenses
   Interest Expense
  Other Income
  Income Tax Expense
   23




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##### Table of Contents



LIQUIDITY AND CAPITAL RESOURCES
     Covenant
    
    Requirement
    
    ActualMinimum EBITDA, as defined in the amended Credit
Agreement
    
    $10.0 million
    
    $26.8 millionCash plus accounts receivable and inventory to debt ratio
    
    2.00:1.00
    
    91.84:1.00Minimum tangible net worth
    
    $55.0 million
    
    $88.2 millionDebt service ratio
    
    1.2
    
    34.5
   24




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##### Table of Contents



CONTRACTUAL OBLIGATIONS
  (Dollars in thousands)Payments due in years ended December 31,Total
    
    
    2011
    
    
    2012  2013
    
    
    2014  2015
    
    
    ThereafterOperating leases
    
    $
    1,461
    
    
    $
    778
    
    
    $
    610
    
    
    $
    73
    
    
    $
    Capital leases
    
    
    1,152
    
    
    
    768
    
    
    
    312
    
    
    
    72
    
    
    
    Deferred compensation
    
    
    13,220
    
    
    
    2,422
    
    
    
    2,687
    
    
    
    1,419
    
    
    
    6,692Security bonus plan (1)
    
    
    25,739
    
    
    
    137
    
    
    
    
    
    
    
    
    
    
    
    25,602Severance obligation
    
    
    3,327
    
    
    
    2,490
    
    
    
    837
    
    
    
    
    
    
    
    Long term incentive plan (2)
    
    
    1,751
    
    
    
    1,492
    
    
    
    259
    
    
    
    
    
    
    
    Purchase commitments
    
    
    4,281
    
    
    
    4,281
    
    
    
    
    
    
    
    
    
    
    
    Total contractual cash
obligations
    
    $
    50,931
    
    
    $
    12,368
    
    
    $
    4,705
    
    
    $
    1,564
    
    
    $
    32,294
 (1)
    
    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.(2)
    
    Amounts owed in 2011 relate
to the 2003-2008 LTIP plan.  Amounts owed in 2012-2013 relate to the
2010-2012 LTIP plan and are subject to increase or decrease based on
future operating performance.
 OFF-BALANCE SHEET ARRANGEMENTS
  CRITICAL ACCOUNTING POLICIES
  Allowance for Doubtful Accounts
 Inventory Reserves
   25




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##### Table of Contents



Income Taxes
  Goodwill Impairment
     26




---



##### Table of Contents



ITEM 7A.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
       27




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##### Table of Contents



ITEM 8.
    
    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
  Report of Independent Registered Public Accounting Firm on Consolidated Financial Statements
    
    
    29Consolidated Balance Sheets as of December 31, 2010 and 2009
    
    
    30Consolidated Statements of Operations for the Years ended December 31, 2010, 2009 and 2008
    
    
    31Consolidated Statements of Changes in Stockholders Equity for the Years ended December 31,
2010, 2009 and 2008
    
    
    32Consolidated Statements of Cash Flows for the Years ended December 31, 2010, 2009 and 2008
    
    
    33Notes to Consolidated Financial Statements
    
    
    34Schedule II  Valuation and Qualifying Accounts
    
    
    54
  28




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##### Table of Contents



Report of Independent Registered Public Accounting Firm
on Consolidated Financial Statements
 
       
  29




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##### Table of Contents



Lawson Products, Inc.
 
 Consolidated Balance Sheets
 (Dollars in thousands)
 December 31,(as adjusted)2010
    
    
    2009ASSETSCurrent assets:Cash and cash equivalents
    
    $
    40,566
    
    
    $
    8,787Accounts receivable, less allowance for doubtful accounts of $1,085 and
$882, respectively
    
    
    33,398
    
    
    
    29,397Inventories
    
    
    47,167
    
    
    
    43,397Miscellaneous receivables and prepaid expenses
    
    
    8,905
    
    
    
    10,142Deferred income taxes
    
    
    4,251
    
    
    
    4,819Property held for sale
    
    
    
    
    
    
    332Discontinued operations
    
    
    619
    
    
    
    41,446Total current assets
    
    
    134,906
    
    
    
    138,320Property, plant and equipment, less accumulated depreciation and amortization
    
    
    44,442
    
    
    
    40,328Cash value of life insurance
    
    
    15,660
    
    
    
    17,021Deferred income taxes
    
    
    11,492
    
    
    
    15,249Goodwill
    
    
    28,307
    
    
    
    27,957Other assets
    
    
    1,577
    
    
    
    2,461Discontinued operations
    
    
    
    
    
    
    311Total assets
    
    $
    236,384
    
    
    $
    241,647LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    18,195
    
    
    $
    12,302Accrued expenses and other liabilities
    
    
    35,348
    
    
    
    33,086Settlement payable
    
    
    
    
    
    
    10,000Discontinued operations
    
    
    2,008
    
    
    
    7,852Total current liabilities
    
    
    55,551
    
    
    
    63,240Noncurrent liabilities and deferred credits:Security bonus plan
    
    
    25,602
    
    
    
    25,931Deferred compensation
    
    
    10,792
    
    
    
    10,374Other
    
    
    1,574
    
    
    
    5,45637,968
    
    
    
    41,761Commitments 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  8,534,028
and 8,522,001 shares, respectively
    
    
    8,534
    
    
    
    8,522Capital in excess of par value
    
    
    5,328
    
    
    
    4,780Retained earnings
    
    
    126,098
    
    
    
    121,888Treasury stock  2,703 and 0 shares held, respectively
    
    
    (70
    )
    
    
    Accumulated other comprehensive income
    
    
    2,975
    
    
    
    1,456Total stockholders equity
    
    
    142,865
    
    
    
    136,646Total liabilities and stockholders equity
    
    $
    236,384
    
    
    $
    241,647
   30




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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,(as adjusted)
    
    
    (as adjusted)2010
    
    
    2009
    
    
    2008Net sales
    
    $
    316,780
    
    
    $
    301,769
    
    
    $
    376,572Cost of goods sold
    
    
    121,954
    
    
    
    116,210
    
    
    
    139,785Gross profit
    
    
    194,826
    
    
    
    185,559
    
    
    
    236,787Operating expenses:Selling, general and administrative expenses
    
    
    180,021
    
    
    
    177,421
    
    
    
    211,100Severance expenses
    
    
    3,629
    
    
    
    6,228
    
    
    
    5,238Loss (gain) on sale of assets
    
    
    (1,701
    )
    
    
    16
    
    
    
    44Other operating (income) expenses
    
    
    (4,050
    )
    
    
    481
    
    
    
    35,616Operating expenses
    
    
    177,899
    
    
    
    184,146
    
    
    
    251,998Operating income (loss)
    
    
    16,927
    
    
    
    1,413
    
    
    
    (15,211
    )Interest expense
    
    
    (391
    )
    
    
    (1,037
    )
    
    
    (789
    )Other income, net
    
    
    160
    
    
    
    1,029
    
    
    
    626Income (loss) from continuing operations
before income taxes
    
    
    16,696
    
    
    
    1,405
    
    
    
    (15,374
    )Income tax expense (benefit)
    
    
    7,106
    
    
    
    (507
    )
    
    
    8,305Income (loss) from continuing operations
    
    
    9,590
    
    
    
    1,912
    
    
    
    (23,679
    )Discontinued operations, net
    
    
    (2,653
    )
    
    
    (4,648
    )
    
    
    (3,952
    )Net income (loss)
    
    $
    6,937
    
    
    $
    (2,736
    )
    
    $
    (27,631
    )Basic income (loss) per share of common stock:Continuing operations
    
    $
    1.13
    
    
    $
    0.22
    
    
    $
    (2.78
    )Discontinued operations
    
    
    (0.32
    )
    
    
    (0.54
    )
    
    
    (0.46
    )Net Income (loss)
    
    $
    0.81
    
    
    $
    (0.32
    )
    
    $
    (3.24
    )Diluted income (loss) per share of common
stock:Continuing operations
    
    $
    1.12
    
    
    $
    0.22
    
    
    $
    (2.78
    )Discontinued operations
    
    
    (0.31
    )
    
    
    (0.54
    )
    
    
    (0.46
    )Net Income (loss)
    
    $
    0.81
    
    
    $
    (0.32
    )
    
    $
    (3.24
    )
   31




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##### Table of Contents



Lawson Products, Inc.
 
 Consolidated Statements of Changes in Stockholders Equity
 (Dollars in thousands)
 Common
    
    
    Capital in
    
    
    
    
    
    
    
    
    
    
    Accumulated OtherStock,
    
    
    Excess of
    
    
    Retained
    
    
    Treasury
    
    
    Comprehensive
    
    
    Comprehensive$1 par value
    
    
    Par Value
    
    
    Earnings
    
    
    Stock
    
    
    Income (loss)
    
    
    Income (loss)Balance at January 1, 2008
    
    $
    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
    
    
    
    
    
    
    
    1,456Net income
    
    
    
    
    
    
    
    
    
    
    6,937
    
    
    
    
    
    
    
    
    
    
    $
    6,937Other comprehensive income, net of tax:Adjustment for foreign currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,519
    
    
    
    1,519Comprehensive income for the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    8,456Stock based compensation
    
    
    12
    
    
    
    548
    
    
    
    
    
    
    
    
    
    
    
    Share repurchase
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (70
    )
    
    
    Cash dividends declared
    
    
    
    
    
    
    
    
    
    
    (2,727
    )
    
    
    
    
    
    
    Balance at December 31, 2010
    
    $
    8,534
    
    
    $
    5,328
    
    
    $
    126,098
    
    
    $
    (70
    )
    
    $
    2,975
   32




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##### Table of Contents



Lawson Products, Inc.
 
 Consolidated Statements of Cash Flows
 (Dollars in thousands)
 Year Ended December 31,(as adjusted)
    
    
    (as adjusted)2010
    
    
    2009
    
    
    2008Operating activitiesNet income (loss)
    
    $
    6,937
    
    
    $
    (2,736
    )
    
    $
    (27,631
    )Loss from discontinued operations
    
    
    2,653
    
    
    
    4,648
    
    
    
    3,952Income (loss) from continuing operations
    
    
    9,590
    
    
    
    1,912
    
    
    
    (23,679
    )Adjustments to reconcile net income (loss) from
continuing operations to net cash provided by
operating activities:Depreciation and amortization
    
    
    6,306
    
    
    
    6,507
    
    
    
    7,431Deferred income taxes
    
    
    5,220
    
    
    
    2,941
    
    
    
    666Stock based compensation expense (benefit)
    
    
    1,915
    
    
    
    12
    
    
    
    (843
    )Settlement payment
    
    
    (10,000
    )
    
    
    (10,000
    )
    
    
    (10,000
    )Provision for settlement
    
    
    
    
    
    
    
    
    
    
    30,000Loss (gain) on disposal of property and equipment
    
    
    (1,701
    )
    
    
    16
    
    
    
    44Changes in operating assets and liabilities:Accounts receivable
    
    
    (4,678
    )
    
    
    6,595
    
    
    
    5,146Inventories
    
    
    (3,539
    )
    
    
    6,278
    
    
    
    3,304Prepaid expenses and other assets
    
    
    2,118
    
    
    
    3,403
    
    
    
    1,402Accounts payable and accrued expenses
    
    
    6,219
    
    
    
    (5,532
    )
    
    
    (771
    )Other
    
    
    (125
    )
    
    
    (1,570
    )
    
    
    (5,188
    )Net cash provided by operating activities
    
    $
    11,325
    
    
    $
    10,562
    
    
    $
    7,512Investing activitiesPurchases of property, plant and equipment
    
    $
    (10,048
    )
    
    $
    (2,721
    )
    
    $
    (2,886
    )Proceeds from sale of property
    
    
    2,027
    
    
    
    2,179
    
    
    
    36Proceeds from sale of businesses
    
    
    27,264
    
    
    
    
    
    
    
    Net cash provided by (used in) investing activities
    
    $
    19,243
    
    
    $
    (542
    )
    
    $
    (2,850
    )Financing activitiesNet payments on revolving line of credit
    
    $
    
    
    
    $
    (7,700
    )
    
    $
    (3,300
    )Dividends paid
    
    
    (2,216
    )
    
    
    (2,727
    )
    
    
    (6,817
    )Other
    
    
    (32
    )
    
    
    (420
    )
    
    
    Net cash used in financing activities
    
    $
    (2,248
    )
    
    $
    (10,847
    )
    
    $
    (10,117
    )Discontinued operationsOperating cash flows
    
    $
    3,463
    
    
    $
    5,361
    
    
    $
    8,747Investing cash flows
    
    
    (4
    )
    
    
    (47
    )
    
    
    (663
    )Net cash provided by discontinued operations
    
    $
    3,459
    
    
    $
    5,314
    
    
    $
    8,084Increase in cash and cash equivalents
    
    
    31,779
    
    
    
    4,487
    
    
    
    2,629Cash and cash equivalents at beginning of year
    
    
    8,787
    
    
    
    4,300
    
    
    
    1,671Cash and cash equivalents at end of year
    
    $
    40,566
    
    
    $
    8,787
    
    
    $
    4,300
   33




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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 Change in Accounting
Principle
 Change in Accounting Principle
  (Dollars in thousands)Less:
    
    
    Less: outboundPreviously
    
    
    discontinued
    
    
    shippingreported
    
    
    operations
    
    
    reclass
    
    
    As adjustedYear ended
December 31, 2009Net sales
    
    $
    378,881
    
    
    $
    77,112
    
    
    $
    
    
    
    $
    301,769COGS
    
    
    161,104
    
    
    
    55,212
    
    
    
    (10,318
    )
    
    
    116,210Gross profit
    
    $
    217,777
    
    
    $
    21,900
    
    
    $
    10,318
    
    
    $
    185,559Gross profit %
    
    
    57.5
    %
    
    
    
    
    
    
    
    
    
    
    61.5
    %Year ended
December 31, 2008Net sales
    
    $
    485,207
    
    
    $
    108,635
    
    
    $
    
    
    
    $
    376,572COGS
    
    
    206,209
    
    
    $
    79,688
    
    
    
    (13,264
    )
    
    
    139,785Gross profit
    
    $
    278,998
    
    
    $
    28,947
    
    
    $
    13,264
    
    
    $
    236,787Gross profit %
    
    
    57.5
    %
    
    
    
    
    
    
    
    
    
    
    62.9
    %
   34




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##### Table of Contents



Lawson Products, Inc.
Notes to Consolidated Financial Statements
 Cash Equivalents
 Allowance for Doubtful Accounts Methodology
 Inventories
 Property, Plant and Equipment
 Cash Value of Life Insurance
 Deferred Compensation
 Stock-Based Compensation Stock Compensation Plans.
 Goodwill
  35




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##### Table of Contents



Lawson Products, Inc.
Notes to Consolidated Financial Statements
 Impairment of Long-Lived Assets
 Income Taxes
   Earnings per Share
 Foreign Currency
 Treasury Stock
  36




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##### Table of Contents



Lawson Products, Inc.
Notes to Consolidated Financial Statements
 Use of Estimates
 Recent Accounting Pronouncements
 Subsequent Events, Subsequent Events,
 The FASB Accounting Standards Codification and the
Hierarchy of Generally Accepted Accounting Principles,
 Note 3  Discontinued operations
 Assembly Component Systems, Inc.
   Rutland Tool & Supply Company, Inc,
    37




---



##### Table of Contents



Lawson Products, Inc.
Notes to Consolidated Financial Statements
 Mexico
  Results
  (Dollars in thousands)Year Ended December 31,2010
    
    
    2009
    
    
    2008Net salesACS
    
    $
    34,786
    
    
    $
    46,427
    
    
    $
    62,143Rutland
    
    
    32,637
    
    
    
    30,685
    
    
    
    46,492Total net sales
    
    $
    67,423
    
    
    $
    77,112
    
    
    $
    108,635Pre-tax operating income (loss) from
discontinued operationsACS
    
    $
    736
    
    
    $
    (3,877
    )
    
    $
    (6,830
    )Rutland
    
    
    88
    
    
    
    (3,265
    )
    
    
    1,504Mexico
    
    
    (264
    )
    
    
    (120
    )
    
    
    (571
    )Total pre-tax operating income (loss)
    
    
    560
    
    
    
    (7,262
    )
    
    
    (5,897
    )Income tax expense (benefit)
    
    
    645
    
    
    
    (2,614
    )
    
    
    (1,945
    )Net operating loss from
discontinued operations
    
    
    (85
    )
    
    
    (4,648
    )
    
    
    (3,952
    )Sale of discontinued operationsPre-tax loss on sale of ACS
    
    
    (3,508
    )
    
    
    
    
    
    
    Pre-tax loss on sale of Rutland
    
    
    (442
    )
    
    
    
    
    
    
    Total pre-tax loss on sale
    
    
    (3,950
    )
    
    
    
    
    
    
    Income tax benefit
    
    
    (1,382
    )
    
    
    
    
    
    
    Net loss from sale of
discontinued operations
    
    
    (2,568
    )
    
    
    
    
    
    
    Loss from discontinued operations
    
    $
    (2,653
    )
    
    $
    (4,648
    )
    
    $
    (3,952
    )
 Note 4  Inventories
  (Dollars in thousands)December 31,(as adjusted)2010
    
    
    2009Finished goods
    
    $
    49,084
    
    
    $
    45,159Work in progress
    
    
    1,203
    
    
    
    1,227Raw materials
    
    
    1,591
    
    
    
    1,759Total
    
    
    51,878
    
    
    
    48,145Reserve for obsolete and excess inventory
    
    
    (4,711
    )
    
    
    (4,748
    )$
    47,167
    
    
    $
    43,397
  38




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##### Table of Contents



Lawson Products, Inc.
Notes to Consolidated Financial Statements
 Note 5  Property, Plant and Equipment
  (Dollars in thousands)December 31,(as adjusted)2010
    
    
    2009Land
    
    $
    8,781
    
    
    $
    8,712Buildings and improvements
    
    
    49,857
    
    
    
    50,730Machinery and equipment
    
    
    32,062
    
    
    
    31,712Capitalized software
    
    
    9,279
    
    
    
    10,090Furniture and fixtures
    
    
    5,538
    
    
    
    5,274Capital leases
    
    
    3,210
    
    
    
    3,439Vehicles
    
    
    247
    
    
    
    211Construction in progress
    
    
    8,944
    
    
    
    348117,918
    
    
    
    110,516Accumulated depreciation and amortization
    
    
    (73,476
    )
    
    
    (70,188
    )$
    44,442
    
    
    $
    40,328
  Note 6  Sale of Distribution Centers
  Note 7  Goodwill
    (Dollars in thousands)December 31,2010
    
    
    2009Beginning balance
    
    $
    27,957
    
    
    $
    25,748Translation adjustment
    
    
    350
    
    
    
    2,209Ending balance
    
    $
    28,307
    
    
    $
    27,957
  39




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##### Table of Contents



Lawson Products, Inc.
Notes to Consolidated Financial Statements
 Note 8  Income Taxes
  (Dollars in thousands)Year Ended December 31,(as adjusted)
    
    
    (as adjusted)2010
    
    
    2009
    
    
    2008United States
    
    $
    14,269
    
    
    $
    2,115
    
    
    $
    (18,575
    )Canada
    
    
    2,427
    
    
    
    (710
    )
    
    
    3,201$
    16,696
    
    
    $
    1,405
    
    
    $
    (15,374
    )
  (Dollars in thousands)Year Ended December 31,(as adjusted)
    
    
    (as adjusted)2010
    
    
    2009
    
    
    2008Current income tax expense (benefit):U.S. Federal
    
    $
    3,681
    
    
    $
    (2,491
    )
    
    $
    2,755U.S. state
    
    
    987
    
    
    
    77
    
    
    
    618Canada
    
    
    366
    
    
    
    (102
    )
    
    
    915Total
    
    $
    5,034
    
    
    $
    (2,516
    )
    
    $
    4,288Deferred income tax expense (benefit):U.S. Federal
    
    $
    1,648
    
    
    $
    2,065
    
    
    $
    3,885U.S. state
    
    
    217
    
    
    
    55
    
    
    
    168Canada
    
    
    207
    
    
    
    (111
    )
    
    
    (36
    )Total
    
    $
    2,072
    
    
    $
    2,009
    
    
    $
    4,017Total income tax expense (benefit):U.S. Federal
    
    $
    5,329
    
    
    $
    (426
    )
    
    $
    6,640U.S. state
    
    
    1,204
    
    
    
    132
    
    
    
    786Canada
    
    
    573
    
    
    
    (213
    )
    
    
    879Total
    
    $
    7,106
    
    
    $
    (507
    )
    
    $
    8,305
  Year Ended December 31,(as adjusted)
    
    
    (as adjusted)2010
    
    
    2009
    
    
    2008Statutory Federal rate
    
    
    35.0
    %
    
    
    35.0
    %
    
    
    35.0
    %Increase (decrease) resulting from:State and local taxes, net
    
    
    1.2
    
    
    
    10.0
    
    
    
    (5.6
    )Executive life insurance
    
    
    (1.8
    )
    
    
    (35.0
    )
    
    
    (13.8
    )Fines and penalties
    
    
    (0.2
    )
    
    
    13.0
    
    
    
    (66.5
    )Meals & Entertainment
    
    
    0.8
    
    
    
    7.8
    
    
    
    (1.4
    )Capital loss carryforward
    
    
    3.7
    
    
    
    73.6
    
    
    
    Deferred tax expense
    
    
    1.2
    
    
    
    
    
    
    
    Change in valuation allowance
    
    
    4.1
    
    
    
    13.7
    
    
    
    Change in uncertain tax positions
    
    
    (1.4
    )
    
    
    (154.0
    )
    
    
    (5.8
    )Provision to return differences
    
    
    1.4
    
    
    
    (1.9
    )
    
    
    4.3Other items, net
    
    
    (1.4
    )
    
    
    1.7
    
    
    
    (0.2
    )Provision for income taxes
    
    
    42.6
    %
    
    
    (36.1
    )%
    
    
    (54.0
    )%
  40




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##### Table of Contents



Lawson Products, Inc.
Notes to Consolidated Financial Statements
       (Dollars in thousands)December 31,(as adjusted)2010
    
    
    2009Deferred tax assets:Compensation and benefits
    
    $
    17,689
    
    
    $
    19,293Inventory reserve
    
    
    2,432
    
    
    
    4,055Capital loss
    
    
    
    
    
    
    2,166Accounts receivable reserve
    
    
    399
    
    
    
    455Property, plant and equipment
    
    
    
    
    
    
    184Net operating loss carryforward
    
    
    2,380
    
    
    
    193Other
    
    
    1,165
    
    
    
    1,423Total deferred tax assets
    
    
    24,065
    
    
    
    27,769Valuation allowance for deferred tax assets
    
    
    (875
    )
    
    
    (1,744
    )Net deferred tax assets
    
    
    23,190
    
    
    
    26,025Deferred tax liabilities:Goodwill
    
    
    5,984
    
    
    
    4,756Property, plant and equipment
    
    
    572
    
    
    
    Other
    
    
    891
    
    
    
    1,201Total deferred liabilities
    
    
    7,447
    
    
    
    5,957Total net deferred assets
    
    $
    15,743
    
    
    $
    20,068Net deferred tax assets:Net current deferred income taxes
    
    $
    4,251
    
    
    $
    4,819Net noncurrent deferred income taxes
    
    
    11,492
    
    
    
    15,249$
    15,743
    
    
    $
    20,068
  41




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##### Table of Contents



Lawson Products, Inc.
Notes to Consolidated Financial Statements
  (Dollars in thousands)December 31,(as adjusted)2010
    
    
    2009Balance at beginning of year
    
    $
    1,230
    
    
    $
    3,197Additions for tax positions of current year
    
    
    
    
    
    
    627Additions for tax positions of prior years
    
    
    
    
    
    
    (1,440
    )Settlements
    
    
    (1,230
    )
    
    
    (1,154
    )Balance at end of year
    
    $
    
    
    
    $
    1,230
  Note 9  Accrued Expenses and Other Liabilities
  (Dollars in thousands)December 31,(as adjusted)2010
    
    
    2009Accrued compensation
    
    $
    13,912
    
    
    $
    13,160Accrued and withheld taxes, other than income taxes
    
    
    2,584
    
    
    
    2,145Accrued profit sharing
    
    
    2,356
    
    
    
    2,066Accrued severance
    
    
    2,229
    
    
    
    3,065Accrued stock based compensation
    
    
    2,566
    
    
    
    1,210Accrued health benefits
    
    
    1,145
    
    
    
    928Cash dividends payable
    
    
    1,023
    
    
    
    511Other
    
    
    9,533
    
    
    
    10,001$
    35,348
    
    
    $
    33,086
 Note 10  Revolving Line of Credit
   42




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##### Table of Contents



Lawson Products, Inc.
Notes to Consolidated Financial Statements
  Covenant
    
    Requirement
    
    ActualMinimum EBITDA, as defined in the amended Credit
Agreement
    
    $10.0 million
    
    $26.8 millionCash plus accounts receivable and inventory to debt ratio
    
    2.00:1.00
    
    91.84:1.00Minimum tangible net worth
    
    $55.0 million
    
    $88.2 millionDebt service ratio
    
    1.2
    
    34.5
  Note 11  Reserve for Severance
  (Dollars in thousands)Year Ended December 31,(as adjusted)
    
    
    (as adjusted)2010
    
    
    2009
    
    
    2008Beginning balance
    
    $
    4,086
    
    
    $
    6,012
    
    
    $
    6,620Charged to earnings current year
    
    
    3,696
    
    
    
    6,579
    
    
    
    5,238Cash paid
    
    
    (4,667
    )
    
    
    (8,280
    )
    
    
    (5,826
    )Adjustment to prior year reserves
    
    
    (67
    )
    
    
    (351
    )
    
    
    Exchange rate variance
    
    
    14
    
    
    
    126
    
    
    
    (20
    )Ending balance
    
    $
    3,062
    
    
    $
    4,086
    
    
    $
    6,012
  (Dollars in thousands)December 31,(as adjusted)2010
    
    
    2009Accrued severance included in:Accrued expenses and other liabilities
    
    $
    2,229
    
    
    $
    3,065Noncurrent other
    
    
    833
    
    
    
    1,021Total accrued severance
    
    $
    3,062
    
    
    $
    4,086
  Note 12  Retirement and Security Bonus Plans
    43




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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 Leases2011
    
    $
    778
    
    
    $
    7682012
    
    
    370
    
    
    
    2232013
    
    
    240
    
    
    
    892014
    
    
    73
    
    
    
    722015
    
    
    
    
    
    
    Total
    
    $
    1,461
    
    
    
    1,152Less: Interest portion
    
    
    
    
    
    
    (204
    )Liability
    
    
    
    
    
    $
    948
 Litigation and regulatory matters
    Tax matters
    44




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##### Table of Contents



Lawson Products, Inc.
Notes to Consolidated Financial Statements
  Note 14  Stock Compensation Plans
   Service based awards
  Stock Performance Rights
   Expected volatility
    
    46.9% to 79.4%Risk-free rate of return
    
    0.1% to 1.7%Expected term (in years)
    
    0.1 to 4.3Expected annual dividend
    
    $0.48
    45




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##### Table of Contents



Lawson Products, Inc.
Notes to Consolidated Financial Statements
  WeightedNumber
    
    
    Averageof SPRs
    
    
    Exercise PriceOutstanding on December 31, 2009
    
    
    388,300
    
    
    $
    28.31Granted
    
    
    2,600
    
    
    
    14.04Cancelled
    
    
    (88,650
    )
    
    
    30.51Outstanding on December 31, 2010
    
    
    302,250
    
    
    
    27.54Exercisable on December 31, 2010
    
    
    215,550
    
    
    $
    30.40
  Restricted Stock Awards
   Restricted StockAwardsOutstanding on December 31, 2009
    
    
    40,400Granted
    
    
    35,692Exchanged for common shares
    
    
    (12,027
    )Cancelled
    
    
    (4,300
    )Outstanding on December 31, 2010
    
    
    59,765
  Restricted Stock Units
   46




---



##### Table of Contents



Lawson Products, Inc.
Notes to Consolidated Financial Statements
 Performance based awards
  SEO LTIP
   VP LTIP
   Note 15  Other Operating (Income) Expenses
    47




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##### Table of Contents



Lawson Products, Inc.
Notes to Consolidated Financial Statements
 Note 16  Earnings (Loss) Per Share
  (Dollars in thousands, except per share data)Year Ended December 31,(as adjusted)
    
    
    (as adjusted)2010
    
    
    2009
    
    
    2008Weighted average shares:Basic weighted average shares outstanding
    
    
    8,522
    
    
    
    8,522
    
    
    
    8,522Effect of dilutive securities outstanding
    
    
    15
    
    
    
    
    
    
    
    Diluted weighted average shares outstanding
    
    
    8,537
    
    
    
    8,522
    
    
    
    8,522Earnings (loss):Continuing operations
    
    $
    9,590
    
    
    $
    1,912
    
    
    $
    (23,679
    )Discontinued operations
    
    
    (2,653
    )
    
    
    (4,648
    )
    
    
    (3,952
    )Net income (loss)
    
    $
    6,937
    
    
    $
    (2,736
    )
    
    $
    (27,631
    )Basic earnings (loss) per share of common stock:Continuing operations
    
    $
    1.13
    
    
    $
    0.22
    
    
    $
    (2.78
    )Discontinued operations
    
    
    (0.32
    )
    
    
    (0.54
    )
    
    
    (0.46
    )Net income (loss)
    
    $
    0.81
    
    
    $
    (0.32
    )
    
    $
    (3.24
    )Diluted earnings (loss) per share of common
stock:Continuing operations
    
    $
    1.12
    
    
    $
    0.22
    
    
    $
    (2.78
    )Discontinued operations
    
    
    (0.31
    )
    
    
    (0.54
    )
    
    
    (0.46
    )Net income (loss)
    
    $
    0.81
    
    
    $
    (0.32
    )
    
    $
    (3.24
    )
  Note 17  Related Party Transaction
   48




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Lawson Products, Inc.
Notes to Consolidated Financial Statements
 Note 18  Segment Reporting
   (Dollars in thousands)Year Ended December 31,(as adjusted)
    
    
    (as adjusted)2010
    
    
    2009
    
    
    2008Net salesMRO
    
    $
    303,138
    
    
    $
    289,715
    
    
    $
    357,092OEM
    
    
    13,642
    
    
    
    12,054
    
    
    
    19,480Consolidated total
    
    $
    316,780
    
    
    $
    301,769
    
    
    $
    376,572Operating income (loss)MRO
    
    $
    14,522
    
    
    $
    9,256
    
    
    $
    24,584OEM
    
    
    283
    
    
    
    (1,118
    )
    
    
    1,103Severance expenses
    
    
    (3,629
    )
    
    
    (6,228
    )
    
    
    (5,238
    )Gain (loss) on sale of assets
    
    
    1,701
    
    
    
    (16
    )
    
    
    (44
    )Other operating income (expense)
    
    
    4,050
    
    
    
    (481
    )
    
    
    (35,616
    )Consolidated total
    
    
    16,927
    
    
    
    1,413
    
    
    
    (15,211
    )Interest expense
    
    
    (391
    )
    
    
    (1,037
    )
    
    
    (789
    )Other income, net
    
    
    160
    
    
    
    1,029
    
    
    
    626Income (loss) from
continuing operations
before income taxes
    
    $
    16,696
    
    
    $
    1,405
    
    
    $
    (15,374
    )Capital expendituresMRO
    
    $
    10,038
    
    
    $
    2,008
    
    
    $
    2,337OEM
    
    
    10
    
    
    
    713
    
    
    
    549Consolidated total
    
    $
    10,048
    
    
    $
    2,721
    
    
    $
    2,886Depreciation and amortizationMRO
    
    $
    5,900
    
    
    $
    6,031
    
    
    $
    6,981OEM
    
    
    406
    
    
    
    476
    
    
    
    450Consolidated total
    
    $
    6,306
    
    
    $
    6,507
    
    
    $
    7,431Total assetsMRO
    
    $
    204,727
    
    
    $
    167,394
    
    
    $
    180,506OEM
    
    
    15,295
    
    
    
    12,428
    
    
    
    14,059Segment total
    
    
    220,022
    
    
    
    179,822
    
    
    
    194,565Corporate
    
    
    15,743
    
    
    
    20,068
    
    
    
    24,286Discontinued operations
    
    
    619
    
    
    
    41,757
    
    
    
    52,372Consolidated total
    
    $
    236,384
    
    
    $
    241,647
    
    
    $
    271,223
  49




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##### Table of Contents



Lawson Products, Inc.
Notes to Consolidated Financial Statements
  (Dollars in thousands)Year Ended December 31,(as adjusted)
    
    
    (as adjusted)2010
    
    
    2009
    
    
    2008Net salesUnited States
    
    $
    288,054
    
    
    $
    276,116
    
    
    $
    346,393Canada
    
    
    28,726
    
    
    
    25,653
    
    
    
    30,179Consolidated total
    
    $
    316,780
    
    
    $
    301,769
    
    
    $
    376,572Long-lived assetsUnited States
    
    $
    41,006
    
    
    $
    36,911
    
    
    $
    43,178Canada
    
    
    3,436
    
    
    
    3,417
    
    
    
    3,148Consolidated total
    
    $
    44,442
    
    
    $
    40,328
    
    
    $
    46,326
   50




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##### Table of Contents



Lawson Products, Inc.
Notes to Consolidated Financial Statements
 Note 19  Summary of Unaudited Quarterly Results of Operations
  (Dollars in thousands, except per share data)2010 Quarter Ended(as adjusted)
    
    
    (as adjusted)
    
    
    (as adjusted)Dec. 31
    
    
    Sep. 30
    
    
    June 30
    
    
    Mar. 31Net sales
    
    $
    80,012
    
    
    $
    81,553
    
    
    $
    80,305
    
    
    $
    74,910Gross profit
    
    
    49,764
    
    
    
    49,948
    
    
    
    48,789
    
    
    
    46,325Income from continuing operations (1)
    
    $
    112
    
    
    $
    5,766
    
    
    $
    1,480
    
    
    $
    2,232Income (loss) from discontinued operations
    
    
    (623
    )
    
    
    (2,337
    )
    
    
    207
    
    
    
    100Net income (loss)
    
    $
    (511
    )
    
    $
    3,429
    
    
    $
    1,687
    
    
    $
    2,332Basic and diluted income (loss) per share
of common stock:Continuing operations (2)
    
    $
    0.01
    
    
    $
    0.68
    
    
    $
    0.17
    
    
    $
    0.26Discontinued operations (2)
    
    
    (0.07
    )
    
    
    (0.28
    )
    
    
    0.03
    
    
    
    0.01Net income (loss) (2)
    
    $
    (0.06
    )
    
    $
    0.40
    
    
    $
    0.20
    
    
    $
    0.27
 2009 Quarter Ended(as adjusted)
    
    
    (as adjusted)
    
    
    (as adjusted)
    
    
    (as adjusted)Dec. 31
    
    
    Sep. 30
    
    
    June 30
    
    
    Mar. 31Net sales
    
    $
    70,767
    
    
    $
    76,821
    
    
    $
    76,031
    
    
    $
    78,150Gross profit
    
    
    42,910
    
    
    
    48,508
    
    
    
    48,343
    
    
    
    45,798Income (loss) from continuing operations
    
    $
    (75
    )
    
    $
    3,151
    
    
    $
    3,536
    
    
    $
    (4,700
    )Income (loss) from discontinued operations
    
    
    (63
    )
    
    
    (1,648
    )
    
    
    (1,689
    )
    
    
    (1,248
    )Net Income (loss)
    
    $
    (138
    )
    
    $
    1,503
    
    
    $
    1,847
    
    
    $
    (5,948
    )Basic and diluted income (loss) per share
of common stock:Continuing operations
    
    $
    (0.01
    )
    
    $
    0.37
    
    
    $
    0.41
    
    
    $
    (0.55
    )Discontinued operations
    
    
    (0.01
    )
    
    
    (0.19
    )
    
    
    (0.19
    )
    
    
    (0.15
    )Net Income (loss)
    
    $
    (0.02
    )
    
    $
    0.18
    
    
    $
    0.22
    
    
    $
    (0.70
    )
 (1)
    
    Income from continuing operations for the three months ended September 31, 2010 and June 30,
2010, respectively, includes a net benefit of $2.1 million and $0.3 million related to the
Share litigation. Income from continuing operations for the three months ended March 30, 2010
includes a net gain of $1.0 million from the sale of the Dallas, Texas distribution center.(2)
    
    The sum of the quarterly earnings per share amounts do not equal the total annual earnings
per share due to rounding and the uneven timing of earnings throughout the year compared to
the weighted average shares outstanding.
  51




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Lawson Products, Inc.
Notes to Consolidated Financial Statements
  (Dollars in thousands, except per share data)Less: outboundLess: discontinued
    
    
    shippingPreviously reported
    
    
    operations
    
    
    re-class
    
    
    As adjustedQuarter ended September 30, 2010Net sales
    
    $
    89,264
    
    
    $
    7,711
    
    
    $
    
    
    
    $
    81,553Gross profit
    
    
    56,054
    
    
    
    3,448
    
    
    
    2,658
    
    
    
    49,948Income from continuing operations
    
    
    5,800
    
    
    
    34
    
    
    
    
    
    
    
    5,766Loss from discontinued operations
    
    
    (2,371
    )
    
    
    (34
    )
    
    
    
    
    
    
    (2,337
    )Net income
    
    $
    3,429
    
    
    $
    
    
    
    $
    
    
    
    $
    3,429Basic and diluted income (loss) per share
of common stock:Continuing operations
    
    $
    0.68
    
    
    $
    
    
    
    $
    
    
    
    $
    0.68Discontinued operations
    
    
    (0.28
    )
    
    
    
    
    
    
    
    
    
    
    (0.28
    )Net income
    
    $
    0.40
    
    
    $
    
    
    
    $
    
    
    
    $
    0.40Quarter ended June 30, 2010Net sales
    
    $
    101,623
    
    
    $
    21,318
    
    
    $
    
    
    
    $
    80,305Gross profit
    
    
    58,630
    
    
    
    7,032
    
    
    
    2,809
    
    
    
    48,789Income from continuing operations
    
    
    1,774
    
    
    
    294
    
    
    
    
    
    
    
    1,480Income (loss) from discontinued operations
    
    
    (87
    )
    
    
    (294
    )
    
    
    
    
    
    
    207Net income
    
    $
    1,687
    
    
    $
    
    
    
    $
    
    
    
    $
    1,687Basic and diluted income (loss) per share
of common stock:Continuing operations
    
    $
    0.21
    
    
    $
    0.04
    
    
    $
    
    
    
    $
    0.17Discontinued operations
    
    
    (0.01
    )
    
    
    (0.04
    )
    
    
    
    
    
    
    0.03Net income
    
    $
    0.20
    
    
    $
    
    
    
    $
    
    
    
    $
    0.20Quarter ended March 31, 2010Net sales
    
    $
    95,073
    
    
    $
    20,163
    
    
    $
    
    
    
    $
    74,910Gross profit
    
    
    55,482
    
    
    
    6,362
    
    
    
    2,795
    
    
    
    46,325Income from continuing operations
    
    
    2,342
    
    
    
    110
    
    
    
    
    
    
    
    2,232Income (loss) from discontinued operations
    
    
    (10
    )
    
    
    (110
    )
    
    
    
    
    
    
    100Net income
    
    $
    2,332
    
    
    $
    
    
    
    $
    
    
    
    $
    2,332Basic and diluted income (loss) per share
of common stock:Continuing operations
    
    $
    0.27
    
    
    $
    0.01
    
    
    $
    
    
    
    $
    0.26Discontinued operations
    
    
    
    
    
    
    (0.01
    )
    
    
    
    
    
    
    0.01Net income
    
    $
    0.27
    
    
    $
    
    
    
    $
    
    
    
    $
    0.27
  52




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Lawson Products, Inc.
Notes to Consolidated Financial Statements
 Less:
    
    
    Less: outboundPreviously
    
    
    discontinued
    
    
    shippingreported
    
    
    operations
    
    
    re-class
    
    
    As adjustedQuarter ended December 31, 2009Net sales
    
    $
    89,342
    
    
    $
    18,575
    
    
    $
    
    
    
    $
    70,767Gross profit
    
    
    51,344
    
    
    
    5,888
    
    
    
    2,546
    
    
    
    42,910Loss from continuing operations
    
    
    (114
    )
    
    
    (39
    )
    
    
    
    
    
    
    (75
    )Income (loss) from discontinued operations
    
    
    (24
    )
    
    
    39
    
    
    
    
    
    
    
    (63
    )Net Loss
    
    $
    (138
    )
    
    $
    
    
    
    $
    
    
    
    $
    (138
    )Basic and diluted loss per
share of common stock:Continuing operations
    
    $
    (0.01
    )
    
    $
    
    
    
    $
    
    
    
    $
    (0.01
    )Discontinued operations
    
    
    (0.01
    )
    
    
    
    
    
    
    
    
    
    
    (0.01
    )Net loss
    
    $
    (0.02
    )
    
    $
    
    
    
    $
    
    
    
    $
    (0.02
    )Quarter ended September 30, 2009Net sales
    
    $
    84,054
    
    
    $
    7,233
    
    
    $
    
    
    
    $
    76,821Gross profit
    
    
    54,045
    
    
    
    3,074
    
    
    
    2,463
    
    
    
    48,508Income (loss) from continuing operations
    
    
    2,773
    
    
    
    (378
    )
    
    
    
    
    
    
    3,151Income (loss) from discontinued operations
    
    
    (1,270
    )
    
    
    378
    
    
    
    
    
    
    
    (1,648
    )Net income
    
    $
    1,503
    
    
    $
    
    
    
    $
    
    
    
    $
    1,503Basic and diluted income (loss)
per share of common stock:Continuing operations
    
    $
    0.33
    
    
    $
    (0.04
    )
    
    $
    
    
    
    $
    0.37Discontinued operations
    
    
    (0.15
    )
    
    
    0.04
    
    
    
    
    
    
    
    (0.19
    )Net income
    
    $
    0.18
    
    
    $
    
    
    
    $
    
    
    
    $
    0.18Quarter ended June 30, 2009Net sales
    
    $
    95,033
    
    
    $
    19,002
    
    
    $
    
    
    
    $
    76,031Gross profit
    
    
    55,869
    
    
    
    4,842
    
    
    
    2,684
    
    
    
    48,343Income (loss) from continuing operations
    
    
    1,896
    
    
    
    (1,640
    )
    
    
    
    
    
    
    3,536Income (loss) from discontinued operations
    
    
    (49
    )
    
    
    1,640
    
    
    
    
    
    
    
    (1,689
    )Net income
    
    $
    1,847
    
    
    $
    
    
    
    $
    
    
    
    $
    1,847Basic and diluted income (loss)
per share of common stock:Continuing operations
    
    $
    0.22
    
    
    $
    (0.19
    )
    
    $
    
    
    
    $
    0.41Discontinued operations
    
    
    
    
    
    
    0.19
    
    
    
    
    
    
    
    (0.19
    )Net income
    
    $
    0.22
    
    
    $
    
    
    
    $
    
    
    
    $
    0.22Quarter ended March 31, 2009Net sales
    
    $
    99,381
    
    
    $
    21,231
    
    
    $
    
    
    
    $
    78,150Gross profit
    
    
    54,167
    
    
    
    5,744
    
    
    
    2,625
    
    
    
    45,798Loss from continuing operations
    
    
    (5,919
    )
    
    
    (1,219
    )
    
    
    
    
    
    
    (4,700
    )Income (loss) from discontinued operations
    
    
    (29
    )
    
    
    1,219
    
    
    
    
    
    
    
    (1,248
    )Net loss
    
    $
    (5,948
    )
    
    $
    
    
    
    $
    
    
    
    $
    (5,948
    )Basic and diluted income
(loss) per share of common stock:Continuing operations
    
    $
    (0.69
    )
    
    $
    (0.14
    )
    
    $
    
    
    
    $
    (0.55
    )Discontinued operations
    
    
    (0.01
    )
    
    
    0.14
    
    
    
    
    
    
    
    (0.15
    )Net income
    
    $
    (0.70
    )
    
    $
    
    
    
    $
    
    
    
    $
    (0.70
    )
  53




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Lawson Products, Inc.
 
 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,
2010
    
    $
    882
    
    
    $
    883
    
    
    $
    (680
    )(1)
    
    $
    1,085Year ended
December 31,
2009 (5)
    
    
    871
    
    
    
    1,222
    
    
    
    (1,211
    )(1)
    
    
    882Year ended
December 31,
2008 (5)
    
    
    933
    
    
    
    860
    
    
    
    (922
    )(1)
    
    
    871Allowance for
excess and
obsolete inventory:Year ended
December 31,
2010
    
    $
    4,748
    
    
    $
    110
    
    
    $
    (147
    )(2)
    
    $
    4,711Year ended
December 31,
2009 (5)
    
    
    4,778
    
    
    
    319
    
    
    
    (349
    )(2)
    
    
    4,748Year ended
December 31,
2008 (5)
    
    
    7,489
    
    
    
    (2,015
    )(3)
    
    
    (696
    )(2)
    
    
    4,778Valuation allowance
for deferred tax
assets:Year ended
December 31,
2010
    
    $
    1,744
    
    
    $
    
    
    
    $
    (869
    )(4)
    
    $
    875Year ended
December 31,
2009
    
    
    2,854
    
    
    
    (536
    )
    
    
    (574
    )(4)
    
    
    1,744Year ended
December 31,
2008
    
    
    3,337
    
    
    
    (483
    )
    
    
    
    
    
    
    2,854
 (1)
    
    Uncollected receivables written off, net of recoveries and translation adjustment.(2)
    
    Disposal of excess and obsolete inventory and translation adjustment.(3)
    
    An inventory reduction plan was implemented that focused on selling slow moving and obsolete
inventory which had been previously reserved. Overall inventory reserves decreased based on
the mix of remaining inventory on hand.(4)
    
    Capital loss carryforward written off.(5)
    
    As adjusted for discontinued operations.
  54




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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
   55




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##### Table of Contents



Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting
 
       
  56




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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.
   57




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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
    
    
    185,373
    (1)
    
    $
    14.05
    (2)
    
    
    311,924Equity compensation
plans not approved
by security holders
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    185,373
    (1)
    
    $
    14.05
    (2)
    
    
    311,924
 (1)
    
    Includes common stock to
cover conversion of 138,776 restricted stock awards and 46,607 stock options.(2)
    
    Weighted-average exercise
price of 46,607 stock options outstanding on December 31, 2010.
 
 ITEM 13.
    
    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
  
 ITEM 14.
    
    PRINCIPAL ACCOUNTING FEES AND SERVICES.
  
 PART IV
 
 ITEM 15.
    
    EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
 (a)
    
    (1) See Index to Financial Statements in Item 8 on page 28.
 (2)
    
    See Schedule II in Item 8 on page 54.(3)
    
    See the Exhibit Index immediately following the signature page of this Annual Report on Form 10-K.
  58




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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 17, 2011By:
    /s/ Ronald J. KnutsonRonald J. KnutsonSenior Vice President, Chief Financial Officer
(principal financial and accounting officer)
Date: February 17, 2011  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
  59




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##### Table of Contents



EXHIBIT INDEX
 ExhibitNumber
    
    Description of Exhibit2.1
    
    
    Asset Purchase Agreement By and Among Assembly Component Systems,
Inc., Lawson Products, Inc., Supply Technologies LLC and Park-Ohio
Industries, Inc. dated as of August 31, 2010, incorporated herein
by reference to Exhibit 2.1 to the Companys Current Report on
Form 8-K dated August 31, 2010.2.2
    
    
    Asset Purchase Agreement By and Among Rutland Tool & Supply Co.,
Lawson Products, Inc., Sid Tool Co., Inc. and MSC Industrial
Direct Co., Inc. dated as of November 9, 2010, incorporated herein
by reference to Exhibit 2.1 to the Companys Current Report on
Form 8-K dated November 9, 2010.3.1
    
    
    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
October 20, 2009.10.1
    *
    
    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, 1995.10.2
    *
    
    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, 2000.10.3
    *
    
    Lawson Products, Inc. Long-Term Capital Accumulation Plan,
incorporated herein by reference to Exhibit 10(c)(10) to the
Companys Current Report on Form 8-K dated October 21, 2004.10.4
    *
    
    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,
2004.10.5
    *
    
    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, 2004.10.6
    *
    
    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, 2008.10.7
    *
    
    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, 2008.10.8
    *
    
    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, 2008.10.9
    
    
    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.
  60




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##### Table of Contents



ExhibitNumber
    
    Description of Exhibit10.10
    *
    
    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, 200810.11
    
    
    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, 2009.10.12
    *
    
    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, 2009.10.13
    *
    
    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, 2009.10.14
    *
    
    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, 2009.10.15
    *
    
    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, 2009.10.16
    *
    
    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, 2009.10.17
    *
    
    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, 2009.10.18
    
    
    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, 2010.10.19
    
    
    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, 2009.10.20
    *
    
    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, 2010.10.21
    *
    
    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, 2010.10.22
    
    
    Consent, Waiver and Third Amendment to the Credit Agreement dated
September 1, 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 August 31, 2010.10.23
    
    
    Consent, Waiver and Fourth Amendment to the Credit Agreement dated
December 10, 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 December 10, 2010.
  61




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ExhibitNumber
    
    Description of Exhibit18
    
    
    Preference letter regarding change in accounting principle.21
    
    
    Subsidiaries of the Company.23
    
    
    Consent of Ernst & Young LLP.31.1
    
    
    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.
  62